BULE HORA UNIVERSITY

SCHOOL OF LAW
Law of Banking & Negotiable
Instrument
By: Nanesa Wata Dereso (LLB,LLM Cand.)
2013 E.c

1
 Introduction
part I: Law of banking
A bank or banker is a business organization or a person engaged in
the banking business.
The Law of Banking is a special area of Commercial Law that
incorporates rules dealing with;
- the definition of banks and banking transactions
- the specific requirements for the establishment and operation of
banking business
- the various types of banks, i.e., commercial banks and central or
national banks and their functions
- the powers and duties of central or national banks
- the various types of banking transactions or operations such as
deposit of funds, bank transfers, deposit and management of
securities, lending deposit of valuable things and documents,
discount of commercial instruments and securities
- the rights and duties of banks and their customers

2
 Part II: LAW OF NEGOTIABLE INSTRUMENT
Negotiable Instruments are documents or papers incorporating or
containing various types of rights which are transferred by
endorsement and delivery or by mere delivery of the document.
The Law of Negotiable Instruments is a branch of commercial law
dealing with;
- the definition and types of negotiable instruments
- the formal requirements for the issuance and circulation of valid
negotiable
instruments
- the mode of transfer of negotiable instruments
- the definition, form and effect of endorsements
- the definition, form and effects of acceptance, acceptance for honor and
payment or acceptance by intervention of negotiable instruments
- the rights and duties of the parties to negotiable instruments
- the performance of obligations arising out of negotiable instruments
- the remedies available to holders of negotiable instruments in cases of
non
performance 3
 Part I: Chapter one
INTRODUCTION
Financial laws have two parts:-
The contract:
Financial regulation:- an administrative law mainly deals
with an issue between the government and the institutions
What Are Financial Institutions?
Financial institutions:- banks, insurance companies,
saving and credit institutions, microfinance institutions
and capital goods leasing institutions.
Are micro finance institutions a public enterprise?
Credit and saving institutions are cooperatives. All the four
has one thing in common which is transacting finance.

4
 DEFINITION
According to Art 2 (2) of the Monetary and Banking Proclamation
No 592/2008
“Bank/banker” means a company licensed by the National Bank
to undertake banking business or a bank owned by the Government.

Other jurisdiction define it as institution/persons w\c deals with

money & its substitutes.
Banking business means any operation involving receiving money
on deposit, lending money, receiving commercial instruments on
deposit, accepting, negotiating/ transferring, discounting
commercial instruments and other evidences of debt, and buying
and selling of gold and silver notes and foreign exchange.
Therefor law of banking is one of special law of
commerce w\c regulate banks and banking transaction
5
The principal types of banking in the modern industrial world are:-
1. Commercial banking :- is a dealer in money and in substitutes for money .The
basis of the banking business receiving “deposits” from individuals, firms, and
occasionally governments and making loans or extends credit and invests in
securities. The banker makes profit by borrowing at one rate of interest and
lending at a higher rate and by charging commissions for services rendered and
2. Central banking:-
mainly regulatory functions &They are often responsible for formulating and
implementing monetary and credit policies, usually in cooperation with the
government.
Bankers to governments and “lenders of last resort” to commercial banks and
other financial institutions.
Liquidity:- A bank must always have cash balances on hand in order to pay its
depositors
-It must also keep a proportion of its assets in forms that can readily be converted
into cash. Only in this way can confidence in the banking system be maintained.
3. The Development of Banking
An ancient origin Banking But now in most countries, this has become a
prerogative of the central bank.
6
 Dev’t of Banking system in general & in Ethiopia

Prior to 13th c. in the world knowledge about banking was little known, In the world the first banking
system was started in 17th c
In the earlier time banks primarily deals with changing money & supply of foreign as well domestic
coin of the correct weight and fineness.
The main factors for the existence of banking system and Negotiable instrument at earlier time was
related with existence of international traders and creation of negotiable instrument
In Ethiopia Banking was started in 1905 . “Bank of Abyssinia’’
-Was established based on the agreement signed between the Ethiopian Government and the National
Bank of Egypt, which was owned by the British.
-Bank of Ethiopia which was fully owned by Ethiopians 1932
-With the Italian occupation (1936-1941), the operation of the Bank of Ethiopia came to a halt.
-The State Bank of Ethiopia was established in 1943
-In 1963, the State Bank of Ethiopia split into the National Bank of Ethiopia and the Commercial
Bank of Ethiopia S.C.
-The first privately owned company in banking business was the Addis Ababa Bank S.C., established
in 1964
-All private banks and 13 insurance companies were nationalized and along with state owned banks
1975
-The Transitional Government :- Market-oriented system and ushered in the private sector

7
Economic Significance of Banks
Serve as financial intermediaries thereby providing ideal source of fund
for investment that is crucial in increasing production, exports, creation
of jobs and foreign exchange
Lending to customers who need the money for consummation,
purchase of various goods and services, construction of houses, and
education increases demand for those goods and services, thereby
encouraging producers and service providers to expand their
undertakings and increase production
Banks also play a positive role in encouraging savings by providing an
incentive to save through payment of interest on deposits/savings and
providing safety and security
The power of the national bank in fixing interest rates is particularly
crucial in both investment and saving
The existence of a network of banks covering all parts of a country
facilities business transactions in the country by making payments
easier, safer and cheaper. Payment through banks also avoids the risk of
loss or theft of money
8
 General regulation of Banks
 To control rent seekers
 To prevent financial sector form fraud
 To get substantial profit & to protect public deposit in general
 To ensure the integrity & stability of financial sectors I.e from bankruptcy
 To promote efficient performance of institution, e.g ATM
 To secure general economy of the country
Financial regulation in Ethiopia should take place for the ff reasons 592
 To increase public confidence as to banking business (art14-17)
 To regulate minimum amounts of capital & reserve requirements of the
banking business (art 18&19)
 To protect the mov’ts of share b/n or among share holders in banking
business activities (art 10&11)
 To protect unsustainable extension of credit provided by commercial
banks
 To regulate branching & new opening banks according to banking
business proc/n. (art 3-5)
9
 Types of Banks
Group Assignment with individual presentation w\c marked out of
15%

