FORMAL REQUIREMENTS OF NEGOTIABLE INSTRUMENTS

D—A Fixed Amount of money

The amount of money to be paid by a negotiable instrument should be fixed and stated with certainty. If the instruments’ value were stated in terms of goods or services, it would be too difficult to ascertain the market value of those goods and services at the time the instrument was to be paid. Art 735(b), 823(b) and 827(a) all require that commercial instruments be paid wholly in money. “Money” here refers to any medium of exchange adopted as currency by Ethiopia or foreign government. The fact that in Ethiopia commercial papers may state the amount of money in a foreign currency can be inferred from Article 777, (Bills of exchange) and Article 862 (cheque).

If the amount on the bill of exchange or cheque is payable by a foreign currency, the drawee has an option to make payment through the stated foreign currency or the equivalent value in terms of Ethiopian Birr. The rate of exchange as a matter of principle is to be calculated according to the rate on the date of maturity. Since cheque is payable on demand, the rate will be calculated according to the rate at the time of payment i.e. on the date of presentment. Whenever there is a default by the drawee to pay a Bill of exchange at maturity or to pay a cheque on the date of presentment, the holder at his option may demand payment according to the rate on the day of maturity or the day of payment in case of Bill of exchange, and with respect to cheque according to the rate on the day of presentment or day of payment.

The amount on a commercial instrument can include interest. In the absence of any indication as to the rate of interest (For example if it simply states “with interest”, no interest will be payable (see Arts 739, 825(2) and Amharic version of Art 836.) The commercial code deviates from the general provisions of contract with regard to the effect given to statement such as “with interest” or “legal interest’.   Art. 1751 of the civil code clearly recognize agreement by the parties stated as “interest” or “legal interest” as bearing 9%  interest on the total sum. Contrary to this, the commercial code does not give effect to interest unless the rate is specified by the parties (Art 739 (2) and 825)

The code also limits payment of interest even if the rate is specified on a bill of exchange and promissory note unless they are payable at sight or at a fixed period after sight (Art 739(1) cum 825(2). It will be difficult to reasonably justify why interest rate specified on the other types of instruments (i.e. payable at a fixed period after date and payable at a fixed date) is excluded by the code. The same can be said with respect to prohibition of speculation of interest on cheques. (see article 836 of the Amharic version of the code) In all instruments irrespective of the time of payment it is possible to calculate interest staring from the date of the instrument or some other date specified by the drawer or the maker.  Art 739(3) clearly applies this same mode of calculation of interest. Hence it can safely be argued that the limited approach followed by the code to interest on negotiable instruments is not due to any logical and practical problems emanating from business transactions.

Question 2

Determine in which of the following instruments does the statement as to amount make it non-negotiable.

  1. a) “I promise to pay B Birr 769 and all other sums which shall be due to him”
  2. b) “Pay Z or order some money sufficient for his education”.
  3. c) “pay M or order Birr 250 including 9% interest three months after Date”

 

E—Payable on Demand or at a definite time

The commercial code after generally stating the requirement of specification or indication of the time of payment of Bills of exchange and promissory note (Art 735(d) cum. 823 ( c), lists down  four types of time of payment in Art 769 cum Art 825(b). The time of payment for cheque is always on demand or at sight (Art 854).

Generally speaking, a commercial instrument may be payable;

  1. a) on Demand or
  2. b) at a definite time.

Clearly to ascertain the value of a negotiable instrument it is necessary to know when the maker, drawee or accepter is required to pay. It is also necessary to know when the obligations of secondary parties will arise. Further, it is necessary to know when an instrument is due, in order to calculate interest (If interest is specified on the instrument) and also to determine when the period of limitation may apply.

A) Payable on demand

An instrument may be payable on demand in two cases. First when it says nothing about when payment is due. [736(a), 824(a)]. Secondly, when the instrument expressly states that it is payable “on demand”, “at sight” or “on presentment.” A cheque is always regarded by law as payable on demand or at sight (Art 854). It is by definition a demand instrument. When an instrument is payable on demand, the holder is entitled to collect payment any time he presents it to the drawee. However, he must present it with in the period of time prescribed by law for presentment. For instance, Bill of exchange and promissory note payable at sight or on demand should be presented for payment within a year of their date (Art 770(a) an 825(1)(b)] This time may be shortened both by the drawer and the endorsers. However, only the drawer can extend this one-year period of time. He can also prohibit presentment before a fixed date.

Example 

Pay X or order Birr 1,000. Do not present before 3-6-2017.

In the above instrument the holder is not entitled to present it for payment before 3-6-2017. He can present it at any time within year after the expiry of 3-6-2017. According to art 770(2) the one-year period for presentment shall run from 3-6-2017. The period of time for presentiment for payment of a cheque is six months. The law requires that it should be presented within six months (Art 855). Unlike Bills of exchange and promissory notes the drawer or subsequent endorsers are not given the right to shorten or extend this period of time. The six-month period shall run from the date written on the cheque. A cheque dated 2-2-2017 may be actually be issued (be delivered by the drawer to the payee) on 2-4-2017. since the six-month period runs from 2-2-2017 the last date of presentment will be 2-8-2017.

B) Payable at a definite time 

If an instrument is not payable on demand to be negotiable it must be payable at a definite time specified on the face of the instrument. The maker or the drawee is under no obligation to pay until the specified time. Art 769(1) of the code enumerates 3 instances of a definite time.

i) Fixed period after sight

This refers to a definite period of time starting from the time it is presented to the drawee for acceptance. The exact time is calculated by first determining the date of presentment for acceptance. Such types of instruments are required to be presented within one year of their date save any change by the drawer or endorsers (Art 759)

Example 

Pay to the order of Almaz 3 months after sight

The time of payment of the above instrument is 3 months after it is presented by Almaz to the drawee for acceptance.

ii) Fixed period after Date

The period of time in this case runs from the date appearing on the face of the instrument.

