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Absence of Consideration in the Law of Bills and Notes

Published online by Cambridge University Press:  16 January 2009

Benjamin Geva
Benjamin Geva
Affiliation:
LL.B., Hebrew University of Jerusalem, 1970; LL.M., Harvard Law School, 1975; Visiting Lecturer in Law, The University of Chicago, 976–77; Associate Professor, Osgoode Hall Law School of York University, Toronto.
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Extract

By the latter part of the sixteenth century the theory of liability on bills of exchange had been adapted to common law theory of contract so as to lie in assumpsit. In 1787 it was fully settled by the House of Lords that all “contracts in writing … [which are] merely written and not specialties … are parol” and require consideration. Promissory notes and bills of exchange fell into this category. Indeed, “bills and notes were contracts and being such there was no persuasive reason why the basis of liability on a bill or note should be any different from that on any other written contract for payment of money.” While there is no provision in the Bills of Exchange Act (“the Act”) directly to the point, it is well established indeed that consideration of “value” is needed for the creation of an obligation under a negotiable instrument. According to Chalmers, “where B, by way of gift, makes a note in favour of C, C cannot recover from B.”

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Articles
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The Cambridge Law Journal , Volume 39 , Issue 2 , November 1980 , pp. 360 - 370
Copyright
Copyright © Cambridge Law Journal and Contributors 1980

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References

1 See general: Street, T. A., The Foundations of Legal Liability (1906) Vol. II, p. 343.Google Scholar

2 Rann v. Hughes (1787) 7 T.R. 350 n. (a); 101 E.R. 1014 n. (a).

3 Street, supra note 1, at p. 389. For a short historical account as to the necessity of consideration in the law of bills and notes, see Britton, W. E., Handbook on the Law of Bills and Notes (1961), pp. 211Google Scholaret seq.

4 Britton, Ibid., p. 213.

5 U.K. 1882, 45 & 46 Vict. c. 61; Can.: R.S.C. 1970, c. B–5. For a list of jurisdictions which have adopted a statute modelled on the Act, see: Falconbridge, On Banking and Bills of Exchange, 7th ed. (1969), by Rogers, pp. 431–432.

6 Cf. U.K., ss. 27–28; Can., ss. 53–55.

7 “Value” means “valuable consideration”; U.K., s. 2; Can., s. 2. “Valuable consideration … may be constituted by … any consideration sufficient to support a simple contract [or] an antecedent debt or liability”; U.K., s. 27 (1); Can., s. 53 (1), emphasis added.

8 For a general discussion on the subject with a specific application to jurisdictions where the common law consideration is not required for the formation of a contract (Quebec, Louisiana, Scotland and Israel) see: Barak. “The Requirement of Consideration for Bills and Notes in Israel” (1967), 2 Is.L.Rev. 499. Note that consideration under the Act includes “past consideration” (U.K., s. 27 (1) (b); Can., s. 53 (1) (b) and as such is broader than the common law consideration; cf. in general: Wickhem, “Consideration and Value in Negotiable Instruments” (1926), 3 Wis.L.Rev. 321, 323–324.

9 Chalmers, On Bills of Exchange, 13th ed., by Smout (1964), p. 102 and n. 16 digesting Holliday v. Atkinson (1826) 5 B. & C. 501; 108 E.R. 187.

10 Chafee, “Rights in Overdue Paper” (1918) 31 Harv.L.Rev. 1104, 1109. The “right to sue” in this context is the power to enforce the obligation rather than the standing to bring the action.

11 Ibid., p. 1110.

12 Equities affecting the instrument or “attaching to the bill” are interchangeable with defects of title”: Chalmers, supra, note 9, p. 122; Falconbridge, supra, note 5, pp. 654, 667 and 670; Alcock v. Smith (1892) 1 Ch. 238, 263.

13 The subjection of a holder not in due course to defects of title is supported by the Act (U.K., ss. 36 (2) and 36 (5), Can., ss. 70 (1) and 72) and agreed among text book writes: Falconbridge, supra, note 5, p. 666; Byles, On Bills of Exchange 23rd ed., by Megrah and Ryder (1972), p. 195, (but cf. p. 190); Cowen, On the Law of Negotiable Instruments in South Africa 4th ed., by Cowen and Gering (1966), p. 274.

14 U.C.C. § 3–408. The prior provision of the Uniform Negotiable Instruments Law (N.I.L.) is s. 28, see note 63 and text, infra.