1. National Bank & Development Banks

2. Commercial Banks, Banks and the Money
Market
3. Savings Banks , Banks and Banking
Transactions in Ethiopia
4. Investment Banks & Islamic Banking
5. Responsibilities of Central Banks
6. Role of Micro Finance Institutions
10
 DUTIES OF THE BANK.
1.To collect deposits: of cash, valuables, cheques and the likes
from, for and on of customers.
2.To pay on demand and honor customer’s cheques
3.Duty of secrecy: to treat its customer’s information and affairs
as private and strictly confidential.
4.To inform the customer on developments and (or) suspicious
activity in relation to his account.
5.To act as collecting banker to the customer: receive all amounts
payable to the customer and clear with other banks.
6.To exercise due care and skill.
7.To give reasonable notice before closing the customer’s account.
& etc

11
 RIGHTS OF A BANK
1.To use deposited money without seeking approval from the customer
2.To charge interest on credit facilities.
3.To refuse a payment order where there is a legal or reasonable justification.
4.To obtain reimbursement from customer for reasonable expenses incurred on
his/her behalf.
5.To exercise a right of lien over the customer’s property in its possession.
6.Combination of accounts - right of a bank to generally retain a credit balance in a
customer’s account against a debt due to the bank from the customer’s other
account.

Duties of a Customer
1. To seek out the bank whenever he wants to withdraw his money rather than the
bank to seek him out.
2. To draw his cheque (or make his withdrawal order) with due diligence and care
so as not to facilitate misrepresentation or fraud.

12
 CHAPTER TWO
MAJOR BANKING TRANSACTIONS
1. Deposit of Funds:- 896-902
2. Bank Transfers :- 903-911 bank deposit
3. Deposit of Securities :-912-918
4. Hiring of Safes :- 919-924
5. Discount :- 941-944
6.Bank Lending:-2471-72, 2020-26
7. Documentary Credits :- 959-967

credit transaction
13
 DEPOSIT OF FUNDS
deposit of funds is a contract whereby a person agrees to deliver and transfer the
ownership of a specified amount of money to a bank which agrees to repay them
under the conditions agreed upon in the contract or on the demand of the
depositor.
The bank, as the owner of money deposited, has the right to use it in respect of its
professional activities.
The contract of deposit of funds is almost identical to contracts of loan of money or
other fungible things under Art 2471 he borrower becomes the owner of money or
fungible things.
 the bank shall not acquire the title to nor the right to dispose of coins or other
individual monetary tokens in :respect of which there is a provision that they shall
be refunded in kind.
The contract of deposit of funds results in the opening of an account in the name of
the depositor by the bank in which the latter enters all transactions made with the
depositor.
The type of account opened may either be a current account in which the depositor
has the right to dispose of the deposit at sight or on demand. This type of account
also is a check operated account.
As the repayment may be demanded at any time, this type of deposit does not bear
interest.
14
 Con…
The account may also be a saving account, which is interest bearing
and the right of the depositor to demand repayment may be limited.
The insured may be prevented from withdrawing an amount which is
greater than a certain amount of money within a certain period or to
give notice of withdrawal.
It may also be a time deposit or account in which the depositor can
not demand repayment or withdrawal before the lapse of the agreed
period of time.
This type of deposit normally bears interest at a rate agreed upon
between the parties provided that it does not exceed the maximum
limit determined by the National Bank.
Where the person has several accounts, each account shall operate
independently unless the parties agree otherwise.
However, a contract of deposit of funds does not entitle the depositor
to demand withdrawal of an amount that is greater than the balance
in his favor in the account.
15
 BANK TRANSFERS
transaction represents one mode of transferring money from one account to
another upon the written and signed order of the transferor, and a means of
performing money obligations.
a bank transfer is a transaction whereby the bank, upon the written order of the
depositor /transferor, debits the account of the transfer and credits the account
of another depositor/the transferee with the amount specified in the
instruction or transfer order.
In cases where the intended beneficiary of the transfer does not have an account
of his own, transfer may still be made through the account of another person.
In such cases, the person to whose account the amount is credited shall carry
the sum to the actual beneficiary of the transaction who must be specified in
the transfer order or instruction.
This type of transfer, which requires the existence of two separate accounts, has
to be distinguished from international transfers and local transfers that do not
require accounts by the transfer and the transferee and hence are commonly
used modes of transfer.
There are no rules governing these types of transfer, and the rights and duties of the
parties are determined by the contract concluded between the bank and the transfer.

