1.0 CASH PAYMENT
The meaning of the term 'money' depends very
much on the context in which it is used. Money serves a purely abstract
function as a unit of account. It is also a store of value and a medium of
exchange.
Physical money has five important
legal characteristics. First, its value in law is not its intrinsic value as
paper or metal but the sum, or unit of account, in which the note or coin is
denominated. So a five-pound note has a legal value of five pounds, even though
the value of the paper of which it consists is negligible. Secondly, and as a corollary, money is not
bought or exchanged; it is either borrowed or received by way of gift or in
discharge of an obligation owed to the recipient. Thirdly, money is fully
negotiable, in the sense that one who receives notes or coins in good faith and
for value obtains a good title even if his transferor stole them or his title
was otherwise defective. Fourthly, unless otherwise agreed a creditor is not
entitled to demand or obliged to accept anything other than money in discharge
of the debt owed to him. Fifthly, money is a fungible, that is, any unit is
legally interchangeable with any other unit or combination of units of the same
denominated value.
2.0
THE CHEQUES
In the checking context, the most common way
for the customer to authorize payment (although not the only way) is by writing
a check, which authorizes the bank to use funds in the customer's account to
pay the amount of the check to the payee. Accordingly, if the payee presents
the check to the customer's bank (the payor bank, as discussed above), it would
be proper for the payor bank to "honor" the check. If the payor bank
does honor the check, it gives funds in the amount of the check to the payee
and charges the customer's account for the amount of the check.
(a)
Overdrafts
Most banks are willing to
agree to pay overdrafts for their customers
(at least for some of their customers)
by providing "overdraft protection." Thus, for a fee, banks
agree in advance that they will honor checks up to a preset limit even if the
checks are drawn against insufficient funds.
(b) Stopping Payment
A second problem about the bank's right to pay
a check arises when a customer changes its mind after it has written a check
and decides that it no longer wants the payor bank to pay the payee. That could
happen for several reasons, ranging from dissatisfaction with the goods or
services purchased with the check to completely unrelated financial distress
(such as loss of a job) that alters the customer's willingness to pay. A
notable feature of the checking system is that the customer's decision to pay
does not become final at the time that the customer issues the check.
(c)
Death or Incompetence of the Drawer
Even if the account has adequate funds and the
drawer does not decide to stop payment, the drawer's death or incompetence
effectively terminates the drawer's intent to pay the check. Of course, it
would be impractical to obligate the payor bank to reject any check presented
after the death or incapacity of one of its customers.
Remedies
for Improper Payment
Sometimes a bank pays a check that was not
properly payable. The most likely problem is (a) that the customer in fact did
not write the check, (b) that payment was not made to the payee or some other
person entitled to enforce the check, or (c) that the bank failed to comply
with a valid order to stop payment. The basic remedy for an improper payment is
simple and intuitively obvious. The bank must reverse the improper transaction.
Specifically, because the item was not properly payable, the bank cannot
sustain the charge on the customer's account based on that item.
3.0
CREDIT CARD
The system involves four major participants: a
purchaser that holds a credit card, the issuer that issues the credit card, a
merchant that makes a sale, and a merchant bank that collects payment for the
merchant. The credit card reflects a relationship between the card-holder and
an issuing bank. The cardholder can make purchases on the account either by
using the card directly or by using the number without the card. The issuing
bank commits to pay for purchases that the cardholder makes in accordance with
the agreement between the issuer and the cardholder. What that means, among other
things, is that the merchant that accepts a credit card ordinarily gets paid
even if the cardholder ultimately fails to pay its bills.
From the cardholder's perspective, payment with
a credit card is a simple affair. In a face-to-face transaction, the merchant
normally swipes the card on a machine and produces a slip for the consumer to
sign a few moments later, on which the cardholder promises to pay the
transaction amount. In a transaction that is completed over the telephone (or
the Internet) rather than face-to-face, the card-holder provides the card
number to the merchant, and the transaction proceeds. The only difference is
that the merchant does not have a signed slip as evidence that the cardholder
in fact authorized the transaction.
4.0
Debit Cards
The key to the debit-card system is that it
replaces the paper check with an electronic impulse that directs the bank to
transfer funds to the customer (when the card is used to withdraw cash at an
ATM) or to transfer funds to a third party (when the card is used in a sales
transaction). The use of the electronic impulse removes the need for the check
and thus many of the cumbersome problems raised by a paper-based checking
system.
