Anda di halaman 1dari 36

PART 5 – SPECIAL CONTRACTUAL

RELATIONSHIPS
 Chapter 26 – The Law
of Negotiable
Instruments

Prepared by Douglas H. Peterson, University of


Alberta

Copyright © 2004 McGraw-Hill Ryerson Limited 1


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

Copyright © 2004 McGraw-Hill Ryerson Limited 2


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

Copyright © 2004 McGraw-Hill Ryerson Limited 3


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

Copyright © 2004 McGraw-Hill Ryerson Limited 4


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
Copyright © 2004 McGraw-Hill Ryerson Limited 5
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

Copyright © 2004 McGraw-Hill Ryerson Limited 6


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

Copyright © 2004 McGraw-Hill Ryerson Limited 7


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
Copyright © 2004 McGraw-Hill Ryerson Limited 8
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
Copyright © 2004 McGraw-Hill Ryerson Limited 9
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

Copyright © 2004 McGraw-Hill Ryerson Limited 10


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

Copyright © 2004 McGraw-Hill Ryerson Limited 11


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

Copyright © 2004 McGraw-Hill Ryerson Limited 12


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

Copyright © 2004 McGraw-Hill Ryerson Limited 13


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

Copyright © 2004 McGraw-Hill Ryerson Limited 14


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

Copyright © 2004 McGraw-Hill Ryerson Limited 15


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

Copyright © 2004 McGraw-Hill Ryerson Limited 16


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

Copyright © 2004 McGraw-Hill Ryerson Limited 17


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

Copyright © 2004 McGraw-Hill Ryerson Limited 18


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

Copyright © 2004 McGraw-Hill Ryerson Limited 19


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

Copyright © 2004 McGraw-Hill Ryerson Limited 20


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

Copyright © 2004 McGraw-Hill Ryerson Limited 21


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

Copyright © 2004 McGraw-Hill Ryerson Limited 22


NEGOTIABILITY
 Order Instrument
 By Endorsement and Delivery
 Bearer Instrument
 By Delivery only

Copyright © 2004 McGraw-Hill Ryerson Limited 23


THE LAW OF NEGOTIABLE INSTRUMENTS
ESSENTIALS OF NEGOTIABILITY
Copyright © 2004 by McGraw-Hill Ryerson Limited.

BILL OF EXCHANGE PROMISSORY NOTE


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

Copyright © 2004 McGraw-Hill Ryerson Limited 24


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

Copyright © 2004 McGraw-Hill Ryerson Limited 25


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
Copyright © 2004 McGraw-Hill Ryerson Limited 26
DEFENCES
 Types of Defences
 Real Defences
 Defect of Title Defences
 Personal Defences
 Each type of defense is good against a
particular party

Copyright © 2004 McGraw-Hill Ryerson Limited 27


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

Copyright © 2004 McGraw-Hill Ryerson Limited 28


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

Copyright © 2004 McGraw-Hill Ryerson Limited 29


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
Copyright © 2004 McGraw-Hill Ryerson Limited 30
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

Copyright © 2004 McGraw-Hill Ryerson Limited 31


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
Copyright © 2004 McGraw-Hill Ryerson Limited 32
DEFENCES

Holder Holder in Endorser


Due Course

Real X X X
Defense

Defect of X X
Title
Defense
Personal X X (if
Defense immediate
party)
Copyright © 2004 McGraw-Hill Ryerson Limited 33
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

Copyright © 2004 McGraw-Hill Ryerson Limited 34


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
Copyright © 2004 McGraw-Hill Ryerson Limited 35
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 36