16
Bank transfer may be internal where the accounts of the transfer and the
con...

transferee are opened within the same branch or external where the accounts
of the transfer and the transferee are opened at two different branches of the
same bank.
Transfer order represents one form of demanding repayment by the depositor.
The transferor cannot order the bank the transfer of an amount which
exceeds the balance without a special agreement between the transferor and
the bank under which the transfer under takes to deposit the agreed amount
within a period determined in advance
2471, 905, 908, 899, 945 agreement is considered as a loan or overdraft
The transferee or the beneficiary of the transfer shall acquire the right of
ownership /title/ to the money to be transferred at the time when the bank
debits the account of the transfer. And the transfer may cancel the transfer
at any time before his account is debited and before the transferee acquires
ownership right to the money.
However, if the transfer order is communicated to the bank by the
beneficiary as agreed according to Art 907(1), the transferor loses the right
to cancel the order from the time the transfer order is issued and handed
over to the beneficiary.
This is mainly because the issuance of the order and its handing over to the
beneficiary shows the existence of a valid contract formed by the acceptance
by the transferee of the offer made by the transfer to pay a certain amount17
 HOW CAN YOU COMPROMISE THE FF
the obligation for the performance of which the transfer
order is issued should have been extinguished by
payment/performance according to Art 1806 civil code.
However, contrary to this general principle of contracts,
Art 909 provides that obligations underlying the issuance
of transfer orders together with securities and collateral (if
any) shall not be extinguished until the account of the
transferee is credited with the amount of money
transferred.
The rational behind is that to protect the transferee's
interest against the cases where the bank is prevented
from crediting the account of the transferee upon the
opposition of the transfer on the ground of bankruptcy of
the former and bankrupt transferee.
18
 DEPOSIT OF SECURITIES
the relevant provisions of the commercial code do not provide a definition
of this transaction.
A contract of deposit of securities may be defined as a contract whereby
an owner of securities (shares or stocks, government bonds and
company bonds (debentures)) or other right holder agrees to deposit the
securities with a bank on the name and behalf of depositor in which
they agrees to provide safe custody and handle or manage them for
consideration as paid Bailee, not as gratuitous Bailee and of yields
arising from securities deposited .
The bank must take necessary measures and comply with formalities
necessary to preserve the rights, arising out of securities such as renewal of
coupon and payment of stamp duty.
Finally, where the contract of deposit of securities is terminated either by
the decision of the depositor, the bank has the duty to restore them to
the depositor or his agent or his creditors, even where the securities are
registered in the name of a third party.
Securities deposited by the usufructury may restore to the bare owner if
the latter produces evidence of the death of the former.
19
 HIRING OF SAFES
Banks take charge of their customers‘ valuables things, like jewelry,
negotiable securities, and documents of title to properties, will, and
deposit them, as they can be conveniently stored. Exception explosive,
narcotic, gun & legal tenderer currency,
- Such deposits are special in nature and thus do not fall under the general
category of banks‘ deposit.
Banks deposit their customer‘s values in either of the following two ways:
1. By accepting the valuables for safe-custody or
2. By hiring out safe deposit boxes to their customers.
-In the first case, customer's valuables are handed over to the bank either
openly or in a sealed cover box. The particulars of the deposit may be known to
the bank in which case a record of them will be made in the safe custody
register.
-Banks usually place the valuables in their safes together with other deposits.
This service is known as safe – custody.
- In 2nd case, the bank hires out safe boxes and the valuables to be deposited
are not as such handed over to the bank; rather the customers themselves place
them in the hired safe boxes. The particulars of the deposit will not be disclosed
to the bank. This service is known as safe-deposit.
20
 Con…
When a customer enters into a contract for hiring of safe, a safe or
compartment of a safe will be placed at his disposal for a specified
period.
The key of the safe box, with its reserves, will be given to the customer.
This key will be at his exclusive possession during the terms of the
contract.
The customer can use the safe box to deposit any article that he wants as
far as the article to be deposited in the safe box is not dangerous in such a
way as to cause damage to the bank‘s and other customers‘ property or is
not thought to be harmful to the public at large.
The bank maintains a safe deposit register in which it will take down the
customer‘s name, address and safe box number, access identification
card when he enters into the contract, signature card ,code word‘ or a
pass word‘ which he will communicate to the strong room attendant when
he comes to visit his safe box.
A safe box may be hired in the joint names of two or three persons. In
such a case the banker should get the mutual consent of all the hirers in
executing any instructions or making subsequent modifications .
21
 GROUNDS OF TERMINATION for HS Kts
the contract for hiring of safes can be terminated at the
will of the parties
 although both parties have the right to unilaterally
terminate the contract
the bank, as a service rendering institution to the
general public, should show good cause to terminate the
contract.
The contract could also be terminated at the death of
the customer or an individual banker.
The laps of the period of the contract and
failure to pay the rental charges by the customer may
also be grounds for terminating the contract.

22
 Discount
Discount is a contract whereby a bank agrees to pay to a
holder of a commercial instrument or security having a future
date of payment an amount which is lesser than its actual
value, against the surrender of the instrument and the
undertaking to repay the value of the instrument by the holder
where payment is not made at the maturity of the instrument.
A bank discounts a commercial instrument for consideration,
which is the difference between the value of the instrument
and the discounted amount paid by the bank to the holder.
On the other hand, a holder of a commercial instrument
agrees to receive an amount which is lesser than the actual
value of the instrument in most cases because he needs the
money for immediate uses and his rights in the instrument
do not mature until a distant future date and he cannot get
the money he needs from other sources and the need does
not allow him waiting until that date.
23
 Con…
The amount of commission and interest charged by the bank which
discounts the instrument shall be calculated by taking into account the
time remaining until maturity of the instrument and the value of the
instrument respectively.
The bank, which discounts a commercial instrument or a security, shall
acquire all the rights of the beneficiary of discount on the instrument
including the right to demand payment from the person or persons
who are liable on the instrument.
In addition, where the bank receives the full value of the instrument at
maturity, the obligations arising out of discount shall be extinguished.
However, if the bank is not successful in its claim for payment at
maturity, it will have two alternative remedies
1. It may proceed against parties liable on the instrument or the company
which issued the share or bond
2. t may proceed against the beneficiary of the discount on the of basis the
contract of discount
However, the right of the bank is limited to the amount of money it has
paid to the beneficiary plus commission, interest and expenses.
24
 BANK LENDING
Bank lending or credit services provided by banks are one of the
most common and traditional functions of banks which, if properly
used, may play a vital role in a country's economic development.
All types of bank loans are given following certain procedures:
The bank under all cases must assess the credit-worthiness of the
customer by studying the business and financial position of the
customer, his credit history and finally by requiring a security or
collateral in the form of mortgage or pledge.
A bank may require a potential borrower to mortgage a building,
a motor vehicle, a business or his right to use urban land
acquired by lease if the amount of guarantee does not exceed the
lease price paid by the holder.
A bank may also provide loan against pledge of chattels of various
types or pledge of incorporeal things particular claims, and
securities documents of title to goods such as bills of lading,
warehouse goods deposit certificates.
25
 DOCUMENTARY CREDITS
A documentary credit is a credit provided to persons engaged in
foreign trade particularly importers who need to pay the price of
goods in foreign exchange.
This type of credit is required because it is only banks which are
allowed to handle and deal in foreign exchange and importers are
required to pay the price of goods imported from abroad through
opening letters of credits.
So an importer who intends to import goods in to the country has to
apply to a bank to open a letter of credit in which the seller of the
goods is the beneficiary.
Where the bank accepts the application of the importer, it opens the
letter of credit equivalent to the price of the goods and transmits or
communicates it to its branch (if it has a branch at the place where
the seller is situated) or to a bank with which it has a
correspondence.
 The correspondent bank, which has received the letter of credit, shall
notify the seller/beneficiary of the credit.
26
 And the correspondent bank shall Con...
pay the price of the goods to the
beneficiary of the credit after receiving documents representing the
goods such as an invoice, a bill of lading, a packing list and an
insurance policy covering risks associated with transportation (Where
according to the contract of sale insurance is the obligation of the seller)
and after confirming that the documents presented by the seller confirm
with terms and conditions of the credit.
 The payment may also be made to third parties such as holders of bills of
exchange to whom the right to receive the part or the whole of value of the
letter of credit is transferred.
 The correspondent bank which has paid the agreed amount to the seller
or third parties to whom the right to receive payment is transferred, shall
send the documents it has received from the seller to the opening bank and
the opening bank will hand over these documents to the importer after
receiving the amount equivalent, in Ethiopian Birr, to the amount paid to
the seller, interest and service charge (commission) for the service
provided.
 In the absence of a contrary agreement, the bank is entitled to the hold and
dispose of the goods imported (represented by the documents at its hand)
and recover the amount of money it or its correspondent has paid plus 27
 PART TWO
LAW OF NEGOTIABLE INSTRUMENTS
CHAPTER ONE
INTRODUCTION
DEFINITION OF NEGOTIABLE INSTRUMENTS