There are two basic uses of a debit card. The
first use is where the cards initially became popular: depositing and
withdrawing money from an account without the burden of going to the bank and
waiting to see a teller during regular banking hours. In that use, a debit card
allows a customer to go to an ATM and perform any of the transactions that the
customer could perform directly with a teller at the bank: withdrawing funds,
depositing funds, inquiring about balances, or transferring funds among
different accounts. Those functions do not involve payments to third parties;
rather, they are limited to adjustment of the relationship between the customer
and the bank where the customer maintains its account. Thus, they are not the
sort of substitute-check transactions that involve use of the debit card as a
payment system.
5.0
The Wire-Transfer System
Wire-transfer payments are attractive to
businesses because they offer almost instantaneous payment at the time of the
transaction. When a payee receives a payment by wire transfer, the payment
normally reaches the payee in the form of immediately available funds in the
payee's bank account. Immediate funds are much more satisfying to the payee
than payment by check or credit card. The largest risk that the payee faces is
that its own bank will become insolvent before the payee withdraws the funds.
6.0
Internet Money
The credit card currently is the payment system
of choice for transactions on the Internet, being used in about 99% of Internet
purchases as of 1998. For several reasons, however, it is doubtful that credit
cards can provide a satisfactory long-term vehicle for those transactions. The
biggest current problem is the lack of security on the Internet, which makes it
imprudent to transmit credit-card numbers over the Internet.
More debilitating, however, have been consumer
concerns about this fraud. One 1998 survey reported 40% of online users do not
make online purchases because of security concerns.
6.1
Minting Ecoins
As with any payment system, the user must start
by arranging to have the stakeholder make payments on the user's behalf. To get
access to DigiCash, a user opens an ecash account at the institution that is
operating the system (the issuer) and makes an initial deposit to that account,
either by wire transfer or by some more traditional method (such as mailing a
check or cash). The issuer then sends the user an account number and a
password. The user downloads the operating software from DigiCash's World Wide
Web home page. The software contains Chaum's contribution to the process: an
extraordinarily sophisticated encryption system that "mints"
electronic "coins"—ecoins—for the user to spend.
The heart of the coin is nothing more than an
extremely large randomly generated serial number, so large that the probability
of random duplication is insignificant; the common phrase is that the coin's
number is "probabilistically unique." To create a usable coin, the
user's software fashions an encrypted electronic bundle that carries the serial
number (an ecoin). The user's software then contacts the issuer, which checks
the validity of the ecoin and "stamps" an electronic signature
(sometimes called a "digital" signature) on the exterior of the ecoin
to verify the issuer's approval of the coin. The electronic signature is a
uniquely identifying character string that the issuer imprints with a secret
private key. The process of imprinting that signature includes a numerical
calculation based on the text of the message to which the signature is attached
(in this case the serial number and amount of the ecoin).
After checking the ecoin and signing it, the
issuer sends the ecoin back to the user and deducts funds from the user's
account in an amount equal to the amount of the ecoin. In the DigiCash system,
that is done by a movement of funds from a bank account to the user's
"mint." When that deduction has been made, the first step of the
process is complete. The user has paid to the issuer funds equal to the amount
of the ecoin. The ecoin reflects the issuer's agreement to disburse those funds
in accordance with the directions of the user.
7.0
Documentary Letters of Credit
In a documentary credit, a bank(s) gives an
independent undertaking to credit a named party's account. This party is called
the beneficiary and is normally the seller. This undertaking(s) is conditional
on the tender, in time, of conforming documents. The mechanism is triggered on
the instructions of the buyer.
The requirements vis-a-vis the documentary
credit, if this is the method of payment agreed between seller and buyer, are
set out in the contract of sale, and include:
(a)
the documents required to be tendered to the banks in order to obtain
payment;
(b) an
indication whether the buyer can choose the banks to implement the documentary credit or whether the seller has
nominated one or more of the banks to be used;
(c)
the type of credit which the seller wants opened;
(d)
currency of payment.
7.1
Legal Structure of Documentary Credit
There are three main types of documentary
credit:
(a)
irrevocable/confirmed documentary credit;
(b) irrevocable/unconfirmed
documentary credit;
(c)
revocable/unconfirmed documentary credit.