15 Falconbridge, supra, note 5, p. 619. See also: Byles, supra, note 13 p. 222, and note 36.

16 Charles v. Marsden (1808) 1 Taunt. 224; 127 E.R. 818; Sturtevant v. Ford (1842) 4 Man. & G. 101; 134 E.R. 42; Lazarus v. Cowie (1843) 3 Q.B. 459; 114 E.R. 583.

17 Supra, note 15. The list in U.K., s. 29 (2) and Can., s. 56 (2) includes fraud, duress, force and fear, illegality and breach of faith.

18 Can., s. 54 is U.K.'s 27 (2) (3). The relevant part is U.K.'s s. 27 (2) set forth in text subsequent to note 37, infra.

19 Chalmers, supra, note 9, p. 102.

20 Parties are “immediate” or “remote” in relation to their own dealings underlying the instrument. In a promissory note issued by a buyer to the order of a seller of goods and subsequently discounted with a finance company, the maker-buyer and the payee-seller are immediate parties, the maker-buyer and the indorsee-finance company are remote parties, and the payee-seller and the indorsee-finance company are immediate parties.

21 Supra, note 15.

22 Cf. Barclays Bank Ltd. v. Astley Industrial Trust Ltd. [1970] 2 Q.B. 527, 538–539Google Scholar per Milmo J.

23 A holder in due course holds the instrument “free from any defect of title of prior parties …”: U.K., s. 38 (2); Can., s. 74 (b).

24 See also: Jacobs, On Bills of Exchange, Cheques, Promissory Notes, etc., 2nd ed. (1924) pp. 57, 106; Cowen, supra, note 13, p. 247–248; Byles, supra, note 13, p. 191; Riley, B. B., Bills of Exchange in Australia 3rd ed., by , Chappenden and , Bilinsky (1976), p. 87.Google Scholar

25 Unlike a promissory note (U.K., s. 176 (1); Can., s. 83 (1)) a bill of exchange is an “order” rather than “promise” (U.K., s. 3 (1); Can., s. 17 (1)). Nonetheless, the liability of the drawer is on his own promise to pay: U.K., s. 55 (1) (a); Can., s. 130 (a).

26 Supra, note 9 and text.

27 U.K., s. 29 (3), Can., s. 57.

28 Rolls v. Pearce (1877) 5 Ch.D. 730, 734. See note 50, infra. Query whether this exception does not depend on the promisor's liability not being contested by the executors of his will.

29 See note 17 and text, supra.

30 Cowen, supra, note 13, p. 270. See also: Riley; supra, note 24, p. 93; Byles, supra, note 13, p. 193. Cf. Chalmers, supra, note 9, p. 98; Falconbridge, supra, note 5, p. 672. The list in U.K., s. 29 (2) and Can., s. 56 (2) (sote 17, supra) is preceded by “In particular …”

31 Cited in note 16, supra.

32 See note 15 and text, supra.

33 Falconbridge, supra, note 5, p. 619.

34 An accommodation party is a party to an instrument who has signed it “without receiving value therefor and for the purpose of lending his name to some other person”: U.K., s. 28 (1); Can., s. 55 (1). He is thus not a party to the underlying contract but a surety of the obligor thereon.

35 U.K., s. 28 (2); Can., s. 55 (2).

36 In general for the consideration requirement in guarantees, see Sheridan, L. A., Rights in Security (1974), p. 289.Google Scholar

37 See generally Anson's Law of Contract 24th ed., by Guest (1975), p. 97.

38 Cited is note 16, supra.

39 Charles v. Marsden, supra, note 16, p. 225 per Mansfield C.J.; see also p. 226 per Lawrence J.; Sturtevant v. Ford, supra, note 16, p. 106 per Cresswell J. Cf. “Equities Attaching to Overdue Bills of Exchange” (1870) 49 L.T. 122: Indeed, an agreement governing a bill constitutes an equity thereto: Holmes v. Kidd (1858) 3 H. & N. 891, 894; 157 E.R. 729.

40 See notes 18–21, supra, Can., s. 54 is U.K., s. 27 (2).

41 Cf. Hunter, “Holders for Value of Negotiable Paper” (1928) 22 Ill.L.Rev. 287.Google Scholar The reason for its inclusion in the Act “is not altogether obvious”; Byles, supra, note 13, p. 190.

