LAW 603 Chapter Notes - Chapter 14: Demand Draft, Oral Contract, No Authority

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LAW603 Chapter 14 Notes – Special Contracts: Negotiable Instruments
-Dealing with a cheque (a cheque is a negotiable instrument)
-Cash is easy to use, but it is bulky and can get lost/stolen
-Credit/Debit cards can be used
Negotiable Instruments: consists of a contract that contains an obligation to pay money (ex:
cheque is a type of contract)
3 Important differences between negotiable instruments and contracts:
1. Consideration
oLike all contracts, a cheque is enforceable only if it is supported by consideration
oSomething of value must be given in exchange for it
oConsideration can consist of a promise to perform an obligation that is already owed
to the same party (2 considerations is possible, example, when buying a car you
have the sale contract and then for your cheque)
2. Privity
oA contract can normally only be enforced by someone with privity
oExample: instead of cashing your cheque to pay the bill for buying your car, the
dealership may sell your cheque to the newspaper company they owe that money to
oIn this case, the newspaper company can sue you even though they were not
originally a party to that contract
3. Assignment
oContractual obligations can be generally be assigned to a stranger
oA person who receives a contractual right through an assignment takes it subject to
the equities
oThe assignee cannot be in a better position that the assignor
-A negotiable instrument represents a compromise between a simple contract and money
-Negotiable means that it is transferrable from one party to another in a way that may
remove any defects
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-Negotiable instruments carry the risk of non-performance
The Bills of Exchange Act
-The intention was to increase economic efficiency by providing business people with a
comprehensive set of rules regarding non-monetary payments
-The Bills of Exchange Act is much less flexible than the Sale of Goods Act
-Sale of Goods Act = default rules
-A sale of goods normally involves only 2 parties while a negotiable instrument can be
transferred amongst many people
Types of Negotiable Instruments
1. CHEQUE: created when a person (drawer) orders a bank (drawee) to pay a specific amount
of money to someone (payee)
oDrawer: the person who “draws”, or creates, the cheque
oDrawee: is the bank that is ordered to pay the money
oPayee: the person who is entitled to receive the money from the bank
o3 Contracts: drawer and payee (the sale of goods agreement and cheque), drawer
and drawee
There is no relationship between the payee and the bank, the payee cannot
sue the bank for NSF, just the drawer
oTypes of Cheques
Postdated Cheque – dated in the future, payee can “cash” in the cheque only
starting at the date, drawer may be waiting for a payment to get into his/her
account
Staledated Cheque – when the payee does not seek payment within a
reasonable time (6 months)
Overdrawn Cheque – when the drawer’s account does not hold enough
money to satisfy it completely (NSF) (The bank could simply not honour the
cheque or take it as a request for a loan)
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