In each
case the buyer will approach a bank, usually in his/her own country and usually
one of his/her choice, to request the opening of a documentary credit in favour
of the seller, on the terms set out in the contract of sale. If the bank
agrees, a contractual relationship comes into existence between the buyer and
the bank known as the issuing bank IB in which the IB, as agent of the buyer, agrees
to issue the type of credit requested, in the time requested and to arrange
payment against conforming documents. The buyer agrees to pay commission and
agrees to put the bank in funds before payment out by the bank, or agrees to
reimburse the bank when payment is
The IB will now enter into one or maybe two or
more contracts. In implementing its instructions in its agency contract with
the buyer, the IB will approach another bank usually in the sellers country,
and sometimes already designated in its contract of agency with the buyer. This
bank is known as an advising bank (AB). (It is also referred to as a
correspondent bank, but the term advising bank will be used here.) The AB will
be asked by the IB to inform the seller/beneficiary that a credit has been
opened by the IB in his/her favour. It may also be asked to take up the
documents and make payment. In these circumstances it will be an
advising/nominated bank Note here that not in every case will an advising bank
act also as the nominated bank and vice versa. In some cases the issuing bank
will approach one of its branches in the beneficiary s country to arrange for
it to take up the documents and make payment.
The advising bank (AB) or the
advising/nominated bank (AB/NB) may be asked to add its own confirmation- (CB)
(see 3.11.4). If the advising or advising/nominated bank accepts the proposals,
a contract of agency arises between the IB and the chosen bank and as
appropriate the IB undertakes to pay commission and put the advising/nominated
bank in funds before the date for payment, or reimburse.
Where the IB on the instructions of its
Principal (the buyer) issues an irrevocable undertaking to pay to the beneficiary,
it gives an independent undertaking, i.e
as a principal to the beneficiary. This undertaking becomes binding as
soon as the letter of credit - sent by the AB, in performance of its obligation
as agent of the IB to inform the beneficiary of &e opening of the credit -
reaches the hands of the beneficiary (Homzeh Mains & Sons v British Imex
Industries Ltd [1958] 2 QB 127). There is at this point a binding contract
between the IB and the seller/beneficiary in which the IB undertakes to pay
against conforming documents (for more on what amounts to a good tender, see
3.14). It may be difficult, if not Impossible, to find the required
consideration for a contract coming into existence at this time. In Hamzeh
Malas v British Imex Industries Jenkins LJ stated that it must be regarded as
established by mercantile custom recognised all over the world that a binding
contract comes into existence at the time the documentary credit reaches the
hands of the beneficiary. No bank has sought to dispute the existence of a
contractual relationship with the beneficiary existing at that time. The credit
which has been issued here is called an irrevocable credit. On non-payment
against a conforming tender, the seller/beneficiary will have a right of claim
in contract against the IB.
The AB or AB/NB, in agreeing to advise the
seller/beneficiary of the opening of the credit, may have been asked to give
its own independent undertaking to pay against conforming documents. Whether it
has been asked will depend on what the seller wanted and thus what went into
the documentary credit clause in the contract of sale. This in turn would have
become part of the buyer's instructions to the IB. The undertaking given by the
AB or AB/NB is called a confirmation, and the AB or AB/ NB becomes a confirming
bank (CB). Where the letter of credit issued by the IB is irrevocable and the
letter of credit informing the seller/beneficiary of its existence has added to
it the confirmation of the CB, the payment mechanism is called an
'irrevocable/confirmed letter of credit'. Again, following Hamzeh Molds &
Sons v British Imex Industries, the confirmation becomes binding as soon as the
letter of credit is received by the beneficiary. If the CB, the party directly
responsible for payment, refuses to make/permit payment against a conforming
tender, the seller/beneficiary will have a contractual remedy against it.
The irrevocable/confirmed
letter of credit is really the best the seller can obtain if a documentary
credit is used. On a wrongful refusal to pay, the seller has a contractual
remedy against (a) the CB, (b) the IB, and, if the letter of credit is a form
of conditional payment only, (c) the buyer on the contract of sale. The
seller/beneficiary will usually pursue his/her remedies against the CB, since
this bank is situated in the seller's own country and the disadvantages of
foreign litigation and enforcement abroad are thus avoided.
Where the seller in the contract of sale did
not feel it necessary to have, or could not obtain the agreement on the part of
the buyer to add the confirmation of an advising or advising/nominated bank,
the credit will be irrevocable/unconfirmed. What has been said above about the
position of the buyer and the IB in relation to the seller still applies.
However, the advising or advising/nominated bank, by not adding its
confirmation cannot be sued on a refusal to pay. There will be no contractual
relationship between the beneficiary and the advising or advising/nominated
bank. The beneficiary can still pursue a contractual remedy against the IB and
perhaps also the buyer but not the AB.
