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Canada (161,707)
LAW 603 (76)
Gil Lan (22)
Chapter 14

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Law and Business
LAW 603
Gil Lan

Chapter 14 – SPECIAL CONTRACTS: NEGOTIABLE INSTRUMENTS (P 335) Lesson; don’t carry more cash than prepared to do without Negotiable Instrument Consists of contract that contains obligation to pay money • Represents compromise between simple contract and money EXAMPLE: Buy car from dealership  Contract; required to pay price dealer required to transfer car How will you pay?  Shouldn’t carry $20 000 cash with you; you write a cheque  cheque is a new contract; promise that $20 000 will be in your bank If bank refuses to honour cheque; dealer can so you on either SALE CONTRACT or CHEQUE CONTRACT IMPORTANT DIFFERENCES BETWEEN NEGOTIABLE INSTRUMENT AND CONTRACTS • CONSIDERATION - Same: cheque must be supported by consideration; giving something of value in return - Normal rule; consideration can’t consist of promise to perform obligation that is already owed to same party but with cheque it can - Ie. Dealership’s promise to give car acted as consideration twice; for sale contract and for cheque • PRIVITY - Normal rule; contract can be enforced only by someone with privity; someone who did not participate in creation of agreement cannot sue on it - Anyone can sue on a cheque - Ie. Dealership owes $20 000 to Daily Beagle, they sell your cheque to them. Daily Beagle can sue you if cheque does not go through, even though they were not original party to contract • ASSIGNMENT - Normal rule: contract obligations generally can be assigned to stranger, assignee cannot be in better position than assignor - Ie. If dealership sells SALES CONTRACT to Daily Beagle and it sues you, you can use any defence you would have used against dealership; if dealership sold you car with $5000 in repairs, you only have to pay Beagle $15 000. - If dealership sold your cheque, it can improve when passed from one person to next - Beagle could recover full $20 000 from you even if car was defective - Would have to sue dealership separately for $5000 for repairs Remarkable: negotiable instrument can improve when passed from one person to another Negotiable Instrument Notes: • More valuable than simple contract; because it is negotiable • Can be easily transferred from one party to another in a way that removes debts • Not actually money; is a contract intended to result in payment of money • Carries risk; non-performance – can be worthless paper from one who has no money Bills of Exchange Act • 1882; British Parliament – Canada introduced own in 1890 • Intention: increase economic efficiency by providing business people with comprehensive set of rules regarding non-monetary payments • Less flexible than Sale of Goods Act • Large number of rules that contract must satisfy • When requirement not met, act does not apply • Greater need for certainty with negotiable instruments; can be transferred easily, need assurance cheque is valuable TYPES OF NEGOTIABLE INSTRUMENTS • 5 general requirements must always be met - Signed and written: negotiable instruments cannot be created orally o Promise cannot be clearly passed unless in writing - Parties Identified: parties must be clearly identified o Must be possible to immediately determine who is required to make payment; important when time comes to cash instrument o Useful when deciding to buy negotiable instrument document - Certain Sum of Money: must involve obligation to pay certain sum of money o Obligation must deal entirely with payment of money, not with delivery of goods or performance of services o Must be possible to calculate amount of money simply by looking at document o Can require interest but not payment of ‘reasonable price’ or ‘any money won in lottery’ - Time of Payment: time of payment must be clearly stated o Person buying negotiable instrument must be able to determine precisely when piece of paper can be turned into cash - Unconditional Obligation: must contain unconditional obligation o Payment cannot be made on condition ie. ‘buyer happy with car’ o Must be possible for person who buys negotiable instrument to immediately know exactly what they are receiving BILL OF EXCHANGE ACT APPLIES TO 3 TYPES OF NEGOTIABLE INSTRUMENTS 3 TYPES OF NEGOTIABLE INSTRUMENTS: Cheques - Most common form of negotiable instrument - Created when person orders bank to pay specific amount of money to someone - Cheque shows: o Drawer: person who ‘draws’ or creates cheque o Drawee: bank that is ordered to pay money (drawer’s bank) o Payee: person who is entitled to receive the money from the bank - Relationships between parties: o Drawer and Payee: two contracts; sale of goods and cheque itself. Fulfilling sale of goods by ordering bank to pay Payee o Drawer and Drawee: contractual relationship with Bank. If cheque withheld; Drawee could be held liable to Drawer for breach of contract o Payee and Drawee: Payee cannot sue bank if refused to honour cheque; must sue Drawer. Drawee does not have obligation with Payee - Possible issues with cheques: o Postdated cheques  Dated in the future  Drawer willing to deliver cheque immediately, does not want it cashed until later  Payee can only be paid on date in future  Problem: if payee seeks payment too soon o Staledated cheques  When payee does not seek payment within reasonable time  Problem: when payee seeks payment too late  Banks usually wont honour cheques more than 6 months old o Overdrawn cheques  When Drawer’s account does not hold enough money to satisfy it completely (NSF)  Bank has option: refuse to honour cheque (payee could sue drawer for non-payment) or treat drawer’s overdrawn cheque as request for loan, pay payee and seek repayment from drawer o Countermanded cheques  Occurs when a customer orders bank to refuse payment on a cheque AKA stop payment