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Canada (510,237)
LAW 603 (121)

Chapter 14

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Law and Business
LAW 603
Stan Benda

Chapter 14 Negotiable instrument – A contract that contains an obligation to pay money; a compromise between a simple contract and money. 3 important differences between negotiable instruments and contracts 1. Consideration: cheque is only enforceable if it is supported by consideration. Something of value must be given in exchange for it 2. Privity: Anyone who holds that cheque can sue on it even if not originally a party 3. Assignment: Can be assigned to a stranger 3 types of contract in the Bills of Exchange acts 1. Cheques 2. Bills of exchange 3. Promissory notes Requirements that must be met in order for the Act to apply 1. Instrument must be written and signed 2. Has to be for a certain sum of money (not with delivery of goods or performance of service) 3. Parties must be clearly identified 4. Time of payment must be clear -> when it can be turned into cash 5. Must be an unconditional obligation to pay Cheques  Created when a person orders a bank to pay a specific amount of money to someone  Drawer: the person who “draws” or creates the cheque  Drawee: the bank that is ordered to pay the money  Payee: the person who is entitled to receive the money from the bank  Drawer -> Payee Relationship o 2 contracts. The first is the sale of goods agreement and the second is the cheque itself.  Drawer -> Drawee Relationship o Drawer has a contractual relationship with the Drawee (bank). If Bank improperly refused to pay to Payee when presented with a cheque, bank could be held liable to Drawer for breach of contract.  Payee and -> Drawee Relationship o Payee does not have a relationship with the bank. Payee is a stranger to agreement between Drawer and the bank. Cannot sue the bank if it refused to pay. If they want the money they would have to sue Drawer on either the cheque or the sales contract. 5 consequences with cheques 1. Postdated Cheques  Dated in the future (risk that there might not be money in account) 2. Stale-dated Cheques  Payee doesn’t seek payment in a reasonable amount of time  If its older than 6 months the bank doesn’t have to cash it  Payee can then sue Drawer for either the cheque or the sales contract 3. Overdrawn Cheques  Drawers account does not hold enough money to satisfy it completely  NSF; insufficient funds  Bank could refuse to honor the cheque and Payee can sue Drawer for non-payment  Or bank could treat overdrawn cheque as a request for a loan, pay to the payee and then seek repayment from Drawer (even if bank failed to realize account was overdrawn and paid by mistake) 4. Countermanded Cheques  Bank can deal with a customer’s money only with authorization  Drawer can put a stop payment order before cheque is cashed (order bank to refuse payment)  Only if cheque has not been cashed yet, if drawer gives the order in person and the cheque in question is fully described.  Bank contracts have a term that allows a bank to debit an account if a countermanded cheque is honored by mistake o Automatically countermanded if the bank is notified that the drawer has died before the payee cashes cheque 5. Certified Cheques  Occurs when a drawee bank promises to honor a cheque. o Deducts the amount from the drawer’s account, places the funds in a suspense account and uses them to honor the cheque when presented for payment  Either party can certify a cheque. (drawer or payee)  Treated as equivalent to money o Once a cheque is certified by bank, bank is also owed an obligation to payee and can be sued by payee if cheque is not honored o Bank assures payee account will not be overdrawn; payee can sue bank if they certified the cheque in the mistaken belief the account had funds o Ensures that cheque cannot be countermanded  Creates a third contract between the payee and the drawee  When you write a cheque you have a contract with the bank. o Who can the dealership sue? Only recourse is to go after the drawer. You in turn can sue the bank for wrongfully withholding the funds. Dealership cannot sue the bank. Only the drawer can sue the bank. Bills of Exchange  Created when one person orders another person to pay a specific amount
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