It may be that the parties in the contract of
sale agree on the use of a documentary credit in order to enable the seller to
obtain payment but they do not feel it necessary from the nature of their
relationship, e.g., the parties are associate companies, to open an irrevocable
credit. Or it may be that the seller cannot demand the opening of an
irrevocable credit because of his/her weak bargaining position. In these
circumstances the credit which the seller will receive is a revocable credit.
Such a credit will not be confirmed. The credit is thus a revocable/unconfirmed
credit. Here the documentary credit, as far as the beneficiary is concerned,
merely acts as a conduit pipe for the passage of funds from buyer to seller.
8.0
Negotiable Instruments
An instrument is a document of title to money.
As a documentary intangible, it is the physical embodiment of the payment
obligation, and its possession (with any necessary endorsement in favour of the
possessor) is the best evidence of entitlement to the money it represents. The
right to receive payment belongs to the holder for the time being, is exercised
by production of the instrument to the obligee or his authorized agent and is
transferred by delivery, with any requisite indorsement.
Whether a writing is an instrument, that is,
whether possession of it is recognized as carrying with it the right to the
specified sum of money or security for
money, depends on mercantile usage and on statute, and the list of instruments
is not closed. In practice, instruments as a class usually possess distinctive
characteristics without which a writing is unlikely to be given recognition as
an instrument. Thus, the document is traditionally concise and no greater in
size than enables it to be conveniently carried and transferred; its terms are
limited to payment obligations, security for payment (if given) and (in the
case of scrip) the right to exchange it for the specified bonds or debentures.
Given that a document is an instrument, the next question is whether it is
negotiable or non-negotiable, which again depends on mercantile usage and
statute.
The promissory note, that is, a document in
which A promises to pay a sum of money to B, is of long standing as a credit
instrument. But the creditor might find it inconvenient to collect payment
himself at the due date and might wish to appoint an agent for that purpose. If
the note provided simply for payment by A to B, then in any proceedings B's
agent would have to produce a formal authority from B to collect payment. But
if the note itself provided for payment to B or his nominee, or to B or other
producer (i.e. holder) of the note, then A could not contest the right of the
producer to collect payment, for A himself had provided for it in the terms of
his undertaking.
The
bill of exchange
Though instruments resembling bills of exchange
have been known for over a thousand years, the development of the bill of
exchange in the form in which we now know it begins with the great fairs,
international meeting places where merchants from all over Europe transacted
business in accordance with that body of law, evidence and procedure
established by international usage and known as the law merchant.
Each merchant selling goods desired to be paid
in his own currency. The currency exchanges were effected at the fairs by
professional money-exchangers, who were conversant with exchange rates and thus
provided a currency clearing house, which is the progenitor of the modern
foreign exchange system. It was natural for creditors who wished to collect,
and debtors who wished to pay, to appoint exchangers to do it for them. But
since the physical transportation of money was inconvenient and hazardous, and
since exchangers had many dealings to settle among themselves, the unnecessary
inconvenience of continual payments and repayments of monies soon became
obvious. The merchants of Lombardy
therfore devised a system by which exchangers could, through using
correspondents in the creditor's country, localize payment and avoid physical
transportation of money.
Suppose that B in Milan wished to pay S in
London for goods bought by B from S. The following procedure could be adopted.
(1) B went to X, a Milan money-changer, and put
him in funds, in lire, for the price and X's charges.
(2) X drew a bill, i.e. a written request or
instruction on Y, his foreign correspondent in London, requiring Y to pay the
sum named to S. X sent this bill to S.
(3) S presented the bill to Y, who paid him in
sterling
(4) Later, X and Y, who would have had numerous
dealings between themselves, struck a balance on their account and settled up.
The advantages of this system were manifold:
(1) The risk and expense of transporting gold
from one country to another were avoided, the payment being localized through
the bill procedure, while the number of settlements was greatly reduced.
(2) If B were being given credit, the embodying
of his obligation in a bill would provide S with an instrument he could sell
before maturity.
(3) If X knew B and Y knew S, each would be
able to extend credit to its own national in respect of the bill.
Tertius Lydgate comes to you with a problem
about a $1,500 check that his wife Rosamund wrote recently on their joint bank
account. The account contained only $50 at the time, and Tertius had declined
to purchase overdraft protection from the bank at which he maintained the
account. Still, the bank honored the check and has now written Tertius a letter
threatening unspecified "serious consequences" if he does not
reimburse the bank for the amount of the check.
a. Is
Tertius liable for the check?
b. Would
your answer change if you learned that Rosamund and he are estranged and that
she used the funds to purchase an airplane ticket for a trip that she took (by
herself) to London?