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Commercial Law Negotiable Instruments Mann Essentials of Business Law pp 829 – 833 & pp 838 - 848.

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Presentation on theme: "Commercial Law Negotiable Instruments Mann Essentials of Business Law pp 829 – 833 & pp 838 - 848."— Presentation transcript:

1 Commercial Law Negotiable Instruments Mann Essentials of Business Law pp 829 – 833 & pp

2 Commercial Law Payment Of Cheque A cheque is either payable To order - requires drawee to pay to or to order of a person specified (s. 21) or To bearer can be paid to whoever holds the cheque this is the default position if not payable to order (s. 22) Only 2 choices!

3 Commercial Law Converting from Order to Bearer (s23) A cheque may be converted from payable to bearer to payable to order Where the only, or last, indorsement of a cheque requires the drawee institution to pay to bearer, the holder may, convert the cheque into a cheque payable to order by changing the indorsement.

4 Commercial Law Account Payee Only A direction to pay only to the bank account of the payee named on the cheque Has no legal status under Cheques Act Operates as a cheque payable to order Puts collecting bank on notice to make further enquiries before paying someone other than named payee

5 Commercial Law Signature You must have signed a cheque, either as drawer or indorsee, to be liable on it (s31)

6 Commercial Law Unauthorised Signatures (s32) Where any signature is placed on a cheque without authority then it is inoperative unless The person against whom the signature is being asserted is estopped from denying its genuineness It has been ratified by the alleged signatory But it operates as a valid signature in favour of any person who takes the check bona fide for value and without notice of the defect

7 Commercial Law Holder in Due Course (s3) A person is a holder in due course if the cheque was transferred by negotiation to the holder and, at the time when the holder took the cheque, it was; Complete and regular on the face of it Not a stale cheque; and Not crossed not negotiable. And took the cheque in good faith, for value and without notice of defect in title

8 Commercial Law Stale Cheques (s3(5)) A cheque becomes stale after 15 months Banks have option to pay stale cheques Customer has right to tell banks not to pay stale cheques

9 Commercial Law Holder in Due Course (s3) (cont.) The holder took the cheque: In good faith; For value; and Without notice of any: dishonour of the cheque; or defect in, or lack of, title of the person who transferred the cheque to the holder

10 Commercial Law Holder in Due Course (s3) (cont.) The holder is deemed to have taken a cheque with notice of defect in title if he had notice that the cheque was transferred to him In breach of faith; or In fraudulent circumstances

11 Commercial Law Holder In Due Course Person to whom a cheque has been negotiated Person has taken cheque in good faith for value and without notice of defect Cheque is regular on the face of it not stale Not crossed not negotiable

12 Commercial Law Negotiation Normally, a person cannot get a better title to goods than the title of the person who transferred it to him (the Nemo Dat Rule) Negotiable instruments are an exception Person who holds a negotiable instrument obtains good title to it even if they have unknowingly dealt with someone who is not the rightful owner

13 Commercial Law Cheque Crossings (s 53) Required 2 parallel transverse lines; or 2 parallel transverse lines with the words not negotiable between, or substantially between, the lines Just putting the words not negotiable is NOT ENOUGH

14 Commercial Law Effect Of Crossing A Cheque A direction by drawer to drawee not to pay the cheque otherwise than to a financial institution (s54) Where a cheque that bears a crossing and is transferred by negotiation to a person, the person does not receive a better title to the cheque than the title of the person from whom he took the cheque (s55).

15 Commercial Law Effect of crossing a cheque Cheque cannot be cashed Acts as a safeguard against fraud Makes the cheque easier to trace A crossing may be added to a cheque by drawer or any body else in possession of cheque

16 Commercial Law Effect of crossing a cheque If bank pays out cash on a not negotiable cheque then bank then bank has converted the cheque and must account to true owner of cheque for his loss If person wrongfully obtains not negotiable cheque and then transfers it, then transferee has converted the cheque and must account to true owner of cheque for his loss Cary v Rural Bank of NSW (Mann 844) Radford v Ferguson (1947) 50 WALR 14

17 Commercial Law Radford v Ferguson (1947) 50 WALR 14 Plaintiff contracted with Johnson to build a house Johnson not a registered builder Plaintiff drew cheque and crossed it Not Negotiable Gave cheque to Johnson Johnson cashed cheque with third party Third party paid cheque paid to bank who honoured it Plaintiffs account debited

18 Commercial Law Radford v Ferguson (1947) 50 WALR 14 Decision Cheque obtained by false pretences Cheque voidable at option of plaintiff Johnson did have good title to cheque Third party did not get good title to cheque Third party had to pay plaintiff value of cheque

19 Commercial Law Effect of crossing a cheque A collecting bank honouring a not negotiable cheque gets no better title than the person presenting it to them This means they could be liable in conversion to the true owner of the cheque

20 Commercial Law Effect of crossing a cheque But Bank that honours cheque in good faith without notice of defect Without negligence Is protected (s 95) So bank that credits not negotiable cheque to customers account cannot be sued

21 Commercial Law Bank Cheques Do not comply with s. 10 definition. Is not drawn by one person on another Drawn by a financial institution on itself s. 5 clarifies and excludes operation of certain sections with respect to bank cheques.