The word negotiable means transferable by delivery and the word

instruments‘ means a written document by which a right is created
in favor of a person.
 Thus, the term negotiable instruments literally refers to a document
containing rights that can be transferred by delivery
In case of money there is no claim however, in case of Nis there may be
claim
-Needs signature of issuer
-Name for whom
28
 Con…
Similarly, Article 715(1) of Eth Com Co. of 1960 defines the term negotiable
instruments as any document incorporating a right to an entitlement in such a
manner that it is not possible to enforce or transfer the right separately from the
instrument.
The rights that could be incorporated in negotiable instruments may be rights
for payment of money arising out of various contracts such as the contract of
loan, sale, lease, payment of money or any other contract performed by payment
of a certain amount of money. E.g.. rights to receive goods under voyage or
deposited in a warehouse.
According to this provision, the holder of negotiable instruments can transfer
the rights incorporated in the instrument by transferring the instrument.
Similarly, a person who claims the rights incorporated in negotiable instruments
may enforce or exercise them only if he has possession of the instrument
He must also present the instrument to the person who is supposed to perform
the obligations arising out of the instrument.
Based on the purpose and rights incorporated in the instruments, Article 715(2)
of the Commercial Code categorizes negotiable instruments into three main
types, i.e., Commercial Instruments, [Transferable] Securities and Documents of
Title to Goods. 29
 Nature and Purpose of Negotiable Instruments
It is incorporeal ppty r8t i.e.. Chosen in action ,must have actual possession of
things,
Duct's are inseparable from r8t incorporated there
It’s form of kt; promise to pay, to deliver goods,there4 the requirements necessary
for the formation of a valid contract must be fulfilled for issuance of a valid and
enforceable negotiable instrument.
It needs signature and name of the party
It’s easily transferable from one person to another
The main purpose of negotiable instruments is
- facilitation of commercial transactions
 It reduce inconvenience in business transaction involving the gds.
 It raise capital for investment; starting new businesses or expansion of
existing businesses thereby increasing the production of goods and
services in the country
 The specific purpose: used as means of borrowing money, buying goods
and services on credit and as method of evidencing a pre-existing debt.
 encouraging individuals to deposit funds in banks, in return the holder of
the certificate has the right to receive interest.
30
 Types of Negotiable Instruments
1. Commercial Instruments
Commercial instruments are negotiable instruments
which incorporating rights for payment of a specified
amount of money.
They are issued and negotiated on the basis and with
the purpose of performing an obligation that can be
performed by payment of a certain amount of money.
Hence, they are used as a substitute for money.
These are bills of exchange, promissory notes,
checks, travelers‘ checks and warehouse goods
deposit certificates as the types of commercial
instruments recognized under the Ethiopian law.

31
 2. Transferable Securities
Securities are negotiable instruments incorporating rights for
payment of money.
The sources of such rights may be investments made in companies
or loans provided to the government or its subdivisions through
purchase of gov’t bonds and treasury bills or to companies
through the purchase of debentures.
A person who invests in a company is entitled to share in the
profits of the company if any, i.e., he has the right to receive
dividends and to share in the assets of the company where the
company is dissolved.
/Art 345/ On the other hand, the person who has purchased a gov’t
bond or a treasury bill or a company bond, also called a
debenture, acquires the right to receive repayment of the money
he has given on loan plus interest.
/Art 433/. Refer also to the provisions of Arts 2490-2511 of the Civil
Code.
32
 Con…
However, all securities are not negotiable
instruments. What makes securities negotiable
instruments is their transferability according to rules
of negotiation.
Therefore, if it cannot be negotiated, it is difficult to
circulate as money.
Bonds, stocks, dollar bills, and transferable shares are
instances of securities which are negotiable
instruments considered to be negotiable instruments
because they can be easily exchanged between parties.
Non-Negotiable vs. Negotiable.