42 U.K., s. 27 (3); Can., s. 54 (2): “a holder for value to the extent of the sum for which he has a lien.” See also: U.K., s. 29 (3); Can., s. 57.

43 U.K., s. 29 (1) (b); Can., s. 56 (1) (b).

44 Cf. Hunter, supra, note 41, pp. 290, 295.

45 Indeed, the draftsmen of the U.C.C. considered the “holder for value” provision “as erroneous and misleading, since a holder who does not himself give value cannot qualify as a holder is due course … merely because value has previously been given for the instrument”; UCC § 3–303, Comment 1.

46 Megrah, letter to the editors, reproduced in Note, “Diamond v. Graham, The Doctrine of Consideration and Value for a Cheque” (1969) 15 McGill L.J. 487, 492.

47 See, e.g., Thornely, “Consideration for Negotiable Instruments” [1968] C.L.J. 196.

48 See note 18 and text, supra.

49 Cowen, supra, note 13, p. 271. “Negotiability” in the phrase denotes the “transfer free from equities,” as distinguished from “the simplicity of transfer”; Cowen, Ibid., p. 3 et seq.

50 But cf. Rolls v. Pearce (1877) 5 Ch.D. 730; the holding in due course requirement is waived where value given prior to the promisor's death completes the gift “as a valid donatio mortis causa” see note 28 and text, supra. There is nothing in the case to suggest its application to either gifts inter vivos or perhaps even to a donee mortis cause who first deals with the instrument for value after the promisor's (donor's) death. The narrow scope of the decision is reinforced by the fact that Malins V.-C. decided the case primarily on the basis of his desire “to do all [he could] to make the gift good” Ibid., p. 733. The executors of the donor's will did not “argue the point adversely to the [donee]” but “only [wished] to see that the case is fairly presented”; Ibid., p. 732.

51 (1797) 1 Bos. & Pull. 648, 651; 126 E.R. 1113 per Eyre C.J. emphasis added. It was held there on the basis of this proposition that one who indorsed bills in blank and handed them to his banker for collection and credit to his account, could not recover the bills from a bona fide pledgee who had lent money to the banker (who had later failed) against the bills. The similarity between the proposition and the case is questionable; in the principal-agent for collection situation (unlike in a donor-donee case), besides want of consideration there is absence of intention to convey anything to the agent (If the customer's account has been credited but not withdrawn—the case anyway involves the failure of consideration by the failure of banker rather than absence of consideration). The pledgee in Collins v. Martin was bona fide, Ibid., p. 648. Even if taken at face value, the case is therefore hardly persuasive as to the rights of the holder for value. The court used this peculiar analogy to reach the result in favour of the pledgee as under contemporary law, since Paterson v. Tash (1743) 2 Strange 1178; 93 E.R. 1110, a pledgee of goods from a factor exceeding his authority was defeated by the principal, Ibid., p. 651. The latter law has eventually been reversed by the first Factors Act, 4 Geo. IV, c. 83 (1823).

52 Bona fide holder for value, bona fide holder for value without notice, as well as bona fide holder of the bill without notice before it is overdue, are all synonyms substituted in the Act by “holder in due course”; cf. Chalmers supra, note 9, p. 94.

53 (1797) 1 Bos. & Pull. 648, 651; 126 E.R. 1113.

54 See note 51 and text, supra.

55 Robins v. Reynolds (1841) 2 Q.B. 196, 211; 114 E.R. 76.

56 Thiedemann v. Goldsmith (1859) 1 De G.F. & J. 4, 12; 45 E.R. 260 per Lord Justice Knight Bruce. The Lord Chancellor properly referred to the indorsee as “a holder bona fide for value”; Ibid., 10, emphasis in the original.

57 Ashley Colter Ltd. v. Scott [1942] 3 D.L.R. 538, 541Google Scholar (Can. S.C.).

58 As to the inaccurate nature of this terminology, see notes 22–23 and text, supra.

59 See text that follows and note 40, supra.

60 Holliday v. Atkinson (1826) 5 B. & C. 501; 108 E.R. 187 (payee v. maker); Easton v. Pratchett (1835) 1 C.M. & R. 798, 808; 149 E.R. 1302 (indorsee v. indorser).

61 Britton, supra, note 3, p. 234. Query whether this explanation was not provided by Professor Britton only in the context of the liability of an accommodation party.

