THE PROBLEM PROMISSORY NOTE: A QUESTION OF ESTOPPEL

Published date01 March 1959
Date01 March 1959
DOIhttp://doi.org/10.1111/j.1468-2230.1959.tb02166.x
THE PROBLEM PROMISSORY NOTE
:
A
QUESTION
OF
ESTOPPEL
THE
PROBLEM
STATED
WHERE
the maker of a promissory note payable on demand has paid
or
otherwise discharged it but allows it to remain in the hands of
the payee who subsequently indorses
it
for
value to an innocent
party, can the latter maintain an action on the note against the
maker
of
it?
A sound moral answer to the question is provided by Ashurst
J.’s
dictum in Lickbarrow v. Mason2 that “whenever one of two
innocent persons must suffer by the acts of a third, he who has
enabled such third person
to
occasion the
loss
must sustain it,”
but this maxim is now
so
crippled by qualifications that it remains
at best no more than a common-sense basis for the sophisticated
modern doctrine
of
estoppel. The search for the legal answer to
the riddle, however, is complicated by the fact that an adequate
solution cannot be found in the usual quarters, neither purely
within the sections of the Bills of Exchange Act 3-f~r the problem
posed appears to be a rare cams omissus-nor in the decided cases
which, apart from obiter dicta by Lord Esher in Glasscock v.
Balls
and Smith and Collins
L.JJ
in Nash
v.
de Fre~ille,~ give
little direct assistance, nor again in the leading textbook-Chalmers
on
Bills
of
Exchange-which is misleading on this particular point.
It
will be suggested in this article that the doctrine
of
estoppel is
the key to the conundrum and that the
‘(
holder in due course
is entitled to succeed, but first the decks must be cleared of possible
arguments in favour of the maker of the note whose carelessness
in
allowing it to remain in the hands of the payee after it had been
discharged by payment must surely be condemned alike by the
law and the dictates of commercial practice.
Section
36
(1)
of the Act declares that “where a bill is
negotiable in its origin
it
continues to be negotiable until it has
been
(a) restrictively indorsed,
or,
(b)
discharged by payment
or
otherwise.”
1
The indorser of the note is,
of
course, precluded
by
8.
55
(2)
(c)
of the Bills
of
Exchange Act from denying to his immediate or a subsequent indorsee that
the
bill
was at the time of his indorsement
a
valid and subsisting bill and
that he had then
a
good title thereto.” The maker
of
a promissory note is,
however, the principal debtor
on
the instrument:
Chartered Bank
v.
Dzekson
(1870)
L.R.
3
P.C.
at p.
580.
2
(1787) 2
T.R.
63;
1
Smith’s
L.C.
(13th ed.), p.
703.
1882
(45
&
46
Vict. c.
61),
hereafter referred
to
as the Act.
4
(1889) 24
Q.B.D.
13.
5
[1900] 2
Q.B.
72,
C.A.
146
MARCH
1959
THE PROBLEM PROMISSORY NOTE
147
Section
29
(1)
defines a holder in due course as a person
who
has taken a bill, complete and regular
on
the face of
it,
under the
following conditions, namely
:
(a)
that he became the holder of
it
before
it
was overdue, and
without notice that
it
had previously been dishonoured, if
such was the fact;
(b) that he took the bill in good faith and for value, and that
at the time the bill was negotiated to him he had no notice
of any defect in the title of the person who negotiated
it.”
The main argument for the maker of the note will rest
on
a
strict literal interpretation of section
56
(1).
It
will be argued that
once a bill has been paid and discharged
it
ceases to be negotiable,
in
terms
of
section
86
(I),
and loses the character of a
bill,” and
cannot, therefore, fall into the hands of a holder in due course
who
is
defined
in
section
29
(1)
as the taker of a “bill.” This
argument is best summarised in the words of Chalmers who says:
“Payment and other discharges are sometimes spoken of as
equities attaching to a bill, but this seems incorrect-they are
rather grounds of nullity. That which purports to be a bill is
no
longer such;
it
is mere waste paper.”
If
this is merely a more
emphatic way of stating that a bill when paid
or
otherwise
satisfied is
‘‘
discharged,’’ the statement is free from objection
;
but
if,
as one suspects from the description of a discharged bill
as
waste paper,” the learned author implies that a holder in due
course cannot in any circumstances (even by estoppel) acquire
rights
on
a
discharged bill, the statement is unsupported by
authority and is,
it
is submitted, incorrect in relation to the special
case of a promissory note payable
on
demand, which does not
appear to have been clearly contemplated by the draftsmen of the
Act. Then again at page
185
Chalmers says:
A bill is discharged
when all rights of action thereon are extinguished.
It
then ceases
to be negotiable, and
if
it
subsequently comes into the hands
of
a holder
in
due course, he acquires
no
right of action
on
the
instrument.” Four cases are cited for this proposition-Harmer
v.
Steele,7 Burchfield
v.
Moore,8 Burbridge
v.
Mannerss and Cundy
v.
Marriott lobut
on
a close examination of these cases
it
will be
seen that in only one
of
the four was the plaintiff a holder in due
course and only a dictum in that case lends even a semblance of
support to the latter half
of
the proposition.
There are three objections to a strictly legalistic approach to the
problem. In the first place, insistence
on
the rigid application of
section
80
(1)
in
the special case of a promissory note payable
on
6
Chalmers
on
Bills
of
Ezchonge
(12th ed.) p. 116.
7
(1849) 4 Exch. 1.
8
(1854) 23
L.J.Q.B.
261.
(1812)
3
Camp. 194.
10
(1831)
1
B.
&
A.
696.

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