CHAPTER Microsoft ® PowerPoint ® Presentation Prepared By Gail McKay, LLB, Thompson Rivers University © 2008 McGraw-Hill Ryerson Ltd., All Rights Reserved. © 2008 McGraw-Hill Ryerson Ltd. All Rights Reserved. 10 Law of Banking and Negotiable Instruments

Fundamentals of Canadian Business Law, Second Edition © 2008 McGraw-Hill Ryerson Ltd. All Rights Reserved10-1 OBJECTIVES 1.To survey the role of cheques, bills of exchange and promissory notes in business and the law relating to them 2.To determine the enforceability of these negotiable instruments and defences to their payment 3.To survey the effect of consumer protection legislation on negotiable instruments

Fundamentals of Canadian Business Law, Second Edition © 2008 McGraw-Hill Ryerson Ltd. All Rights Reserved10-2 INTRODUCTION A negotiable instrument is an instrument in writing that, when transferred in good faith and for value without notice of defects, passes a good title to the instrument to the transferee It replaces the need for an exchange of cash (legal tender) for goods or services in business transactions Cheques, bills of exchange and promissory notes are the most common negotiable instruments

Fundamentals of Canadian Business Law, Second Edition © 2008 McGraw-Hill Ryerson Ltd. All Rights Reserved10-3 THE BILLS OF EXCHANGE ACT The federal Bills of Exchange Act charts the role of negotiable instruments in creating credit arrangements and reducing risk by replacing the need to transport cash A bill of exchange is defined as an instrument in writing, signed by the drawer and addressed to the drawee, ordering the drawee to pay a certain sum of money to the payee (or bearer) at a fixed or determinable future time, or on demand

Fundamentals of Canadian Business Law, Second Edition © 2008 McGraw-Hill Ryerson Ltd. All Rights Reserved10-4 An endorser and endorsee are, generally, the equivalents of an assignor and assignee of contractual rights The holder of a negotiable instrument must be a bearer, a payee, or an endorsee A holder for value is someone who has paid something of value in return for the negotiable instrument, as opposed to someone who has received it as a gift NEGOTIABLE INSTRUMENTS

Fundamentals of Canadian Business Law, Second Edition © 2008 McGraw-Hill Ryerson Ltd. All Rights Reserved10-5 A HOLDER IN DUE COURSE If a holder has received an instrument that is 1.Complete and regular on its face, 2.Before it is due and payable, 3.Without any knowledge that it has previously been dishonoured, and the holder 4.Has taken the instrument in good faith and for value, and 5.Has had no notice of any defect in the title of the person who negotiated it, then the holder is a holder in due course

Fundamentals of Canadian Business Law, Second Edition © 2008 McGraw-Hill Ryerson Ltd. All Rights Reserved10-6 CHEQUES A cheque is a special type of bill of exchange, payable on demand, in which the drawee is always a bank However, the bank is only required to honour an ordinary cheque if the drawer has enough money on deposit to cover the cheque Certification of a cheque requires a bank to withdraw the amount of a cheque from the drawer’s account and set it aside for future payment, thereby making the bank liable

Fundamentals of Canadian Business Law, Second Edition © 2008 McGraw-Hill Ryerson Ltd. All Rights Reserved10-7 PRESENTATION AND ENDORSEMENT Cheques should be presented for payment within a reasonable time A restrictive endorsement limits payment to a named person or “for deposit only” into a named person’s account A special endorsement requires a specific endorser before further negotiation can occur Endorsement without recourse limits the liability of the endorser if dishonour arises

Fundamentals of Canadian Business Law, Second Edition © 2008 McGraw-Hill Ryerson Ltd. All Rights Reserved10-8

