copyright © 2004 mcgraw-hill ryerson limited 1 part 5 – special contractual relationships ...

Copyright © 2004 McGraw-Hill Ryerson

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PART 5 – SPECIAL CONTRACTUAL RELATIONSHIPS

Chapter 26 – The Law of Negotiable Instruments

Prepared by Douglas H. Peterson, University of Alberta


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THE LAW OF NEGOTIABLE INSTRUMENTS

Introduction Historical Development of the Law The Bills of Exchange Act Bills of Exchange Liability of the Parties to a Bill of Exchange Cheques Promissory Notes Defences to Claims for Payment of Bills of

Exchange Consumer Protection and Negotiable

Instruments


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INTRODUCTION

Negotiable Instrument – an instrument in writing that, when transferred in good faith and for value iwthout notice of defects, passes good title to the instrument to the transferee A document that meets the requirements for

circulation without reference to other sources Significant role in commercial transactions and

commercial credit Credit required in business world Greater safety in negotiable instruments than in

cash


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ESSENTIAL CHARACTERISTICS OF A NEGOTIABLE INSTRUMENT

Claim for funds against drawer of instrument

Freely transferable May be used as credit instrument Instruments are contracts with special

rules New party may enjoy better rights than

old Similar to an assignment but new party

gets better rights than old


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ESSENTIAL CHARACTERISTICS OF A NEGOTIABLE INSTRUMENT

Consideration – instruments has own consideration Two contracts – promise supports 2

different contracts Sale Instrument

Privity of contract Instruments are an exception to the rule

Anyone with instrument can sue or be sued regardless of privity

Assignment of contract: subject to the equities


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HISTORICAL DEVELOPMENT

Allowed for trade between merchants in different places Connection of business merchants in different

places to provide a note or authorization Notes became known as bills of exchange

UK codification of common law prior to 1882 Adopted in Canada Applies to all types of negotiable instruments Applies federally


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THE BILLS OF EXCHANGE ACT

Applies to bills of exchange, cheques, and promissory notes

Mandatory rules, parties cannot agree otherwise

Advantages: Convenience – suitable substitute for money Credit – can be used to create credit Negotiability – ability to be readily transferred to

another party Greater rights than a normal assignment Reduces risk Holder of instrument may have better rights than person

received instrument from


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BILLS OF EXCHANGE ACT

Types Bill of Exchange – instrument in writing,

signed by drawer and addressed to drawee, ordering drawee to pay a certain sum to the payee at some fixed or determinable time, or on demand

Promissory Note - written promise to pay a specified sum of money to another party at a fixed or determinable time or on demand

Cheque – Bill of Exchange drawn against a bank and payable on demand


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BILLS OF EXCHANGE ACT

Endorsement – signing of one’s name on the back of a negotiable instrument for the purpose of negotiating it to another

Holder – the person in possession of a negotiable instrument

Holder in due course – a person who acquires a negotiable instrument before its due date that is complete and regular on its face and who gave value for the instrument, without any knowledge of default or defect in the prior title holders


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BILLS OF EXCHANGE

Bill of Exchange (B.O.E.) An order to a person to pay an amount to

another person Drawee has no obligation to third party

until bill is accepted Avoids having to use cash Can be used to create creditor/debtor

relationship


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BILLS OF EXCHANGE

Drawer – party who draws up the bill of exchange

Drawee – party who is required to make payment on the B.O.E.

Payee – party named to receive payment on the B.O.E.

Acceptor – drawee who consents to B.O.E. by signing it together with the word “accepted” and the date


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BILLS OF EXCHANGE

Demand draft – payable immediately upon presentation

Sight draft – “at sight” 3 days of grace Time draft – payable within certain

stipulated period after date stamped on instrument


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LIABILITY OF PARTIES (BILL OF EXCHANGE)

Acceptance of a bill – renders the drawee liable to pay the bill according to the bill Must be presented by holder at place

specified If payment refused holder must act quickly Bill dishonored

Holder can sue drawer, acceptor and endorsers Must give notice of dishonor


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CHEQUES

A bill of exchange drawn on a bank and payable on demand

Primary purpose the exchange of funds Issuing a Cheque

An unconditional promise to pay the specified sum to anyone who presents the cherub to the bank for payment

Holder – a person who presents a negotiable instrument for payment


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CHEQUES

Delay Accepting a cherub is equivalent to extending

credit since there are several days between handing over goods and receiving payment from a cherub

Bank has an obligation to honor cherub when the drawer has sufficient funds to cover it

Certified cheques insure that the instrument will be honored by the bank

Treated like accepted bill of exchange


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CHEQUES

Certification – undertaking by bank to pay amount of check to holder when later presented for payment By Drawer

Bank certifies before delivery Drawer entitled to return cherub for

cancellation Stop Payment (Countermanding) before

delivery terminates bank’s obligation to honor cherub

Not allowed once delivered to payee


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CHEQUES

Certification by Holder Bank is liable for payment Drawer becomes discharged from liability

Uncertified Cheque Similar to bill of exchange Not legal tender Conditional payment Cheque dishonored

Debt remains and action can be taken


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CHEQUES

Postdated – date later than the time delivered Post-dated cheques create a

creditor/debtor relationship Stop Payment (Countermanded) –

drawer instructs bank not to pay check


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ENDORSEMENTS

The process of signing a negotiable instrument to enable negotiation By signing the back of a cherub or bill, an

endorser implicitly contracts that they will compensate the holder or any subsequent endorser if the cherub is dishonored