Example

Pay Gebru three months after date. Let’s assume this instrument is dated 27-03-2005. Hence the date of payment will be 3 months from such date which is 27-06-2005.

iii) Fixed date

A fixed date refers to an exact future time indicated by the drawer for payment

Example

Pay Almaz or order birr 100 on February 26, 2017.

F—Payable to order or Bearer

The very essence of a negotiable instrument lies in its transferability. Its payment is not limited to the one whose name is specified but extends to any other person designated by the first specified person. So as to assure proper transfer, the instrument must be “payable to order or to bearer” at the time it is issued or first comes into the possession of the holder. If an instrument is neither order nor bearer paper, then it is non-negotiable and therefore only assignable and governed by contract law.

Order instruments

An instrument is payable to order if is payable;

  1. i) to the order of an identified person e.g. “pay to the order of zinabu or order’’
  2. ii) to an identified person or order e.g. “pay to zinabu or order”

According to Art. 719 of the code negotiable instruments may be to bearer, in a specified name or to order. The specific rules governing Bills of exchange and promissory note (Arts 735(f) and (823(e) require that both instruments should indicate the name of the person to whom it is payable or a statement that the note is payable to Bearer. Art 827 which enumerates the valid requirement of a cheque does not have any similar provision.

A cheque, if not payable to order or bearer cannot be considered as negotiable instrument. As stated above the very essence of any negotiable instrument lies in its transferability. The words “to order” or” to bearer” are the element which make the instrument negotiable. An instrument payable to x or order is payable to x or any other person designated by X. If it is payable to bearer, the person who happens to be in possession of the instrument will be entitled to collect payment.

Deviating from some other jurisdictions the code gives effect not only to “order” and “Bearer” instrument but also considers a commercial instrument payable to a specified name without any qualifying words “to order” or” to the order of” as negotiable. (Art 735(f),823(e), 842(1)

Example 

“pay to fikadu” or “I promise to pay Zinabu” is negotiable under Ethiopian law but not according to Uniform commercial code.

Any other instrument other than “to a specified person” to order or to bearer is non-negotiable.

Example

i) pay to Hussein Ahmed only

ii) pay to Hussein Ahmed, not to order.

In the first case payment of the instrument is limited only to Hussein Ahmed. He cannot negotiate or transfer it to any other person. Similarity in the second example the drawer of the instrument has clearly limited its negotiability by expressly inserting the words “not to order” In both examples the instrument could be transferred to another person only through Assignment, which is governed by the general provisions of contract (see Art 746(2), 825(1)(a), 842(2) Transfer by Assignment entitles the transferee only those rights of the transferor. Whereas transfer through negotiation gives a better title to the transferee provided he takes the instrument in good faith and for value.

Bearer instruments

A bearer instrument is an instrument that does not designate a specific payee. The term bearer refers to a person in possession of an instrument. The maker or drawer of a bearer instrument agrees to pay anyone who presents the instrument for payment. The commercial code in general makes reference to bearer instruments [see Articles 721, 735(7), 746(1), 823(e), 825(1)(e), 833(1) (c)]. without clearly indicating what constitutes a ‘bearer instrument’.

Generally, any instrument containing the following terms is a bearer instrument

  • “payable to the order of bearer.”
  • “Payable to X or bearer”.
  • “Payable to bearer”
  • “Pay cash”
  • “Pay to the order of cash”

 

References:

  1. Commercial Code of the Empire of Ethiopia, Proclamation No. 166 of 1960
  2. Uniform Commercial Code (UCC)-Article 3-Negotiable Instruments (2002) available at https://www.law.cornell.edu/ucc/3
  3. The Negotiable Instrument Act, 1881 (India) available at https://indiankanoon.org/doc/1132672
  4. Sarah Riches & Vida Allen, Keenan & Riches’ BUSINESS LAW. Pearson Education Limited, 2009
  5. R ichard A . M ann & B arry S . Roberts, SMITH & ROBERSON’S Business Law. South-Western, Cengage Learning, 2011
  6. Ray August, Don Mayer & Michael Bixby, International Business Law: Text, Cases and Readings. 5th. Pearson Education, Inc. 2009
  7. Roger E. Meiners, Al H. Ringleb & Frances L. Edwards, The Legal Environment of Business. 11th South-Western, Cengage Learning, 2009

Published by

Abrham Yohannes

Abrham Yohannes Hailu Licensed Lawyer & Consultant

6 thoughts on “FORMAL REQUIREMENTS OF NEGOTIABLE INSTRUMENTS”

  1. hi thanks yohanas.ethiopian commercial code have a defect regarding commercial instrument.under commercial code warehouse deposit certificate is included under commercial instrument.since commercial instruments have substitute for money and perform obligation of money,how can warehouse deposit certificate is included under commercial instruments?.because it,s a certificate evidencing the thing deposited in warehouse.so how can you see this provision?

  2. Dear Abreham,Thank you for your articles that you post. It is very helpful for those who can not get access to library.

  3. Sir, “negotiability” is not defined anywhere in the commercial code.What is its strength and what are its tenets ?- not discussed. what makes a NI different from other Instruments are not included[endorsement and Delivery are the mode of transaction of the instrument ]

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