Principle of Negotiability of Negotiable Instruments

Is the principle of negotiability of negotiable instruments still relevant to modern international trade finance law, or has been displaced by the electronic revolution and/ or the dematerialisation of negotiable instruments.

Introduction

‘Negotiable’ is an ambiguous word. In common language the term negotiable is frequently used simply to mean transferable. It has a negative form which carries the connotation that what appears to be a payment instrument shall not intend to be genuine, as in the legend ‘non negotiable’ that finds on play money, bogus checks used in advertising tricks, to duplicate copies of money orders and the like. As that indicates, the term has a great deal to do with the use of written instruments as payment devices. In the modern day we can probably assert that in legal usage the term has got a specific meaning: an instrument is negotiable means that it shall be appropriate type and form to be governed by the holder in due course rules so that a bonafide purchaser for value takes the instrument free from the claims and free from most defences of the parties obligated on it. Thus if a negotiable instrument is stolen and passed to a purchaser who qualifies as a holder in the course, the purchaser takes free of the claim of the true owner. Moreover, if a note or other negotiable instrument gets into the hands of one who is qualified as a holder, it can be enforced against the maker despite most defences the maker would have had against the original payee.

There is a connection between the legal usage of negotiable as referring to a certain specific rules about the rights of the transfers, and the lay usage of negotiable which means ‘ genuine money’. The lawyer’s usage reflects the basic assumption of the subject known variously as “Bills and Notes”, “Negotiable Instruments Law”, these are the various instrument rules and laws that have been used for years and therefore the legal concept of negotiability has always been vital in the law of governing these instruments.

The rapid development and growth of technology has revolutionized the people and in their business. This has significantly reduced the importance of negotiable instruments both in domestic and international trade. Though the usages of negotiable instruments are present it may decline in future. Yet the advantage of negotiability cannot be denied. Thus this essay tells us that electronic revolution is the next step of the way, but still there are certain problems which have to be resolved.

Classes Of Instruments

Instruments can be negotiable or non negotiable. A negotiable instrument by statute or mercantile usage may be transfer by delivery and endorsement to a bonafide purchaser for a value in such circumstance that he takes free from defects in the title of prior parties. There are different classes of negotiable and non negotiable instruments founds, but they all fall under two categories, they are, an undertaking to pay a sum of money and an order to another to pay a sum of money, whether to the person giving the order or to a third party. The instruments which are taking an express or implied form are promissory notes, bank notes, treasury bills, bearer bonds, share warrants, bearer debentures, bearer script certificates and negotiable certificates of deposit and all these are negotiable instruments.

How Instruments Become Negotiable

There are two method recognised in which a document may become negotiable instrument. They are

1. STATUTE

In most are all the cases, statutory recognition of negotiability merely confirms the judicial acceptance of a mercantile usage which recognised an instrument as negotiable. The landmark case Clerke V Martin held that a promissory note playable to order was not a bill of exchange, and was, therefore not negotiable. Lord Holt said that ‘the promissory note could note be a bill of exchange. That the maintain of these actions upon such notes, were innovations upon the rules of the common law; and that it amounted to the setting up a new sort of speciality, unknown to the common law, and invented in the Lombard Street, which attempted in these matters of bill of exchange to give laws to Westminster Hall..’ But most of the commentators have interpreted this decision wrong and have held that the 1704 Act to declaratory of the case law as it existed prior to Clerke V Martin.

2. MERCANTILE USAGE

These are instruments which are regarded as negotiable through judicially recognised mercantile usage. In Goodwin V Robarts, Clockburn CJ traced out the history of bills of exchange, bankers notes, promissory notes, exchequer bills and cheques came to be regarded as negotiable and continued.

Siginificance Oif Negotiabilty

The most important theme of modern legal profession’s sense of the law of commercial paper is that the concept of negotiability and always has been dominant of this body of law. Negotiability has become important and and a very useful concept in the present day law and that negotiability has been the keystone of the law of bills and notes from at least the eighteenth century. We can see that recently there has been some retreat from the view that negotiability is necessarily the beneficiary doctrine in modern commercial transactions. For an example, during the 1960’s the application of the holder in due course rules to commercial transactions was under an attact, culminating in 1975 with the promulgation of the Federal Trade Commission rule annulling the doctrine in consumer transactions.