order  Countermanding: drawer removes drawee’s authority to deal with account  Limited to 2 factors; FACTOR 1: countermands not usually accepted unless in person; with cheque fully described (date, payee, amount) to ensure correct cheque countermanded  FACTOR 2: bank contracts may allow bank to debit drawer’s account if countermanded cheque honoured by mistake; otherwise bank may sue payee to recover mistaken payment o Certified cheques  Certification: Occurs when drawee bank promises to honour cheque; best way to avoid problem of non-payment  Usually done by stamping certified on date on front of cheque  Funds deducted and put into ‘suspense account’ uses them to honour cheque when presented for payment  Payee can certify cheque, more commonly done by drawer  Certification; something equivalent to money in eyes of law  Once cheque certified Bank now owes obligation to payee  Payee may demand payment even if drawee made certification by mistake thinking drawer had enough funds; they can’t hide behind mistake  Drawer loses right to countermand cheque when it is certified Bills of Exchange Is created when one person orders another person to pay a specific amount of money to a third person Example: Marisa – operator of manufacturing plant in Winnipeg bought shipment of steel from Olaf; industrialist in Sweden  contract made on March 1 2012; agreed to purchase price of $100 000, due September 1 2012  Marisa arranged payment through Red River Trust Company; issued bill of exchange Bill of Exchange: Drawer (Marisa) orders drawee (Red River Trust) to pay payee (Olaf) • Olaf not entitled to receive payment immediately (contract said payment due Sept 1) • Olaf presents bill to Red River Trust on March 15, for assurance he would receive payment • Red River Trust has two options when presented with Bill: - Could have indicated not ready to pay on September 1 (if drawer’s credit is smaller than bill amount)  Marisa could therefore not satisfy bill and Olaf could sue her - If she has enough credit, drawee indicates it will honour bill when due (Sept 1) - Randy; authorized signing agent with Red River accepted bill o Acceptance: occurs when drawee promises to pay a bill o Randy did so in writing ‘Accepted’, date of acceptance and signing bill and returning to payee o Red River becomes acceptor at that point rather than drawee • Acceptance similar to certification; drawee can be sued by payee after acceptance • Drawer loses control of bill once accepted, they lose ability to cancel bill • Trust company pays Olaf on Sept 1, orders repayment from Marisa In General: • Bill of exchange like cheque is a contract; not enforceable unless supported by consideration  INDICATED BY PHRASE: FOR VALUE RECEIVED AS INDICATED ON BILL • Bill of exchange may be payable on demand: it is a ‘demand draft’ BUT can also be ‘sight draft’; like demand only payee is not entitled to receive any money until 3 days after bill has been presented to drawee • Time draft: payable only on a future date (in ex above) • Bill of exchange usually used for 1 of 2 purposes: - Like a cheque to safely transfer funds - Can be used to easily extend credit because it doesn’t have to be payable on demand • Bills less common than cheques today; usually only used in special circumstances i.e. international trade between large businesses Elements of Bill of Exchange: Next pg Elements of Bill of Exchange: • Drawee’s Acceptance (‘accepted’, date, name, for what bank/trust) • Due date • Drawee • Date made • Amount • Drawer’s signature Promissory Notes Created when one person gives another person a written promise to pay a specific amount of money • Usually between 2 parties • Person intended to receive money is Payee, person creating instrument is Maker Example: May 1 2012: Rita agrees to deliver shipment of sleds to John for $50 000 John doesn’t have enough $$$ to cover immediately, Rita agrees to accept instalment payments John gives Rita promissory note • No drawee under promissory note, but document indicates Rita entitled to collect money at bank of Acadia in Wolfville Nova Scotia (where John has account) • Promissory note almost always used as credit instrument; John allowed to postpone payment for sleds  usually will have to pay interest with promissory note (acts as credit) • Promissory note can be payable as lump sum; however, notes often payable as instalments – John should ensure short receipt written on the note when each instalment paid ie. “$10 000 received in part payment, Rita Perez (1 November 2012) - Without receipt john may be forced to make same payment twice • Acceleration Clause usually found on promissory notes: - Acceleration Clause: states that they entire amount of the promise becomes due immediately if a single instalment is not paid on time - Without acceleration clause: payee could only sue for missed payment amount - With acceleration clause: payee can sue for entire amount plus interest Elements of Promissory Note • Place of Payment • Amount with interest • Date • Payee • Terms of instalments • Maker’s signature NEGOTIATION Process of negotiation depends on whether instrument payable to bearer or to order Methods of Negotiation Negotiable instrument: (BEARER) payable to bearer if any person who holds it is entitled to receive payment Bearer instrument can arise in several ways: • One could make promissory note (ex) payable to ‘Jane Doe or Bearer’ or simply ‘to bearer’ • One could leave name of payee blank • One could make note payable to fictitious person; ‘Sherlock Holmes’ or to non-person ‘to cash’ • Order note could be bearer note if bearer had delivered it to someone else after endorsing it with their signature Bearer instrument can be negotiated by delivery or physical transfer of document, (endorsement unnecessary) Negotiable Instrument: (ORDER) payable to order if the party entitl
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