Fundamentals of Canadian Business Law, Second Edition © 2008 McGraw-Hill Ryerson Ltd. All Rights Reserved10-9 BILLS OF EXCHANGE Still used in international business for the purchase and sale of goods, the bill of exchange is not as common as it once was, but is an excellent way to sell goods on credit The drawer is the person who writes a bill of exchange or order to pay, and the drawee is the person to whom it is addressed An acceptor is a drawer who accepts liability for payment of the bill of exchange

Fundamentals of Canadian Business Law, Second Edition © 2008 McGraw-Hill Ryerson Ltd. All Rights Reserved10-10 DEMAND AND SIGHT BILLS OF EXCHANGE The timing for payment of bills of exchange is subject to certain rules A demand bill is payable on demand or upon presentation of the bill of exchange and does not require any acceptance A sight bill, on the other hand, is generally payable three days after the acceptance has occurred

Fundamentals of Canadian Business Law, Second Edition © 2008 McGraw-Hill Ryerson Ltd. All Rights Reserved10-11 LIABILITY FOR A BILL OF EXCHANGE Where acceptance by the drawee has occurred, the drawee is liable to pay at the specified time and place or at a reasonable time If payment is refused, the holder of a bill of exchange can, after giving them notice of the dishonour and an opportunity to pay, sue the drawer, acceptor and endorsers The notice should be given not later than the next business day following the dishonour

Fundamentals of Canadian Business Law, Second Edition © 2008 McGraw-Hill Ryerson Ltd. All Rights Reserved10-12

Fundamentals of Canadian Business Law, Second Edition © 2008 McGraw-Hill Ryerson Ltd. All Rights Reserved10-13 PROMISSORY NOTES A promissory note is an unconditional promise in writing, signed by the maker, to pay a certain sum of money to the person named or to the bearer at a fixed or determinable future time, or on demand A promissory note differs from a bill of exchange and a cheque because it is a promise rather than an order to pay, and there is no drawee involved; but once delivered to the payee or bearer, the maker is liable to pay the note according to its terms

Fundamentals of Canadian Business Law, Second Edition © 2008 McGraw-Hill Ryerson Ltd. All Rights Reserved10-14 PROMISSORY NOTES continued A promissory note held as collateral need not be presented for payment so long as it is continuing to be held for that purpose The calculation of time for payment, as with a bill of exchange, includes three days’ grace unless the note is payable on demand If a promissory note is dishonoured, the holder must immediately give notice of the dishonour to all endorsers

Fundamentals of Canadian Business Law, Second Edition © 2008 McGraw-Hill Ryerson Ltd. All Rights Reserved10-15

Fundamentals of Canadian Business Law, Second Edition © 2008 McGraw-Hill Ryerson Ltd. All Rights Reserved10-16 INSTALLMENT NOTES Some promissory notes allow for payment by a number of installment payments The seller of expensive consumer goods may take a security interest in the goods as collateral security to a promissory note Alternatively, a seller of such goods may specify that title to the goods will not pass until the final payment is made

Fundamentals of Canadian Business Law, Second Edition © 2008 McGraw-Hill Ryerson Ltd. All Rights Reserved10-17 ADVANTAGES OF INSTALLMENT NOTES The buyer of goods on installment may spread the cost of expensive purchases over a pre arranged period of time But the seller benefits from the fact that the installment note is a negotiable instrument, meaning it can be negotiated to a financial institution which will receive the payments from the consumer, while the seller is paid immediately

Fundamentals of Canadian Business Law, Second Edition © 2008 McGraw-Hill Ryerson Ltd. All Rights Reserved10-18 ACCELERATION CLAUSES When installment notes are designed, a common requirement is that if a default in the payments occurs, the entire remaining balance becomes due and payable Without the acceleration clause, the institution handling the credit transaction could only sue for missed payments as they arose – which would not provide the same dis-incentive to miss payments

Fundamentals of Canadian Business Law, Second Edition © 2008 McGraw-Hill Ryerson Ltd. All Rights Reserved10-19