22 Commercial Law Bank Cheques (cont.) Bank has no duty to warn public if cheques stolen No duty to prevent use by unauthorised persons. Not negotiable crossing means holder is not holder in due course. This means holder can obtain no better title than person from whom he took cheque Can be met with defence of total failure of consideration However may be misleading and deceptive conduct

23 Commercial Law Bank Cheques (cont.) ABA Guidelines for dishonour of bank cheques Forged or counterfeit instruments Bank cheques materially altered Bank cheques reported lost or stolen Failure of consideration for the issue of a bank cheque Court order restraining payment Still situations where they will be dishonoured.

24 Commercial Law Raper V. Commonwealth Trading Bank Of Australia (1975) 2 NSWLR 227 Jacobsen possessed a bank cheque drawn on US Bank Wife used it to open account for them with CTB 12 days later obtained bank cheque in favour Sidney Raper PL Used ank cheque to obtain goods from Raper US Bank Cheque dishonoured So, Commonwealth Bank dishonoured its bank cheque

25 Commercial Law RAPER V. COMMONWEALTH TRADING BANK OF AUSTRALIA (1975) 2 NSWLR 227 Decision No value given by Raper to bank for cheque. Total failure of consideration Credit in account conditional on clearance of US Bank cheque Bank cheque not equivalent to cash

26 Commercial Law Lyritzis and Lyritzis v. Westpac Banking Corporation No SG54 of 1992 FED No 812/94 Lyritzis opal miners and dealers in Coober Pedy Mr Lyritzis accepted 4 bank cheques drawn on ANZ from interstate buyer unknown to him Before transaction Westpac Bank Manager told him that a bank cheque was as good as cash and acceptable to any bank as a good and valid order for payment and failed to advise him that there were circumstances in which a bank cheque could be dishonoured The bank cheques had been stolen Interstate buyer disappeared with the opals

27 Commercial Law Lyritzis and Lyritzis v. Westpac Banking Corporation No SG54 of 1992 FED No 812/94 Federal Court: Advice was misleading and deceptive due to failure to warn of possibility of dishonour (s52 TPA) A case where s. 52 TPA conduct may be constituted by silence Negligence because duty to exercise reasonable care and skill when advising customer.

28 Commercial Law Defects in Title Where a person obtains a cheque by fraud duress other unlawful means they do not get title to it (s3(3)) This does not limit the circumstances in which they do not get title (s3(4))

29 Commercial Law Defects in Title However, where a person lacks capacity or power to incur a liability issues a cheque the cheque is still valid (s 30(3))

30 Commercial Law COMMERCIAL BANK OF AUSTRALIA V YOUNIS (1979) 1NSWLR 444 Hallitt Bros owed Younis money Thought it was $3,000 and gave him a cheque Discovered more like $2,000 Cancelled the $3,000 and gave him a new cheque for $2,000 Younis presented both and both paid by bank Bank could not collect from drawer

31 Commercial Law COMMERCIAL BANK OF AUSTRALIA V YOUNIS (1979) 1NSWLR 444 Hallitt Bros owed Younis money Thought it was $3,000 and gave him a cheque Discovered more like $2,000 Cancelled the $3,000 and gave him a new cheque for $2,000 Younis presented both and both paid by bank Bank could not collect from drawer

32 Commercial Law COMMERCIAL BANK OF AUSTRALIA V YOUNIS (1979) 1NSWLR 444 Decision Bank was entitled to recover money paid under mistake of fact Unjust enrichment for Y to keep the money Note that it might have been different if Y had changed his circumstances in reliance on money as this is a defence to a claim for return of money paid under a mistake of fact

33 Commercial Law Drawing Banks Duty to Customer Pay any cheque presented for payment if there are sufficient funds Will be liable for defamation if it doesnt Pay only in accordance with instructions given by drawer Not to pay if cheque materially altered or signature forged Will be protected if pays in good faith and without negligence

34 Commercial Law Drawing Banks Duties The bank is not to honour a cheque if Countermanded (i.e. stop payment) (s90(1)(a)) It has notice of Drawers mental incapacity (s90(1)(c)) Drawers death (s90(1)(c)) Drawer being an undischarged bankrupt (ss 125 and 126 of Bankruptcy Act )

35 Commercial Law Drawing Banks Liability Drawing bank that honours cheque in good faith without notice of defect Without negligence is protected (s 94)

36 Commercial Law Customers Duty to Bank Inform bank if it becomes aware of forged signature Write cheques carefully so as to reduce forgery Greenwood v Martins Bank (mann p 843) Commonwealth Trading Bank v Sydney Wide Stores (Mann p 843)


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