Negotiable instruments are vital in marketing transactions as they facilitate smooth, reliable payment and credit mechanisms between businesses and clients. In Kenya's dynamic commercial environment, marketing professionals must understand these instruments to manage receivables, negotiate credit terms, and ensure compliance with legal frameworks. This chapter explores the key negotiable instruments used in marketing, including cheques, bills of exchange, and promissory notes, highlighting their features, functions, and legal implications in the Kenyan context.

8.1 Negotiable Instruments

Negotiable instruments are written documents guaranteeing the payment of a specific amount of money either on demand or at a set time, which can be transferred from one person to another. These instruments are crucial in marketing for securing payments, enabling credit sales, and facilitating trade. Kenyan marketing professionals encounter negotiable instruments frequently in dealings with suppliers, customers, and financial institutions, making competence in this area essential for effective commercial operations.

8.1.1 Cheques

Cheques are among the most common negotiable instruments used in Kenyan commercial transactions. They serve as instructions from the drawer (account holder) to the bank to pay a specific sum to the payee. Understanding the legal and practical aspects of cheques is essential for marketing professionals who often handle payments and receipts through banking channels.

Meaning and Legal Nature of Cheques

A cheque is a written order directing a bank to pay a specified amount from the drawer’s account to the person named or bearer. It is a negotiable instrument governed by the Kenyan Negotiable Instruments Act. Cheques are primarily used for settling debts, purchasing goods, or transferring funds without cash exchange. The legal nature of a cheque includes the following features:

• Written and Signed Order: The drawer must sign the cheque, making it a binding payment order.
• Unconditional Payment: The cheque instructs unconditional payment of the stated amount.
• Payable on Demand: Payment must be made immediately upon presentation.
• Transferability: Cheques can be endorsed and transferred to third parties.
• Bank’s Obligation: The bank is legally bound to honor a cheque if sufficient funds exist.

Types of Cheques and Their Uses

Cheques come in various forms, each serving different commercial purposes. Familiarity with these types helps marketing professionals advise clients and manage payments effectively.

Types of Cheques

• Bearer Cheque: Payable to the person holding the cheque; it can be cashed by anyone.
• Order Cheque: Payable to a specific person or their order; requires endorsement for transfer.

• Crossed Cheque: Contains two parallel lines indicating it must be deposited into a bank account, enhancing security.

• Post-dated Cheque: Dated for a future date and cannot be cashed until that date.

• Stale Cheque: Presented after six months from the date of issue; banks usually refuse payment.

Parties Involved in a Cheque Transaction

Understanding the roles of the parties involved clarifies responsibilities and liabilities in cheque transactions.

• Drawer: The account holder who issues the cheque directing payment.
• Drawee: The bank upon which the cheque is drawn and from which funds are withdrawn.
• Payee: The person or entity to whom the cheque is payable.
• Endorser: A payee who transfers the cheque to another party by endorsement.
• Holder: The person currently entitled to receive payment.

Dishonour of Cheques and Remedies

Cheque dishonour occurs when the bank refuses payment, often due to insufficient funds or irregularities. Marketing professionals must understand the causes and legal recourse available.

Common Causes of Dishonour

• Insufficient funds: The drawer’s account balance is inadequate.
• Signature mismatch: The cheque bears an unauthorized signature.
• Post-dated cheque presented early: Attempting to cash before the date.
• Stale cheque: Presented after expiry of six months.
• Alterations: Unauthorized changes to the cheque details.

Legal Remedies

• Notice of dishonour: The payee must notify the drawer promptly.
• Filing a suit: The payee may sue the drawer for the amount under the Negotiable Instruments Act.
• Reporting to authorities: Dishonoured cheques may be reported to the Directorate of Criminal Investigations for possible prosecution.

8.1.2 Bill of Exchange

The bill of exchange is a versatile negotiable instrument widely used in marketing to facilitate credit sales and international trade. It involves three parties and represents an unconditional order to pay a fixed sum at a future date.

Definition and Legal Framework

A bill of exchange is a written, unconditional order by the drawer directing the drawee to pay a certain sum either on demand or at a specified future date. It is governed in Kenya by the Bills of Exchange Act and forms a critical part of credit management in marketing, especially when dealing with suppliers or buyers on credit.

Parties and Their Roles

Bills of exchange involve three key parties whose roles define the transaction:

• Drawer: The party who creates the bill and orders payment.
• Drawee: The party to whom the order is addressed and who is expected to pay.
• Payee: The party entitled to receive payment; may be the drawer or a third party.

Characteristics and Functions

Bills of exchange have distinctive features that make them useful in commercial transactions:

• Unconditional order: The payment instruction must be clear and absolute.
• Specified amount: The sum to be paid is fixed and certain.
• Time-bound payment: Payment is due on demand or at a predetermined date.
• Transferability: The bill can be endorsed and transferred to others.
• Evidence of debt: Serves as proof of a credit transaction.

Usage in Marketing Transactions

In marketing, bills of exchange are used to guarantee payment for goods or services supplied on credit. For example, a supplier delivering products to a retail business may require a bill of exchange to secure payment within 30 days. This instrument assures the supplier of legal recourse if payment is delayed.

8.1.3 Promissory Note

Promissory notes are written promises to pay a certain sum of money to a specified person or bearer. They are simple instruments often used in marketing for financing and credit arrangements.

Meaning and Legal Basis

A promissory note is a signed written promise by one party (the maker) to pay a definite sum to another party (the payee) either on demand or at a fixed future date. The Kenyan Negotiable Instruments Act regulates promissory notes, providing a legal framework that supports credit transactions in marketing.

Essential Elements of a Promissory Note

To be valid, a promissory note must contain certain elements:

• Unconditional promise: The maker must promise to pay without conditions.
• Definite amount: The sum payable must be clearly stated.
• Payee identification: The person to whom payment is promised must be named.
• Signature of maker: The note must be signed to bind the maker.
• Time of payment: Must specify when payment is due.

Differences Between Promissory Notes and Bills of Exchange

Although both are negotiable instruments, promissory notes differ from bills of exchange in several ways:

• Number of parties: Promissory notes involve two parties; bills of exchange involve three.
• Nature of obligation: Promissory notes are promises to pay; bills of exchange are orders to pay.
• Usage: Promissory notes are common in lending and credit agreements; bills of exchange are often used in commercial trade.

Role in Marketing Financing

Marketing professionals often use promissory notes to formalize credit extended to customers or to secure loans for business operations. For example, a hotel providing services on credit to a corporate client may require a promissory note as assurance of payment within a stipulated period.

Chapter Summary

This chapter examined the law of negotiable instruments, focusing on their types, characteristics, and distinctions. It began by exploring negotiable instruments, specifically cheques, bills of exchange, and promissory notes, describing their functions and legal roles in commercial transactions. The discussion then highlighted the essential characteristics that define negotiable instruments, such as transferability, unconditionality, and the promise or order to pay a certain sum. Understanding these features is crucial for recognizing the legal implications and protections afforded to holders in due course. The chapter concluded by clarifying the distinctions between the various negotiable instruments, emphasizing their differences in parties involved, form, and enforceability. Mastery of these concepts is fundamental for applying the law effectively in commercial dealings involving negotiable instruments.