Negotiable instruments are vital tools in procurement management, facilitating smooth financial transactions and credit arrangements between buyers and suppliers. Understanding their legal framework enables procurement professionals to effectively manage payments, mitigate risks, and enforce contractual obligations. In Kenya, negotiable instruments such as cheques, bills of exchange, and promissory notes are governed by the Negotiable Instruments Act, which ensures their reliability and negotiability in commercial dealings. Mastery of these instruments equips procurement managers to handle payments and credit confidently within both public and private sector procurement environments.

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. They are crucial in procurement as they facilitate credit transactions and provide security to suppliers and buyers. The negotiability feature allows the holder to transfer the instrument to another party, often without the need for additional documentation, enabling liquidity and flexibility in commercial operations.

8.1.1 Cheques

Cheques are among the most common negotiable instruments used in procurement to effect payment. They are written orders directing a bank to pay a specified sum from the drawer’s account to the payee. In Kenya, cheques are widely used by businesses and government entities to settle supplier invoices and operational expenses.

Definition and Legal Framework of Cheques

A cheque is a written order from a bank account holder (drawer) instructing the bank (drawee) to pay a specified sum to a named person (payee) or bearer. The law governing cheques in Kenya is primarily the Negotiable Instruments Act and the Banking Act, which stipulate requirements for validity and enforceability. The cheque must be signed by the drawer, contain an unconditional order to pay, specify the amount, and be payable on demand.

Types of Cheques and Their Uses in Procurement

Procurement professionals encounter different cheque types, each serving distinct purposes:

• Bearer Cheque: Payable to the bearer or holder; used for quick payments but risky if lost or stolen.
• Order Cheque: Payable to a specific person or their order; safer as it requires endorsement for transfer.

• Crossed Cheque: Contains two parallel lines, directing the bank to pay only into a bank account; reduces risk of theft.

• Open Cheque: Not crossed, can be cashed directly at the bank counter.

• Post-dated Cheque: Dated for a future date; used for deferred payments in procurement contracts.

Dishonour of Cheques and Remedies

Dishonour occurs when a cheque is returned unpaid by the bank due to insufficient funds, a mismatch of signature, or a stopped payment order. In procurement, dishonoured cheques disrupt cash flow and supplier relationships. Remedies include:

• Demand for Payment: The payee can demand immediate payment from the drawer.
• Legal Action: Filing a suit under the Negotiable Instruments Act for recovery.
• Criminal Proceedings: Dishonour of cheque can be a criminal offence under Kenyan law.
• Negotiation: Suppliers and procurement managers may renegotiate payment terms to avoid litigation.

Endorsement and Transfer of Cheques

Endorsement involves signing the back of the cheque to transfer ownership to another party. This feature ensures flexibility in procurement payments, allowing suppliers to transfer receivables. Endorsements can be:

• Blank Endorsement: Just a signature; cheque becomes bearer instrument.
• Special Endorsement: Specifies the person to whom the cheque is payable.
• Restrictive Endorsement: Limits further transfer, e.g., “For deposit only.”

8.1.2 Bill of exchange

Bills of exchange are formal written orders from one party to another, requiring the drawee to pay a specified sum to the payee or bearer at a future date. They are essential in procurement for managing credit and deferred payments, especially in large-scale projects and government procurement.

Definition and Characteristics of Bills of Exchange

A bill of exchange involves three parties: the drawer (who issues the bill), the drawee (who pays), and the payee (who receives payment). It must be unconditional, in writing, signed by the drawer, and specify the amount and payment date. The bill is transferable by endorsement, making it a flexible financial instrument in procurement transactions.

Parties Involved and Their Roles

Understanding the roles clarifies responsibilities in procurement payments:

• Drawer: Usually the supplier or creditor who draws the bill to receive payment.
• Drawee: Often the buyer or debtor who is ordered to pay.
• Payee: The party entitled to receive payment, which can be the drawer or a third party.

Acceptance and Maturity of Bills of Exchange

Acceptance occurs when the drawee signs the bill, agreeing to pay on maturity. In procurement, acceptance confirms the buyer’s commitment to pay the supplier on the agreed date. Maturity is the date when payment must be made, which can be on demand, a fixed date, or after a certain period from acceptance.

Dishonour and Notice of Dishonour

If the drawee fails to pay or accept the bill, it is dishonoured. Procurement managers must understand the procedures for notice of dishonour to protect supplier rights:

• Protest: Formal declaration by a notary public indicating dishonour.
• Notice: Informing all parties involved about the dishonour.
• Recourse: Supplier may seek payment from the drawer or endorsers.

8.1.3 Promissory Note

A promissory note is a written promise by one party to pay a specified sum to another party either on demand or at a fixed future date. It provides a simpler alternative to bills of exchange, often used in procurement to document credit arrangements.

Definition and Legal Requirements

The promissory note must be a written, unconditional promise signed by the maker (the party promising to pay), specifying the amount and payee. In Kenya, the Negotiable Instruments Act governs promissory notes, ensuring these instruments are enforceable in court.

Parties to a Promissory Note and Their Obligations

There are two primary parties:

• Maker: The person who promises to pay the amount.
• Payee: The person to whom payment is promised.

The maker’s obligation is absolute and unconditional, unlike bills of exchange which involve three parties.

Transferability and Endorsement

Promissory notes are transferable by endorsement, allowing procurement managers to assign the right to receive payment. Endorsement must be written on the note, signed by the endorser, and can be:

• Blank: Converts note to bearer instrument.
• Special: Names the new payee.

Dishonour and Legal Remedies

Non-payment of a promissory note when due constitutes dishonour. Remedies include:

• Demand for payment from the maker.
• Filing a civil suit for recovery.
• Criminal prosecution if dishonour is due to insufficient funds.

Procurement professionals must monitor promissory notes to ensure timely payments and safeguard supplier relationships.

Chapter Summary

This chapter has explored the law of negotiable instruments, focusing on key types such as cheques, bills of exchange, and promissory notes. It began by examining the nature and purpose of these instruments in facilitating commercial transactions and their distinctive features. The discussion then moved to the essential characteristics that define negotiable instruments, including their transferability and the right to sue on them. Following this, the chapter detailed the critical elements required for a valid negotiable instrument, highlighting the legal requirements that ensure enforceability. Attention was also given to the role of third parties in the handling and negotiation of these instruments, emphasizing the importance of proper endorsement and delivery. Overall, the chapter provided a comprehensive understanding of how negotiable instruments operate within commercial law and their significance in business dealings.