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Chapter 14 - Negotiable Instruments (1).docx

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MKT 100
Jennifer Fraser

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Chapter 14: Special Contracts: Negotiable Instruments • Negotiable Instrument: consists of a contract that contains an obligation to pay money • Many rules that apply to contracts do not apply to negotiable instruments o Consideration – a cheque is enforceable only if it is supported by consideration; something in value must be given in exchange for it  Unlike before, the same promise to perform an obligation that is already owed can be used twice  For example the dealerships promise to give the car is consideration twice, once for the sale contract, and once for the cheque o Privity – a contract can be enforced only by someone with privity; anyone who holds a cheque can sue on it o Assignment – contractual obligations can generally be assigned to a stranger; a person who receives a contractual right through an assignment takes it subject to the equities • A negotiable instrument represents a compromise between a simple contract and money • A negotiable instrument is more valuable than a simple contract because, like money, it is negotiable • A negotiable instrument is not actually money, it is a contract that is intended to eventually result in the payment of money The Bills of Exchange Act • British Parliament introduced Sale of Goods Act (1893) – aim was to ensure that the economy ran smoothly • British Parliament enacted the Bills of Exchange Act (1882) – adopted rules that judges had developed over several centuries • Legislature’s intention was to increase economic efficiency by providing business to people with a comprehensive set of rules regarding non-monetary payments • 1890 Canada’s Parliament introduced its own Bills of Exchange Act • Most important different between SoGA and BoEA is the flexibility • BoEA is much less flexible, the SoGA is simple and provides default rules • BoEA is longer, contains a large number of rules that a contract must satisfy; must meet requirements or Act does not apply • Sales of goods normally apply to two people, negotiable instruments are designed to be freely transferred amongst many people Types of Negotiable Instruments • Five requirements that must be met before the Act will apply: o Signed and written o Parties identified o Certain sum of money o Time of payment o Unconditional obligation CHEQUES • Cheque: 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 • Postdated Cheques o Postdated Cheques: dated in the future o A drawer is willing to deliver a cheque immediately, but does not want it to be cashed until later • Staledated Cheques o Postdated cheque causes problems if the payee seeks payment too soon o Staledated Cheque: when the payee does not seek payment within a reasonable time o Banks normally will not honour a cheque that is presented more than six months after the date that appears on it • Overdrawn Cheques o Overdrawn Cheque: when the drawer’s account does not hold enough money to satisfy it completely o Bank could either not pay the payee, or pay the payee and request for a loan for drawer • Countermanded Cheque o Countermanded Cheque: occurs when a customer orders a bank to refuse payment on a cheque o The ability to countermand a cheque is useful, but is limited by two factors:  A bank will not normally accept a countermand unless the drawer gives that order in person and unless the cheque in question is fully described  Many bank contracts include a term that allows a bank to debit a customer’s account if a countermanded cheque is honoured by mistake; bank may have to sue payee if it wants to recover a payment made by mistake o Cheque is automatically countermanded if the bank is notified that the drawer has died before the payee receives payment • Certified Cheques o Certification: occurs when a drawee bank promises to honour a cheque o Cheque can be certified by the payee o Banks consider certification equivalent to money  A bank normally owes an obligation only to its own customer, but once it is certified, it is also owed an obligation to payee  By certifying a cheque, bank assures payee that it would not later dishonour that instrument on the ground that drawers account was overdrawn and if fails to pay money could be sued  Certification assures payee that cheque could not be countermanded BILLS OF EXCHANGE • Bill of Exchange: created when one person orders another person to pay a specific amount of money to a third person • Major difference between cheque and bill of exchange is that a cheque may be drawn on a bank and a bill of exchange may be drawn on a bank or anyone else • Acceptance: when the drawee promises to pay a bill • Acceptance of a bill is very similar to certification of a cheque • Once the drawee has accepted a bill, it can be sued by the payee for failing to make payment on the due date • Once a bill is accepted, the drawer loses control of it • Four more things about bills of exchange o A contract; therefore not enforceable unless it is supported by consideration o Cheques must by payable “on demand”; the drawer must order the drawee to make payment as soon as cheque is presented  Bills of exchange can be payable on demand  Bills of exchange can also be a sight draft where the payee is not entitled to receive any money until three days after the bill has been presented  Bills of exchange can be a time draft which is payable only on a future date o Bills of exchange is usually used for one of two purposes  To safely transfer funds
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