Advantages Of Negotiable Instruments

The assignment of a promise to pay money was not permitted at common law before 1874. However it was the refusal of the common law to allow the transfer of promises to pay money which made way for the usage of negotiable instruments. There are a number of distinct advantages of negotiable instruments and two of its important benefits can be summarised as follows

1. the transferee of a negotiable instrument can see his own name, even though there has been no assignment I writing, or a notice to the obligor or even if the transferee is not absolute, as required for assignments under the statute; and
2. The transferee of the negotiable instruments who takes it for value and in good faith acquires title free from equities; where as an assignee under the statute always takes subject to equities.

Electronic Negotiable Instruments

The recent and rapid development of Information and Technology has revolutionized the way people and business transfer of goods and services. Electronic revolution is real and continues to grow as a medium to order goods, services or tickets. Compared with traditional payment methods, such as cheques, electronic medium indeed have got many advantages. However, electronic medium are often costly, challenging to implement and sometimes technically hard to understand by common man. When we pay for goods or service in a shop using a credit or a debit card, the retailer must pay a commission to the financial institution processing the card details; additionally there shall be an operating cost for the system used to process the cards. Due to various factors like that in the present day cheques are still viable payment method and will continue to be in future.

Bills Of Exchange And Promissory Notes

A bill of exchange which can also be termed as ‘draft’ in some parts of the world is a negotiable instrument that is payable to the seller and drawn on the issuing bank or the buyer. This sort of document is prepared by the seller and it has an equivalent effect with a cheque written from the buyer to the seller. These drafts can be either ‘sight drafts’ where the bank pays the full amount of the sellers presentations or the ‘time draft’ here the bank has the obligation at the time of presentation is merely to accept the draft for payment at a later date, for example 60 days or more after the sellers presentation. Time drafts provide the buyers with short term financing. Due to this factor, bank often purchase their accepted time drafts at a discounted rate.

A promissory note shall have a similar effect with bills of exchange. The difference is that the promissory notes are prepared by the importer promising to give a direct payment to the seller on a specific date in the future. This note is not drawn to any intermediate party. The bills and notes can be negotiated to an unlimited number of successive holders when the present holder wishes to obtain immediate cash payment and the new holders shall wish to buy the note or draft as a short term investment. These shall be transferred either by endorsement and physical delivery or in the form of ‘bearer instrument’ by delivery and must be drawn in unconditional term.

E Bills Of Exchange And Promissory Notes

It is necessary for negotiable instruments in the form of bills of exchange and promissory notes have to preserve their expediency in international trade in the modern day. They must be recognised in a valid electronic format. These electronic instruments should be capable of satisfying the legal requirements which are set out in various statutory provisions and different jurisdictions. In order to ensure certainty in the international trade context, a uniform law shall be adopted, for example UNCITRAL Model Law on Electronic Commerce 1996, which was amended in 1988, these sort of uniform laws can overcome the deficiencies in the current statutory regime and increase the certainty in relation the enforceability of electronic bills of exchange and promissory notes. However, in the absence of such a uniform law and in order to effectively analyse whether or not it is feasible to substitute the negotiable instrument with the electronic medium, it shall be necessary to examine, if those electronic variants satisfy the requirements of the present law. If we compare the characteristics as outlined in the UK Bill Of Exchange Act 1882; the definition provided in section 3(1) emphasizes on two central characteristics for a valid bill of exchange and a promissory note they are namely ‘in writing’ and ‘signed’. Therefore the electronic bill of exchange should overcome this hurdle to replace the traditional paper based method.

1. In writing

The Bill of Exchange Act 1882 tells us that written includes printed and writing. However writing includes typing, printing, lithography, photography and other modes of representing or reproducing words in visible form. This shall apply to the Bills of Exchange Act 1882 and it would be construed, so as to include electronic printing which indeed shall be a visible form. Therefore this shall accepted and implementation of UNCITRAL Model Law would put an end to questions, since article 6 explicitly confers to electronic data messages with the same legal effect paper writing has.

2. Signed

The UK Bill of Exchange Act 1882 ask for a signature for a bill to be valid, the electronics and technology has provided with an answer to that question with the emergence of digital or electronic signatures. These signatures can be used to endorse an electronic document. A valid digital signature does not imply that the person or organisation named is also the author of the document, and should therefore more approximately be constructed as an endorsement of document. Digital signatures are those which employ encryption technology to authenticate electronic transmissions and this shall be implemented in internet banking.

