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Chapter 14

LAW 603 Chapter Notes - Chapter 14: Certified Check, Negotiable Instrument, Cheque

Law and Business
Course Code
LAW 603
George Ellinidis

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Chapter 14 Special Contracts: Negotiable Instruments
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

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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
o Certain Sum of Money must deal entirely with the payment of money, not delivery or
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
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
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
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
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