62 U.K., s. 28 (2); Can., s. 55 (2): “An accommodation party is liable on the bill to a holder for value.…”

63 U.K., ss. 53–58; Can., ss. 127–138.

64 U.K., s. 38 (2); Can., s. 74 (b).

65 Cf. note 61 and text et seq., supra.

66 Cf. note 46 and text, supra.

67 The Uniform Negotiable Instruments Law (N.I.L.) is the predecessor of Art. 3 of the U.S. Uniform Commercial Code (U.C.C.).

68 N.I.L. § 26. The provision was omitted from U.C.C. Article 3. See note 45, supra. Its effect as a “sheltering provision” (notes 71–76 and text, infra) is looked after in U.C.C. § 3–201 (1); see note 92, infra.

69 N.I.L. § 29.

70 N.I.L. § 28, emphasis added. Cf. note 14 and text, supra.

71 Cf. notes 10–13 and text, supra.

72 Britton, supra, note 3, p. 234.

73 Easton v. Pratchett (1835) 1 C.M. & R. 798, 808; 149 E.R. 1302, 1307, per Lord Abinger C.B. emphasis added.

74 Note in McGill L.J., supra, note 46, p. 487 and note 2.

75 U.K., s. 31 (4); Can., s. 61 (1).

76 U.K., s. 29 (3); Can., s. 57.

77 But see Diamond v. Graham [1968] 1 W.L.R. 1061Google Scholar where the Court of Appeal, while not articulating any specific theory behind the “holder for value” provision, understood it to have a wider effect than suggested in this article. The case is critically examined in Part III infra.

78 By itself the power to sue on the instrument given by U.K., s. 38 (1) (Can., s. 74 (a)) to every holder does not necessarily lead to this result, as the section deals only with standing to sue and is silent as to equities (whether available or unavailable) against the plaintiff. As a codification of an existing general principle of law (see note 93 and text, infra) the “holder for value” provision (as construed in this article) is no more superfluous than, for example, the provisions cited in notes 75–76 and text, supra.

79 Whether he is the promisee himself or his transferee even without value, cf. note 22 and text.

80 See note 4 and text, supra.

81 Queries as to the range of his rights (even beyond his alleged power to overcome original absence of consideration) were raised by Byles, supra, note 13, p. 190; Megrah, supra, note 46, p. 402; Milmo, J. in Barclays Bank Ltd. v. Astley Industrial Trust Ltd. [1970] 2 Q.B. 527, 538.Google Scholar

82 [1968] 1 W.L.R. 1061; commented on in [1968] C.L.J. 196; (1969) 15 McGill L.J. 487.

83 [1968] 1 W.L.R. 1061, 1064 per Diplock L.J.

84 Danckwerts, Diplock, and Sachs L.JJ.

85 [1968] 1 W.L.R. 1061, 1065 per Diplock L.J.

86 Ibid., p. 1064 per Danckwerts L.J.

87 Cf. note 46 and text, supra.

88 See note 37 and text, supra.

89 In general for the “remitter” as one who procures the issuance of an instrument payable to another, see Beutel, “Rights of Remitters and Other Owners not within the Tenor of Negotiable Instruments” (1928) 12 Minn.L.Rev 584.

90 Munroe v. Bordier (1849) 8 C.B. 862, 872.

91 Since R. E. Jones Ltd. v. Waring and Gillow Ltd. [1926]Google Scholar A.C. 670 (H.L.) it would be difficult to hold that an original payee can be a holder in due course (subject perhaps to the recent qualification which emerges from Jade International Steel Stahl und Eisen Gmb H and Co. Kg v. Robert Nicholas (Steels) Ltd. [1978] 3 W.L.R. 39Google Scholar with regard to the payee who reacquires the instrument from a holder in due course, see Thornely [1978] C.L.J. 236). But see the effective criticism of this understanding of Jones (in particular as applied to the “remitter”) in Aigler, “Payees as Holders in Due Course” (1927) 36 Yale L.J. 608, 609–619. It is submitted here that in Diamond v. Graham, if D could not be a holder in due course of cheque II (as a matter of either law or fact), he should not have been allowed to recover from G.

92 See notes 71–76 and text, supra. Note that such a general proposition is embodied in U.C.C., § 3–201 (d): “Transfer of an instrument vests in the transferee such rights as the transferor has therein…” This is a considerable improvement in relation to the piecemeal treatment of the subject in the Act.

93 Cf. in general Stoljar, “A Rationale of Gifts and Favours” (1956) 19 M.L.R. 237.