33
con…
Negotiable :- When an asking price or contract is referred to as
negotiable it means that it is not set in stone and can be adjusted
depending on the circumstance.
Or Negotiable refers to the price of a good or security that is not firmly
established or whose ownership is easily transferable from one party to
another.
 Likewise, instruments of this nature can be exchanged or transferred
with ease
 Non-negotiable refers to the price of a good or security that is firmly
established and cannot be adjusted, or a part of a contract or deal that
is considered a requirement by one or both involved parties & hat
cannot be exchanged or transferred to a new owner.
 Additionally, the term can relate to a good or security whose
ownership is not easily transferable from one party to another.
 if one party involved in a transaction is not willing to make any changes
to a condition that has been set in place.  An example of a non-
negotiable instrument is a crossed cheque, a non-marketable
instrument, would be a government savings bond. 34
 3. Documents of Title to Goods
These are negotiable instruments containing rights of
ownership over goods that are being transported or goods
which are warehoused and which enable their holders to
receive such goods.
That is a written description, identification, or declaration of 
goods authorizing the holder usually a bailee to receive, hold,
and dispose of the document and the goods it covers.
Examples of documents of title are warehouse receipts, bills of
lading, (a receipt for shipped goods, and a contract between a
carrier and shipper) and delivery orders.
Refer Arts 571-576 and 610-619 of the Commercial Code regarding
documents of title to goods under voyage and Arts 2814-2824 of
the Civil Code regarding documents of title to goods warehoused.

35
 CHAPTER TWO
COMMERCIAL INSTRUMENTS
Definition
Commercial instruments are negotiable instruments incorporating rights
for payment of a specified amount of money.
They are issued and negotiated on the basis and with the purpose of
performing an obligation that can be performed by payment of a certain
amount of money. Hence, they are used as a substitute for money.
Art 732(1) of the defines commercial instruments as negotiable instruments
setting out on entitlement consisting in the payment of a sum of money.
Sub(2) of the same Article provides that bills of exchange, promissory notes,
checks, travelers‘ checks and warehouse goods deposit certificates as the types
of commercial instruments recognized under the Ethiopian law.
However, treating warehouse goods deposit certificates, which evidence
contracts of warehousing and the right to receive the goods warehoused, as
commercial instruments does not seem to be in accordance with the
definition of commercial instruments, i.e., documents containing right for
payment of money.
36
 Types of Commercial Instruments
1. Bills of Exchange
are negotiable instruments incorporating an
unconditional order, addressed by one person to
another, signed by the person giving it, requiring the
person to whom it is addressed to pay on demand or at
a fixed or determinable future time a certain sum in
money to or to the order of a specified person.
It involve an order to pay money rather than a promise
to pay money. There are three parties
Drawer, the person issuing the order,
Drawee, the person ordered to pay and
Payee, the person who receives the payment.

37
 Con…
The Commercial Code of Ethiopia does not provide a definition of
bills of exchange. However, Art 735 enumerates the requirements to
be fulfilled for drawing a valid bill of exchange from which one
may deduce the definition of the term under Ethiopian law.
 Accordingly, a bill of exchange must contain;
 The term bill of exchange‖
 An unconditional order to pay a certain sum in money
 The name of the person who is to pay ( the drawee)
 The time of payment
 The place of payment
 The name of the person to whom or to whose order payment is made
or an
indication that it shall be payable to bearer
 The date when and the place where the bill is issued
 The signature of the person who issues the bill (drawer)
38
 Con…
A bill of exchange that does not contain any one of the
above requirements shall not be valid and the drawer or
any other party to the instrument can raise defect of
form against any person who claims based on the bill.
 Art 717/1/ However, a bill which does not contain the
time of payment is presumed to be payable at sight or
on demand.
A bill which does not mention the place of payment,
shall be deemed to be payable at the domicile or at the
address of the drawee, and
a bill which does not provide place of issue, is deemed
to have been drawn at the place mentioned beside the
name of the drawer.
39
 2. Promissory Notes
A promissory note is defined as
- a document incorporating an unconditional promise
in writing made by one person to another signed by the
maker, engaging to pay, on demand or at a fixed or
determinable future time, a sum certain in money, to or
to the order of a specified person or to bearer.
- It implies that promissory notes are promise to pay
money and they are only two parties i.e.
 the maker of the promise and
 the payee to whom payment is effected.

40
 Con…
Similar to the cases of bills of exchange, the Commercial Code
of Ethiopia does not provide the definition of a promissory note
apart from the requirements provided under Art 823 for validity
of promissory notes, which are identical with the definition given
above.
These requirements are essential for the validity of a promissory
note.
 The term “promissory note”
An unconditional promise to pay a sum certain in money
The time and place of payment
The name of the person to whom or to whose order payment is
to be made or a statement that the note is payable to bearer
The date when and the place where the note is issued
The signature of the person who issues the instrument
41
 CON…
These requirements should be observed for promissory
note to be negotiable instrument.
Failure to comply with these requirements results in the
invalidity of the instrument except in the cases provided
by Art 824, which fills gaps in case of absence of time of
payment, place of payment and the place of issuance.
 Accordingly, a promissory note which does not specify
time of payment, shall be deemed to be payable at sight
or on demand, a promissory note which fails to indicate
the place of payment is presumed payable at the address
of the maker of the promise and
note which does not indicate the place of issuance
deemed to have been drawn at the place indicated
beside the name of the maker.
42
 DISTINCTIONS BETWEEN BILLS OF
EXCHANGE AND PROMISSORY NOTES
 a promissory note contains promise to pay whereas a bill
of exchange contains an order to pay.
 The maker of promissory note is always primarily liable
and its liability is the same as the acceptor of a bill of
exchange,
 but in case of drawer of bill of exchange once the bill is
accepted he is only liable as surety in the event of
dishonoring of bill of exchange.
 The concept of acceptance is not applicable to promissory
notes unlike bills of exchange that may be accepted.
 Finally, promissory notes involve two parties only as
opposed to bills of exchange that under normal
circumstances involve three parties.
43
3. Checks
A check is the most widely used form of commercial
instrument.
It is bill of exchange drawn on a bank and payable on demand.
The English Bills of Exchange Act of 1882 defines cheques under
Art 73 as a bill of exchange drawn on a banker payable on
demand.
Therefore, since check is defined by reference to a bill of
exchange, most provision governing bills of exchange are
applicable to cheque.
The check is an unconditional order in writing, addressed by
one person, the drawer, to a banker, signed by the drawer,
requiring the bank to pay, on demand, a sum certain in money
to or to the order of specified person or to bearer.