Electronic Data Interchange (Edi)

It offers a secure interchange of information in united Europe. It replaces the traditional paper transactions with a well approved and organised mechanism for proving origin, preventing repudiation and maintaining confidentiality. This is a technique which enables computer to computer transfer of structured information; this takes place usually between companies who are trading partners. EDI is used to exchange documents of all types which are involved in the trading partner relationship. Invoices, catalogues, orders, specifications and many other documents are transferred between the computers to facilitate paperless trading. This has become an important feature of business in twenty first century. Some of the large companies do not trade if the other party has not got EDI.

Advantages Of Electronic Revolution

As the technology has improved there are various benefits to be found and they are namely

1. faster, better, cheaper

The present day would claim that faster, better and cheaper have become the key mantra of electronic revolution, whereas anytime, anywhere has become the mantra of consumers. This form has made the work much simpler, one need no travel from place to place and waste time or mails a document. Therefore due to the emergence of e- revolution this has been possible.

b. convenience, confidence and complexity

In this convenience refer to the capital, time, labour and any other resources that are needed to make transactions. For example, consumers with computer modems can access banks by using banking software installed on their personal computer. Secondly confidence is the trust that the parties shall have in transactions that generate risk. This risk includes legal risks and operational security which affect both the users and provides of such service. For example, the use of electronic check payment may increase a paying bank risk of check fraud (US General Accounting Office, Janauary15, 1988; July 14, 1988). Complexity refers to the ease of making transactions.

c.Better funds management

According to this point the customers can easily access and download the history of different accounts or transactions which are present. In this way a savvier customer can better manage his funds and payments.

Benefits Of An Institution From E- Revolution

As there are advantages present for the individuals through the emergence of e- revolution similarly there are few benefits for institutions namely

a. reduced branch load

The emergence of e- revolution has helped the institution to reduce the load of transactions at the physical branch. This shall be useful catering to a large number of customers. Due to this the institution can address a greater customer base while maintaining the same number of branches and staff strength.

2. Attracting the future customers

Providing internet access to the customers has become very essential because this makes the consumer work faster and cheaper. Therefore implementing this institution shall attract more and more customer in the future.

Problems Posed By Paperless Transactions

1. Problems arising out of making uniform rules

1. Conflict of Uniform Rules

Different international organisation is making different ‘uniform rules’ to overcome the same problem. Each of the rules is slightly different from others and the purpose or the function of each set of rules is different from others. Therefore, we can see conflict in uniform rules.

2. Speed in the making of uniform rules

Uniform rules for e- transactions need to be established quickly and modified time to time. The problem which is found in the activities of these organisations is speed at which they work. For example UNCITRAL Model Law on Electronic Signature was started in 1996 and was finally agreed on 2001, in these five years states all over the world were deeply involved in e-transactions and rules for electronic signature were solely needed. Thus this is a major drawback.

3. Involvement of Private Organisations

Many of the private organisations are association of business entities or funded by business entities. The questions are whether these organisations are neutral and unbiased.

2. Technology Challenges

1. Security transaction information

The e-revolution that is internet is a public network with over 150 million users and more than 25 million host computers connected. A financial transaction which shall be sent on the network could travel the world several times before it reaches the final destination. This message transmitted can be trapped or altered at numerous locations. A joint survey conducted by the FBI and the computer Security Institute of a sample of 500 companies demonstrated that 42% of the respondents had reported unauthorised use of their information system 32% reported losing upwards of US 100 $ million due to security breaches.

3. Backward Countries

The other major drawback is that the less developed countries are not yet ready technologically to follow the automating of international trade.

Conclusion

Thus we can to a conclusion through this essay that there is an undeniable truth lying behind e- revolution, no one can resist the progress of e-revolution. It is the next major step present in the modern world. This may not yet be realised as a whole, but surely not a far reached vision. There are still certain problems present which have to be solved and questions to be answered. In the present day life students in law economics, finance, computers electronics and in many other fields are being trained and educated to deal with the electronic trade in every different aspect. The next generation is getting prepared to overcome the difficulties present in e-trading.

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Websites

1 www.google.com