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LAW 603 (76)
Chapter 14

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Law and Business
LAW 603
George Ellinidis

Chapter 14 – Special Contracts: Negotiable Instruments Introduction  Cash can be inconvenient and dangerous (bulky and usually impossible to recover if lost) o Essential feature of cash: it is currency o Person becomes owner of cash by honestly paying for it o If someone steals $1000, does not own cash, but if buys a stereo with it, the storekeeper who is unaware of the theft, now owns the cash and it cannot be retrieved  “nemo dat quod non habet” – no one can give what they do not have. If you trade stolen car for neighbour’s boat, victim may recover value of car from neighbour, even if neighbour acted honestly  Negotiable Instrument – consists of a contract that contains an obligation to pay money o You decide to buy a car, and writing a cheque for it creates a new contract o If bank does not honour cheque, dealer can sue either on the sales contract, or on the cheque itself  Easier to prove the existence of a negotiable instrument rather than the existence of a sales contract  Obligation conditionally discharged once cheque given to dealership  Cheque is a type of contract  Differences between normally governed contracts and cheques: o Consideration – cheque is enforceable only if it is supported by consideration – something of value must be given in exchange  Normally, consideration cannot consist of a promise to perform an obligation that is already owed to the same party, but this does not apply to cheques  Presumes that consideration was given by every person whose signature appears in the negotiable instrument o Privity – anyone who holds a cheque can sue on it  Normally, a contract can be enforced only by someone with privity (someone who participated in the creation of the contract)  If instead of cashing the cheque, the payee sells it to someone it owes money to, that third party can sue you on the cheque o Assignment – contractual obligations can be assigned to a stranger  A person who receives a contractual obligation through an assignment takes is subject to the equities  Assignee cannot be in a better position than the assignor  Negotiable instrument represents a compromise between a simple contract and money o More valuable than money because it is negotiable and can be easily transferred from one party to another in a way that may remove any defects o It is a contract that is intended to eventually result in the payment of money  Major risk: non-performance o Easier to sue on a negotiable instrument rather than simple contract  Enforcement is necessary in either event  Coins and bills never worthless, have value in themselves The Bills of Exchange Act  Canadian Parliament introduced Act in 1890 o Intention: increase economic efficiency by providing business people with a comprehensive set of rules regarding non-monetary payments o British Parliament released act in 1882 o Much less flexible than Sale of Goods Act  Simple and provides default rules, even if not all rules are accepted, it stills falls within the Act o Contains many rules that a contract must satisfy, if not met, Act not applied o Difference arises because sale if goods normally involves only 2 parties, while negotiable instruments are designed to be freely transferred amongst many people  Contracts for negotiable instruments and sales of goods have both been codified  Does not refer to certification – procedure based on American banking law Type of Negotiable Instruments  Bills of Exchange Act covers cheques, bills of exchange and promissory notes  Five requirements must be met for the Act to apply: o Signed and Written o Parties Identified – must be possible to immediately identify who is required to make the payment o Certain Sum of Money – must deal entirely with the payment of money, not delivery or performance  Must be able to calculate amount of money by simply looking at it (may not involve the payment of interest ) o Time of Payment – must be able to determine when it can be turned to cash o Unconditional Obligation – must be possible to immediately know exactly what payee is receiving  Each requirement serves the goal of certainty  A negotiable instrument must tell a complete story  Document that does not meet those requirements may still be a valid contract, but will not fall under the Act Cheques  Cheque – created when a person order a bank to pat a specific amount of money to someone  Most common form of negotiable instrument  Drawer – 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  Relationships: o Drawer and Payee – 2 contracts exist: first is the sale of goods agreement and the second is the cheque itself  By writing cheque, drawer is fulfilling his obligation under the sales contract by ordering the drawee to pay the payee o Drawer and Drawee – bank promised to honour cheque and pay as long as it appears in the correct form and drawer has enough money in the account  If bank improperly refuses to pay, it could be held liable to drawer for breach of contract o Payee and Drawee – Payee does not have a relationship with the bank  Payee cannot sue bank if it refused to pay the cheque, would have to sue drawer on either the cheque or the sales contract  Since bank does not owe any obligations to payee, bank may use slightly different rules from those set out Postdated Cheques  Postdated Cheque – dated in the future  Drawer may deliver cheque, but does not want it cashed until later  Bank is only allowed to debit account if it acts in accordance with his instructions  Usually used if a contract requires installment payments (rent, car lease, etc.) Staledated Cheques  Staledated Cheque – when payee does not seek payment within a reasonable time  Usually 6 months after the date on the cheque  Payee could sue drawer on either the cheque or sales contract o Payee has 2-6 years to sue drawer, or it becomes unenforceable Overdrawn Cheques  Overdrawn – when the drawer’s account does not hold enough money to satisfy it completely  Also referred to as NSF – Non-Sufficient Funds  Bank may still honour cheque, and then seek repayment from drawer o Even if bank honours cheque by mistake  If drawer knows that account does not have sufficient funds, he can be charged with the crime of False Pretenses Counterdemanded Cheques  Bank can deal with a customer’s money only if it has that person’s authorization  Counterdemand – when a customer orders a bank to refuse payment on a cheque o Also referred to as “Stop payment Order”  By counterdemanding, drawer is removing bank’s authority to deal with his account  Limitations: o Banks will not normally accept a counterdemand unless the drawer gives that order in person, and cheque details are given in full  Details required so incorrect stop payment is not placed o Many bank contracts include a term that allows a bank to debit a customer’s account if counterdemanded cheque is honored by mistake  Bank may have to sue payee if it wants to recover payment made by mistake  Bank would sue under restitution under action of unjust enrichment  Bank cannot sue in contract because it does not have a contract with payee  Cheque is automatically counterdemanded if the bank is notified that the drawer has died before the payee receives payment Certified Cheques  There is no guarantee that a cheque will be cashed o It is a promise to pay, but not all promises are kept  Certification – when a drawee bank promises to honour a cheque o Usually stamped “Certified” and dated o Fee charged for certification o Courts consider it “something equivalent to money” o Funds withdrawn from drawer’s account and placed in a “suspense account” until cheque is presented for payment and can be honoured  Cheque can be certified by payee or drawer  Once cheque is certified, drawee owes and obligation to payee o If bank does not honour cheque, payee can sue bank  Bank cannot hide behind its own error, must fulfill its promise o If certified by mistake, and account is overdrawn, bank must still honour cheque  Certification ensures cheque cannot become counterdemanded o Bank may allow a certified cheque to be counterdemanded if the drawer is willing to provide indemnification by promising to provide compensation to the bank if it is sued o If cheque is certified by drawer, it can be cancelled and the funds returned to the account if the cheque has not been delivered to the payee Bills o
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