The legal environment unit4

1. THE UGANDA INSTITUTE
OF BANKING &
FINANCIAL SERVICES
UIBFS
ISO 9001:2008 CERTIFIED
Introduction to law
Contract law and Banking
Banking and its relationship with legislation
MODULE COVERAGE
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Banker-Customer Contract
Negotiable Instruments

2. THE UGANDA INSTITUTE
OF BANKING &
FINANCIAL SERVICES
UIBFS
ISO 9001:2008 CERTIFIED
Negotiable Instruments: what are they?
For ease of perception (or imagination), let us look at negotiable instruments from a
functional perspective.
We can say that they are documents used in commerce to secure the payment of
money. This functional definition, while perfectly accurate, is very general.
However, it provides a basis for a framework of rules to regulate their use.
• The exact legal definition of a negotiable instrument, as per the Bills of Exchange
Act is: “ …. written order or unconditional promise to pay a fixed sum of money
on demand or at a certain time”.
• As implied by the word - Negotiable – these instruments may be transferred from
one person to another upon negotiation. For this reason, negotiable instruments
have two functions—a payment function and a value function.
• Let us digest this aspect of negotiable instruments by considering an instrument
which, hopefully, you are familiar. The ‘Bank Cheque’.
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3. THE UGANDA INSTITUTE
OF BANKING &
FINANCIAL SERVICES
UIBFS
ISO 9001:2008 CERTIFIED
What is a cheque?
• From a legal perspective, a cheque is a written promise by a drawer that the bank
on which it is drawn will pay the payee on demand the amount stated.
• Actually, the Bill of Exchange Act defines a cheque as” … a bill of exchange drawn
on a banker payable on demand”. A definition you should learn. Clearly this
definition implies that you should know what a bill of exchange is.
• For the purposes of this course, you do not actually need to go into details of the
‘bill of exchange’ definition’ and indeed, in practice, the technicalities that go with
it do not need answering in relation to cheques.
• Note that Cheques are written on standard forms, which when properly completed
satisfy all the technicalities of a bill of exchange. Below is a picture of a cheque –
Fig 10.5, for ease of your understanding.
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4. THE UGANDA INSTITUTE
OF BANKING &
FINANCIAL SERVICES
UIBFS
ISO 9001:2008 CERTIFIED
4
Fig 10.5 Picture of a Cheque.
As seen from the picture, there are several features on the cheque. But for now, we
shall concentrate on three parties. These are: the drawer (the person who makes the
cheque); the drawee (the person to whom the order is addressed); and the payee
(the person to whom the cheque is made payable).

5. THE UGANDA INSTITUTE
OF BANKING &
FINANCIAL SERVICES
UIBFS
ISO 9001:2008 CERTIFIED
• Reading from our picture, the drawer is: MOSES MASABA; the payee is: GRACE
REAL ESTATE LTD; and the drawee is: FARMERS BANK. These are the three
important parties to the transaction.
• The cheque has been properly completed – with the date, the person to pay, the
amount to be paid (both in figures and words), and the account owner’s signature.
It has been duly signed with, we can assume, the correct signature of Moses
Masaba.
• Whereas there are legally several instruments that are categorised as negotiable,
we are taking ‘cheques’ as our area of focus, not bills of exchange and negotiability
generally, for as a foundation for your future training and education, cheques are
what you need to know about. Indeed, unless you start work in a specialist
department handling import/export business (customers), you will seldom see a
bill of exchange other than a cheque.
• Having narrowed down our focus, let us redirect attention back to negotiation.
Negotiation takes place when a cheque is transferred in such a way as to make the
transferee (bona fide receiver) the holder of it. At this point, we need to
distinguish between transfer and negotiation.
• The key to the distinction is to remember that the tem ‘negotiation’ is a term
unique to bills of exchange and other negotiable instruments and relates to the
special attributes of negotiable instruments when title (ownership) is transferred.
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6. THE UGANDA INSTITUTE
OF BANKING &
FINANCIAL SERVICES
UIBFS
ISO 9001:2008 CERTIFIED
Features of a Cheque
This topic should be read with direct reference to Fig. 10.5 in this unit. As shown in Fig
10.5, a cheque as an instrument of payment carries several features. The drawer,
drawee and payee have already been explained. The rest of the key features
include:
The cheque number, the sort code, the account number, and a crossing (parallel lines
on the face of the cheque). These features are intended to provide controls and
issue specific instructions to the bank by the account holder – the customer.
The cheque number may be equated to the serial number on a currency note; the sort
code is a computerised means defining the branch on which the cheque is drawn –
these differ from bank to bank; and as mentioned, the two parallel lines across the
face of the cheque is simply a direction to the bank only to pay the cheque by way
of cheque deposit to the payees account – and not cash obtainable at the drawee
bank counters.
A cheque which is not crossed is referred to as an open cheque. Open cheques can be
paid cash at the bank counter, although this practice was relaxed due to forgeries
and bank frauds. In any case, more efficient methods of cheque clearing, thanks to
advancements in technology, have long since taken over the technical reasons for
crossings and today they are used to minimise the chances of persons fraudulently
obtaining payment of a cheque.
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7. THE UGANDA INSTITUTE
OF BANKING &
FINANCIAL SERVICES
UIBFS
ISO 9001:2008 CERTIFIED
Finally, we conclude this unit by summarising the features of negotiable instruments in
general. You will learn about other negotiable instruments in your future studies
on banking.
Elements of Negotiable Instruments
The essential elements of every negotiable instrument are as follows.
The instrument must:
i. Bear the signature of the maker or Drawer
ii. Be an unconditional promise or order to pay
iii. Be made out of a fixed amount of money
iv. Be payable on demand or at a definite time
v. Be payable to order or to bearer
In the next unit we shall discuss the banker-customer contract. At this point of our
study, we can confidently state that handling of the cheques by a banker is part of
a wider banker-customer contract.
Such a relationship does not exist between the drawer and the drawee of a bill,
although, of course a bill of exchange can be drawn on a bank. And, you should
remember that a cheque is a bill of exchange drawn on demand but SPECIFICALLY,
it is drawn on a BANK.
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