Types of Endorsements Endorsement in Blank - signing a cherub

without any special instructions Restrictive Endorsement - signing a

cherub for deposit only to a particular bank account


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ENDORSEMENTS

Types of Endorsements Special Endorsement - signing a cherub

and making it payable to a specific person Conditional endorsement – condition on

endorsement Qualified endorsement – denies liability

“without recourse” Anomalous endorsement – added as a

guarantee


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PROMISSORY NOTES

Promises to pay the amount stated Used for granting credit

May bear interest May be paid by installment Acceleration clause upon default

An IOU is not a negotiable instrument unless it is designated payable on a certain date

Parties to a note Maker - person who makes note Payee - person entitled to receive payment


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NEGOTIABILITY

Negotiability – special quality possessed by N.I. As a distinct class of assignable contract Transfer of instrument from one party to

another Transferred or assigned Better rights - may give greater rights

to the bearer than the person from whom it was received

Sue in own name


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NEGOTIABILITY

Order Instrument By Endorsement and Delivery

Bearer Instrument By Delivery only


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THE LAW OF NEGOTIABLE INSTRUMENTS

ESSENTIALS OF NEGOTIABILITY

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BILL OF EXCHANGE PROMISSORY NOTE

Unconditional •Order •

in Writing •Signed by Drawer •

Addressed to Drawee •Requiring the •

Drawee to Pay •on Demand or •

at a Fixed or •Determinable Future Time •

a Sum Certain in •Money •

to the Order •of a Specified •

Person or Bearer •

• Unconditional• Promise• in Writing • Signed by Maker• of the Note• to Pay to, or• to the Order of• a Specific Person• or Bearer• on Demand, or • at a Fixed or• Determinable • Future Time, a• Sum Certain in• Money.


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DEFENCES

General rule – holder of an instrument entitled to present the document for payment Each endorsement is deemed to have been made

in the order in which it appears on instrument Prior endorsers must indemnify subsequent

endorsers Holder of an instrument, may obtain a better right

than an ordinary assignee under contract law Exception: payment may be refused based

on various defenses Liability on instrument is subject to defenses


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DEFENCES

Depends on relationship of parties Depends on type of defense Types of Parties

Immediate party – people who deal directly with each other

Holder – person in possession of instrument Holder in due course – a person who acquires a

negotiable instrument before its due date that is complete and regular on its face and who gave value for the instrument, without any knowledge of default or defect in the prior title holders


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DEFENCES

Types of Defences Real Defences Defect of Title Defences Personal Defences

Each type of defense is good against a particular party


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REAL DEFENCES

Most effective defense Effective against all types of parties

Immediate party, holder, holder in due course

Defences that go to the root of the instrument Instrument itself is defective


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REAL DEFENCES Forgery

Signature of maker, drawer, or endorser is forged on instrument

Incapacity of a Minor Minor cannot incur liability on an instrument

Same defense may apply for an insane person Lack of Delivery of an Incomplete Instrument

Drawer or maker signs an incomplete instrument, but does not deliver it

Incomplete instrument – an instrument lacking some required item

Date, amount, payee, etc Need both incomplete instrument and lack of

delivery


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REAL DEFENCES

Material Alteration of the Instrument Material change to instrument

Change in amount, payee etc. Defense limited to changes made, does not affect

the enforcement of the instrument Negligence on party drafting instrument may

preclude this defense Fraud as the Nature of the Instrument

Fraud as defense to payment Limited to cases of non est factum

Cancellation of the Instrument If apparent on the face of the instrument


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DEFECT OF TITLE DEFENCES Instrument improperly obtained

Not valid against holder in due course, only against immediate parties and holders

Instrument has to be acquired in good faith without notice of any problems associated with the original transaction

Types of Defect of Title Defences Fraud Duress Undue influence Illegal consideration Failure of consideration Breach of trust


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PERSONAL DEFENCES

Defences affect the parties themselves, not the instrument Only valid against immediate parties, not a

remote party Types

Set off – arising from a separate transaction A defense of the indebtedness of the party claiming

payment Lack of consideration

If holder and prior parties failed to give consideration

Release or payment before maturity


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DEFENCES

Holder Holder in Due Course

Endorser

Real Defense

X X X

Defect of Title Defense

X X

Personal Defense

X X (if immediate party)


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CONSUMER PROTECTION 1970 Bills of Exchange Act amended to

provide for 2 new types of instruments Consumer bills Consumer notes

Can be a check, a bill, or a note Purpose: to protect consumers Bills of exchange that arise out of a

consumer purchase Credit purchase Purchased from a business who provides

consumer goods and services Purchase for personal use


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CONSUMER PROTECTION

Consumer instrument must be marked Marked “consumer purchase”

Before or at time the bill or note is signed

Unmarked instruments are void Except in hands of holder in due course

who had notice it is a consumer instrument Penalties for violation Subject to any defenses consumer has

Subject to the equities All defenses available against all parties


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SUMMARY

Governed by Bills of Exchange Act Three types

Bill of Exchange Cheque Promissory Note

Negotiability Transferability Holder may obtain better rights

Defences Depends on type of party and type of defense

copyright © 2004 mcgraw-hill ryerson limited 1 part 5 – special contractual relationships ...

Documents

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