LAW 603 Lecture Notes - Lecture 6: Fide, Demand Draft, Secondary Liability
28 May 2018
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Department
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Lecture 6 - Negotiable Instruments
Monday, March 5, 2018
1:10 PM
Topics
• Overview
• Negotiable Instrument: Unique Form of Contract
• Bills of Exchange Act
• Types of Negotiable Instruments
o Cheque
o Bill of Exchange
o Promissory Note
• Transference of a Negotiable Instrument (Negotiation)
• Transferability: Types of Endorsements
• Defences to Payment
Overview
• Contemporary commercial and consumer transactions make it impractical and inefficient for
parties to purchase all types of goods and services directly and immediately for cash.
• A negotiable instrument is a species of contract that permits consumer and commercial
transactions to proceed without having to provide immediate payment in cash.
o E.g., cheques, promissory notes, bills of exchange
Negotiable Instrument: Unique Form of Contract
• Negotiable Instrument
o Conceptually somewhere between a contract and money
• Like a Contract
o An obligation by one party to another party to pay money
• Not Like a Contract
o Consideration
▪ Usual rule: Consideration (i.e., a promise to pay) cannot be provided more than once
for the same transaction;
▪ However, the promise to honour a cheque, promissory note or bill of exchange is the
same consideration given for the transaction for which the cheque, promissory note
or bill of exchange was issued.
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find more resources at oneclass.com
• Rory agrees to purchase a car from Joan for $20,000.
• They sign a contract for the purchase of the car, and Rory issues a cheque to Joan for $20,000.
• The consideration provided by Rory in the contract is the promise to pay Joan $20,000 and is the
sae osideatio otaied i Ro’s heue issued to Joa.
• If the cheque is not honoured by the bank, Joan can sue Rory for payment on either transaction.
o Privity of Contract
▪ A contract typically binds only those who are parties to it; i.e., there has to e piit
of otat. A otat aot e efoed agaist stages to it;
▪ However, the recipient of a cheque, promissory note or bill of exchange can transfer
the negotiable instrument to another party (stranger), who can enforce payment.
o Assignment (Negotiation)
▪ A otatual ight tasfeed to aothe pat is tpiall sujet to a euities
between the original parties; e.g., any bona fide legal defence against payment that
the payer may have against the original payee is transferred to the new payee;
▪ This is not necessarily the case in the assignment of a negotiable instrument;
▪ The new payee may be entitled to enforce payment, notwithstanding that the payer
had a legitimate defence against honouring the original cheque, promissory note or
bill of exchange issued to the original payee.
• Ma puhases a a fo Roi’s auto dealeship fo $, ad poides a heue i that
amount.
• Before the cheque is deposited by the dealership, Mary notices certain problems with the car
requiring repair in the amount of $5,000.
• Mary could put a stop payment on the cheque and substitute another for $5,000.
• However, if the dealership has assigned the cheque to one of its suppliers in satisfaction of a debt,
the supplier could legally insist that Mary honour the $10,000 payment.
Bills of Exchange Act
• The Bills of Exchange Act is a federal statute that prescribes the rules for the issuance, transfer and
enforcement of negotiable instruments.
• The Act is important for certainty in establishing the value and enforcement of a negotiable
instrument.
• There are many types of negotiable instruments (e.g., share certificates).
• The Bills of Exchange Act applies only to cheques, bills of exchange and promissory notes.
• We will consider only these three.
• There are five statutory requirements for negotiable instruments to facilitate their assignment or
transfer to other parties.
find more resources at oneclass.com
find more resources at oneclass.com
• Written and Signed
o Facilitates passing the negotiable instrument on to other parties.
• Parties Identified
o Identifies who is to make the payment to whom.
• Prescribed Amount
o States the actual amount or the means for determining the amount owing (e.g., the
principle owing plus the prescribed interest rate).
• Time of Payment
• Unconditional Obligation
o No preconditions to payment.
What do you Think?
• Class 6 Fact Scenario 1
o There are two discrete contracts
▪ The agreement between Muskoka Watercraft Inc., and Dina for the sale of the boat;
and
▪ The promissory note issued by Dina to Muskoka Watercraft Inc. as payment for the
boat.
o Prior to the assignment of the promissory note to TD Bank, Dina may have had a legal right
to reduce her payments under the promissory note.
o The assignment of the promissory note to TD Bank has reduced, if not eliminated, any legal
right Dina may have had to reduce her payments. The bank has the right to insist on full
payment.
Types of Negotiable Instruments
• Cheque
o A person (the drawer) orders a bank (the drawee) to pay a specific amount to a designated
party (the payee);
o By way of process, the drawer has an account with the drawee and orders the drawee to
pay the prescribed amount to the payee by debiting its account.
• Consideration
o The money paid by the cheque is a second promise for the same transaction.
• Privity of Contract
find more resources at oneclass.com
find more resources at oneclass.com
Document Summary
Topics: overview, negotiable instrument: unique form of contract, bills of exchange act, types of negotiable instruments, cheque, bill of exchange, promissory note, transference of a negotiable instrument (negotiation, transferability: types of endorsements, defences to payment. Negotiable instrument: unique form of contract: negotiable instrument, conceptually somewhere between a contract and money. The bank has the right to insist on full payment. The bank is obliged to honour the cheque, however, under its contractual relationship with the provider of the cheque (drawer); What do you think: class 6 fact scenario 2, legal action only against cynthia. By certification, the bank has effectively promised the payee that it will not refuse to honour the cheque: bill of exchange. Instruction to a party to pay a specific amount to another party: similar to a cheque except, a bill of exchange may be drawn on anyone, including a bank.