44
 the main differences between checks and bills of
exchange
A check is always drawn on a banker and is always payable on demand while
a bill of exchange may be drawn on any one and may be made payable on
demand or at fixed or a determinable future time and
A check can be crossed in several ways but bills can not be crossed.
 Acceptance is not necessary for a check since it is payable on demand as
opposed to bills of exchange which may be made payable at fixed or
determinable future time presentment for acceptance may be necessary.
It is also important to note that a drawer of a bill of exchange and a check or the
maker of a promissory note may antedate or postdate it, provided that he has
not committed a fraud.
In other words, unless the drawer or maker intended to jeopardize the interest of
the payee by causing the rights contained in the instrument to lapse, the mere fact
of antedating or post dating an instrument does not make it invalid. Arts 744
Though the provisions of the commercial code relating to promissory notes i.e. Art
823-27 do not refer to Art 744, a promissory note may also be antedated or post
dated as bills and notes are identical with respect of maturity.
45
 Crossed Checks and Checks Payable into Account
A crossed check is a check containing two parallel lines drawn across
its face by the drawer or holder. A check may be crossed generally or
specially.
A check is crossed generally where it bears the two parallel lines
only or where the word bank‘ or banker‘ is inserted between the lines.
The crossing shall be special where the name of a specific bank is
inserted between the lines.
A check crossed generally can only be paid to a bank, which is the
banker of the payee or holder, or to a person who is the customer of
the drawee. check crossed specially can only be paid to the bank
specified in the crossing.
Such bank may have the check collected by another bank. Where
the bank whose name appears in a special crossing is the drawee itself,
the check may be paid to a person who is the customer of the drawee.
However, a bank may not collect crossed checks on behalf of
persons other than their customers or other banks. Art 864
46
 purpose of crossing checks
The whole purpose of crossing checks is to make sure
that the check is paid to the intended person by
preventing payment to other persons into whose
hands the check might fall.
It also helps to avoid or at least minimize risks
associated with loss or theft of checks i.e.to trace and
identify the person who actually received payment for
the purpose of recovery.
because crossed checks are paid to either banks or
customer of banks whose addresses are known and
traceable.

47
 Con...
However, the fact that a check is crossed does not mean that it
cannot be negotiated as open checks.
Negotiation of crossed checks shall have the same effect as the
negotiation of open checks and the person to whom such
check is transferred shall have the status of a holder in due
course if the requirements are fulfilled.
 However, the drawer or holder may prohibit negotiation
by inserting words such as not negotiable‘ or 'not
transferable‘ in the same manner as the drawer or endorser of
an open check.
 A person to whom a crossed check containing such a provision
is transferred shall not acquire a status of a holder in due
course and does not acquire a better title than the transferor/
Art 865. / See also Art 842, which provides for the effect of
transfer a non negotiable open check.

48
 Con…
Where the drawer or holder of a check writes
transversally across the face of the check words such as
payable in account‘ or any similar expression, the
drawee may not pay the check in cash to a person who is
not its customer.
Such check can only be settled by means of crediting
an account, by transferring from one account to another,
set off …Art 867(1).
The bank that violates this provision and pays the check
in cash at the counter shall have the liability to pay
damages provided under Art 866.

49
 4. Certificates of Deposit
A certificate of deposit is a form of commercial instrument
issued by a bank.
It is an instrument containing an acknowledgement by a
bank that it has received a sum of money on deposit and a
promise to repay the sum of money.
When a person deposits money in a bank he will be given
the document showing the deposit of money which could
be withdrawn by the depositor or the holder of the
certificate.
under our law, a certificate of deposit is not considered as
a commercial instrument. It is not even mentioned in our
law but in common law countries, it is treated as a
commercial instrument because it serves as means of
payment of money similar to other type of commercial
papers.
50
 Agreements as to Payment of Interest
According to Art 739 and 825 bills of exchange and promissory notes payable
at sight or at a fixed period after sight may contain a provision regarding
payment of interest.
 It also clearly prohibits agreements as to the interest made in relation to
bills and notes payable at a fixed period after date and those payable on a
fixed future date.
On the other hand, the Amharic version of Art 835 of the Commercial Code
provides that any provision according to which the drawer of a check agrees
to pay an interest shall be of no effect.
Now let us see these provisions in light of the purpose of interest
The borrower of money or the buyer of goods on credit may be required to
pay interest on the loan or the price of the goods as a service charge or price
for the use of money by the borrower or buyer of goods on credit and a
compensation‘ for the lender or seller on credit for giving up his right to use
the money for various purposes and the benefit or gain he has lost as a
result.
51
 Con…
When we see the provision of Art 739(1) in light of this purpose of
interest, we may understand that agreement as to payment of interest
inserted in bills of exchange and promissory notes payable at fixed
period after sight is appropriate.
Because in such cases the payee or holder of the instrument (the
creditor) has given-up his right to receive payment and use or invest it
until the date of maturity and hence may be entitled to receive interest.
However, the question is as to why the provision prohibits agreements
as to interest in bills and promissory notes payable at a fixed period
after date or those payable on a fixed future date which are similar to
bills payable at a fixed period after sight, i.e., both are payable on a
determinable future date.
Taking into account the purpose of the agreement as to payment of
interest and the maturity of these types of instruments, i.e., a future
date, it is possible to conclude that payment of interest in these
instruments is appropriate and there is no acceptable economic or legal
ground to prohibit such agreements.
52
 Con…
Furthermore, by allowing such agreement to be made in cases of
bills of exchange and promissory notes payable at sight,
Art 739 contradicts the provision under Art 835 that prohibits the
parties from agreeing on payment of interest in checks, which are
always payable at sight or demand.
 Allowing agreement as to payment of interest in cases where the
economic and legal reasons justifying payment of interest are not
present, i.e., on bills and notes payable at sight or
demand may even encourage a person to wait until the last date
of the period within which payment may be demanded with the
purpose of collecting the interest and result in litigations and
delay contrary to purpose of commercial instruments.
Therefore, the provision of Art 739 has to be read and
interpreted in light of the purpose of interest and the spirit of Art
835, which prohibits such agreement on instruments payable at
sprit or on demand. 53
 Opposition, Payment and Discharge
The drawer or an endorser of a bill of exchange may oppose the payment of the
value of the bill at any time before payment on the grounds of the bankruptcy
of the holder.
Similarly, the holder of a bill may oppose payment of a bill on the ground of
loss or theft of bill before payment is made. /Art 779. / Opposition on these
grounds may be made by notifying, in writing or orally, the drawee of the
grounds of the opposition.
However, payment of a check may be stopped by the instruction of the drawer
at anytime before
payment without the need to prove the existence of a valid ground to do so. /
Art 857. /
The drawer who pays a bill at maturity or a check is validly discharged and
cannot be held liable unless he has violated the opposition of payment or stop
payment‘ order respectively. /Art 776 and Art 861/
The drawer must verify the signature of the drawer but not the signature of
endorsers, as it does not have the specimen of signatures of all the potential
endorser of the bill or check . /Art 776(3) and Art 860/

