CONSIDERATION FOR A BILL OF EXCHANGE — AN OLD ISSUE RECONSIDERED

• Citation: (1991) 3 SAcLJ 308
• Published date: 01 December 1991
• Date: 01 December 1991

To accommodate the free trade in negotiable instruments, section 27 of the Bills of Exchange Act 1882, adopted without change in the Act of Singapore, enacted certain departures from the strict doctrine of consideration as applicable at common law to simple contracts. Whilst section 27 (1) (a) affirms that any consideration sufficient to support a simple contract constitutes good consideration for a bill of exchange,1 sub-section (1) (b) adds that “an antecedent debt or liability” is equally valid. In this way, past consideration is deemed to be an adequate consideration for a negotiable instrument.2 The commercial justification for this major departure from the strict common law doctrine is that a bill or cheque is often issued to satisfy a liability incurred before its execution.3 One important effect of section 27 (1) (b) is that where a customer, whose account is overdrawn, negotiates a cheque payable to him to his bank, the pre-existing debt constitutes adequate consideration for the transfer of the instrument to the bank.4

The doctrine of consideration is further abrogated in respect of negotiable instruments by section 27 (2). Where value has at any time been given for a bill, the holder is deemed to be a holder for value as regards the acceptor and all parties to the bill who became parties thereto prior to such time. This provision was enacted to accommodate the cardinal feature of negotiable instruments, which is their transferability. Once consideration has been furnished by one party to the bill, there is no need to establish that further transfers were likewise effected for value.5

By and large, the provisions made in the two respective sub-sections of section 27 are clear. The case law concerning their construction deals mainly with one grey area respecting section 27 (1) (b). This is whether a past consideration furnished for a bill has to be provided by the promisee,

viz. the payee or transferee of the bill, or may be equally furnished by an outsider or “stranger”, who does not become a party to the bill. This question arose in situations in which a party, who was in arrears of payment or whose own cheque or bill had bounced, induced another party to issue a cheque in favour of the creditor. There could, of course, be no doubt that if, in reliance on such a cheque, the creditor forbore to sue the original debtor, his forbearance constituted adequate consideration for the fresh cheque given to him by the third party. In some instances, though, where an actual forbearance could not be readily established on the facts, the question arose as to whether the original debtor’s past debt might constitute good consideration for a cheque furnished by the third party.

The issue, thus, was whether section 27 (1) (b) abrogated not only the rule against past consideration but also the rule that consideration must move from the promisee. Although the words of paragraph (b) provided no support for such a construction, Lord Evershed M.R., in Oliver v. Davis,6 thought that the section had such an effect. His dictum was, however, not followed in two later cases. In Pollway Ltd. v. Abdullah7 Roskill L.J. emphasised that the consideration for a cheque had to move from the payee. Similarly, in Hasan v. Wilson8 Robert Goff J. said that “the antecedent debt or liability referred to in section 27 (1) (b) must be an antecedent debt or liability of the promisor or drawer of the relevant bill of exchange and not of a stranger to the bill.”

An abrogation of the principle that consideration must move from the promisee is, however, provided by section 27 (2), cited earlier on. Obviously, when one party to the bill, such as the original payee of a cheque or the drawer of a bill of exchange, furnished consideration, a subsequent transferee need not establish that he, too, took the instrument for value. The point was made in Diamond v. Graham,9 where Danckwerts L.J. said: “There is nothing in the subsection which appears to require value to have been given by the holder as long as value has been given for the cheque…”. At the same time, his Lordship indicated that sub-section (2) was applicable only when the instrument had been transferred. The provision could not be invoked by the original payee of the bill or cheque.

The traditional construction of the relevant paragraphs of section 27 of the

Act, based on the authorities cited above, was re-examined recently by the Court of Appeal in MK...