54
 Con…
The drawer which fully pays a bill or a check and the maker
who full pays the note shall demand
the surrender if the instrument is receipted by the holder.
/Art 859(1) and Art 775(1). /
Where the cover held by the drawer is lesser than the amount
of the instrument, the holder cannot refuse partial payment if
the drawer decides to effect partial payment.
 In such a case the drawer cannot demand the surrender of
the instrument as the holder cannot enforce the remaining
rights without instrument / Art 71511) 716(1) /.
However, the drawee can demand the holder to specify such
payment in the instrument and to give a receipt. / Art 859(4)
and Art 759(3)/

55
 Negotiation of Negotiable Instruments
The mode of negotiation /transfer of negotiable instruments and
proof of lawful ownership by the owner /holder depend on the type
of negotiable instrument concerned, which in turn depends on the
manner in which the beneficiary of the rights contained in the
instrument is named or designate
Negotiable instruments issued in the name of a specified person
may be transferred by canceling the name of the transferor followed
by entering the name of the transferee in the instrument and
entering the name of the beneficiary in the register kept by the
person issuing the instrument or by issuing a new instrument in the
name of the transferee and entering the name of the transferee in
the register kept by the person who issued such instrument.
This mode of transfer is, however, inconvenient and impractical to
most types of negotiable instruments for the following reasons.

56
 Con…
Firstly, it may result in suspicion and unacceptability because of the
cancellation of the name of the transferor in the instrument, which in turn
results in reluctance of people to accept such instrument.
Secondly, it is incompatible with the purpose and nature of commercial
instruments which are supposed to circulate freely as substitutes for money
because persons will not be willing to receive an instrument which contains
cancellations.
Finally, the registration of the name of the transferee in the register kept by
the person issuing the instrument is impossible in cases of commercial
instruments as there is no such register kept by the drawer or maker, apart
from the piece of paper which remains in the check book or bill of exchange
or promissory note which cannot be considered as a register‖ in any sense of
the term.
Therefore, this mode of transfer should be restricted to transfer of securities
particularly shares/stocks and debentures rather than commercial
instruments which require faster and easier
mode of transfer in line with their nature and purpose. /Art 340 and 723/.
57
 Con…
Negotiable instruments to order are transferred by endorsement followed by delivery
of the instrument to the transferee called the endorsee.
Endorsement consists of the signature of the transferor /called endorser usually on
the back of the instrument with or without the word pay, the name of the endorsee
and the date of endorsement.
However, an endorsement may not contain a condition or conditions and any
condition attached to an endorsement shall be disregarded because it would be
contrary to the main features of negotiable instruments particularly commercial
instruments which always contain unconditional order or promise to pay a specified
amount of money and affect their transferability.
Furthermore, endorsement should be made to the full value of the instrument, i.e.,
endorsement for part of the value of the instrument is not possible,
because, as we have seen in the definition of the negotiable instruments, rights
contained in such instruments cannot be exercised, enforced nor transferred
separately from the document and it would be impossible for the endorser to transfer
part of the right to the endorsee and retain the remaining at the same time. See Art
724, 725, 746/2/ 747, 748, 842, 843, and 844
not all endorsements have the effect of transferring the rights arising out of
negotiable instruments from the endorser to the endorsee. Endorsement may have
other purposes such as creating agency and pledge contracts between the endorser
and the endorsee. 58
 Maturity of Commercial Instruments
Bills of exchange and promissory notes may be made
payable either at sight or on demand, at
fixed date, at a fixed period after sight or acceptance or at a
fixed period date.
The maturity of checks and the period within which they
must be presented for payment are different from those of
the bills of exchange and promissory notes.
This is because checks are always payable at sight or on
demand.
 Furthermore, checks have to be presented for payment
within a period of six months from the date of their
drawing irrespective of the date of their issuance.

59
 Acceptance of Commercial Instruments
Acceptance of commercial instruments refers to the agreement of the drawee
to pay the value of the instrument to the holder at its maturity.
Acceptance shall be made on the instrument and may
be expressed by words such as accepted‘ agreed‘ or any other similar
expression implying agreement of the drawee and signed by the latter.
A mere signature of the drawee on the bill shall also constitute acceptance.
Acceptance should also indicate the date when it is given, particularly in cases
where the instrument is required by the drawer to be presented for acceptance
within the time specified in the bill of exchange and in cases where a bill is
payable at a fixed period after sight.
This is because, in the first type bill, the date when acceptance is given is
essential as failure to present the instrument for acceptance within the period
stipulated might result in the loss of right of the holder.
 In the second type of bills, such date is important to determine the maturity
of the bill. Where the date of acceptance is not shown on these types of bills,
the holder must authenticate the omission of the date of acceptance by
protest drawn within the period provided for drawing up of a protest.
60
 Con…
he concept of acceptance applies to bills of exchange and
not to promissory notes and checks
because of the following reasons.
A promissory note shall not be accepted as it does not
involve a drawee whose agreement constitutes acceptance
and the maker of a promissory note is considered as an
acceptor of a bill of exchange who has already expressed
his agreement to pay the agreed amount on a future date.
 On the other hand, a check cannot be accepted because it
is always payable at sight or on demand and the drawee
shall pay the value of the check on presentment. Note that
acceptance is applicable to bills with a future date of
payment.

61
 Certification of Checks
As we have seen above the concept of acceptance does not
apply to commercial instruments payable at sight and hence
to checks.
However, checks may be certified by the drawee, upon the
request of the drawer, provided that it has a sufficient cover.
Where checks are so certified, the drawee will have the
obligation to keep the amount of such check in a separate
blocked account for the benefit of the holder of the check
until the expiry of the period provided for presentment for
payment i.e., six months from the date of drawing.
In effect, the drawee, which certified the check, is considered
as the acceptor of a bill of exchange who has agreed to pay the
value of the instrument on maturity. Similar to acceptance of
a bill, a check is certified by signature of the drawee on the
face of the instrument.
62
 Acceptance for Honor
Acceptance for honor represents a guarantee to pay the
value of commercial instruments by any person who may
even be a signatory of the instrument.
A person may guarantee the payment of
the whole or part of the value of a commercial instrument
on its maturity by accepting it for the honor of any one of
the parties liable to the holder.
The person who accepts a commercial instrument shall be
liable on the instrument in the same manner as the person
for whom he has become a guarantor.

63
 Intervention for Honor
A person may accept or pay a commercial instrument by intervention
for the honor of any person against whom the holder may have a right
of recourse.
Acceptance or payment by intervention may be made by any person
including persons who have already signed the instrument and are
liable on it except the acceptor.
 The person who pays or accepts the instrument by intervention shall
have to give notice of his intervention to the person for whose honor
he has intervened within two working days from the date of such
intervention.
This seems to be intended to avoid double payment by debtor. This
type of acceptance is expressed by words such as accepted by
intervention for the honor of or similar words implying acceptance by
intervention and the signature of the acceptor.
It should also indicate the person on whose behalf it is given, in the
absence of which the law presumes that it has been given on behalf of
the drawer.
64
 CHAPTER THREE
RIGHT OF RECOURSE OF A HOLDER OF
COMMERCIAL INSTRUMENTS
The right of recourse refers to the right of a holder of
commercial instruments to institute legal action based on the
instrument for the purpose of recovering the unpaid value of
the instrument.

This right may be exercised before maturity in cases of bills of

exchange, which are capable of
acceptance,
i.e. all types of bills of exchange except those payable at sight
or on demand, or after maturity in cases of non-payment of
commercial instrument.
65
 Con…
The holder may exercise his right of recourse against parties liable
on the instrument, i.e., signatories of the instrument in various
capacities.
 These parties include the drawer of a bill of exchange and a check,
the maker of a promissory note, endorsers, acceptors, acceptors for
honor and the acceptor by intervention for honor.
The holder who intends to exercise a right of recourse must have a
protest drawn up. Protest is a written document drawn up by a
notary public or by a court registrar evidencing non-acceptance or
non-payment of a commercial instrument.
Failure to have a protest for non-acceptance or non-payment
within the period provided by the law will result in the loss of
right of recourse of the holder

66
 Con…
However, the holder who is prevented from presenting the instrument for
acceptance or for payment within the time provided by law or the
instrument or from having a protest drawn up within the time provided for
drawing a protest by a force majeure as defined in the law of contracts, the
holder does not lose his right of recourse. In such cases, the periods of time
shall be extended.
The other requirement which the holder of a commercial instrument must
comply with before exercising his right of recourse is to give notice of
nonpayment or non acceptance to his endorser /if any/ and to the drawer or
maker of the instrument.
Such notice has to be given within a period of four working days from the
day of protest or from the day of presentment where drawing a protest is
not necessary.
Each endorser who has received a notice must also give a similar notice to
his endorser within the period of two working days and this shall continue
until the drawer or the maker is reached.

67
 Con…
This notice may be given in any form or by returning the instrument to the
endorser, the drawer or the maker.
However, failure to give notice or to comply with specific requirements as to
time, the names and addresses of the persons who have given notice shall not
result in loss of right of
recourse of the holder.
 It shall only result in the liability of the holder who failed to give notice or who
gave incomplete notice to pay damages to the person who incurred
losses/expenses/ because
of such failure or incomplete notice.
Alternative remedies : A holder of a commercial instrument who has lost his
right to recourse/ the right to seek judicial remedy to recover the unpaid value of
a commercial instrument may still have an opportunity to recover his money
based on the obligation underling the issuance or the transfer of the commercial
instrument or the provisions of the law unlawful enrichment. That is through
causal proceedings and proceedings for unlawful enrichment.

68
 ULFAADHAA!!!
WOYYOOMAA!!
BHU SoL 2013.
By : Nanesa Wata Dereso.(LLB,LLM Cand.)

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