Fundamentals of Canadian Business Law, Second Edition © 2008 McGraw-Hill Ryerson Ltd. All Rights Reserved10-20 DEFENCES TO CLAIMS FOR PAYMENT According to the Bills of Exchange Act, if a default occurs on a negotiable instrument, prior endorsers must indemnify subsequent endorsers, with liability following the order of signing In comparison, an ordinary assignee of a contractual right assumes the rights of the assignor, subject to any defects in the title of the assignor – such as undue influence, fraud or a right of set off against the assignor

Fundamentals of Canadian Business Law, Second Edition © 2008 McGraw-Hill Ryerson Ltd. All Rights Reserved10-21 RIGHTS OF A HOLDER IN DUE COURSE When the holder of a negotiable instrument meets the qualifications of a holder in due course (including receiving the instrument for value and without notice of defects either in the instrument itself or the title of the prior holder), then he or she can enforce the instrument against all prior parties This is the case despite the existence of any problems between the original parties except forgery or the lack of capacity of the maker

Fundamentals of Canadian Business Law, Second Edition © 2008 McGraw-Hill Ryerson Ltd. All Rights Reserved10-22 THREE CLASSES OF DEFENCES Real defences are those which go to the root of the negotiable instrument and are effective against all holders, including a holder in due course Forgery of the signature of the maker, drawer or endorser of a negotiable instrument is a real defence, as is the signature of a minor If an instrument is signed but incomplete, and if it not delivered, then these two missing elements together constitute a real defence

Fundamentals of Canadian Business Law, Second Edition © 2008 McGraw-Hill Ryerson Ltd. All Rights Reserved10-23 A material alteration to a negotiable instrument also provides a real defence insofar as the altered portions of the document are concerned, unless the drawer was negligent Similarly, a cancellation of the negotiable instrument which is clearly apparent on its face provides a real defence against payment to a holder CLASSES OF DEFENCES, continued

Fundamentals of Canadian Business Law, Second Edition © 2008 McGraw-Hill Ryerson Ltd. All Rights Reserved10-24 DEFECT OF TITLE DEFENCES In contrast to real defences, defect of title defences do not apply to a holder in due course although they are effective against other holders Examples of defect of title defences include fraud, breach of trust, duress, undue influence, consideration that is illegal or a failure of consideration, the theft of a negotiable instrument in completed form, or the absence of delivery of an instrument

Fundamentals of Canadian Business Law, Second Edition © 2008 McGraw-Hill Ryerson Ltd. All Rights Reserved10-25 PERSONAL DEFENCES A personal defence is one that is limited to an immediate party, and not against a remote party An example is the set off, which allows one party to raise as a defence the indebtedness of the party presently claiming payment Other personal defences are release or payment prior to maturity

Fundamentals of Canadian Business Law, Second Edition © 2008 McGraw-Hill Ryerson Ltd. All Rights Reserved10-26 CONSUMER PROTECTION The Bills of Exchange Act has two rules associated with the protection of consumers against defective goods purchased on a credit arrangement Consumer bills are bills of exchange which are post dated for more than 30 days to purchase consumer goods; and consumer notes are promissory notes used to purchase consumer goods

Fundamentals of Canadian Business Law, Second Edition © 2008 McGraw-Hill Ryerson Ltd. All Rights Reserved10-27 CONSUMER PROTECTION, continued These two instruments must be marked “consumer purchase” before or at the time that each type of document is signed; otherwise the document is void against all but a holder in due course

Fundamentals of Canadian Business Law, Second Edition © 2008 McGraw-Hill Ryerson Ltd. All Rights Reserved10-28

Fundamentals of Canadian Business Law, Second Edition © 2008 McGraw-Hill Ryerson Ltd. All Rights Reserved10-29 SUMMARY The Bills of Exchange Act governs the negotiability of cheques, bills of exchange and promissory notes Liability for dishonour of a negotiable instrument depends on whether defences are real defences, defects of title or personal defences Consumer bills and consumer notes must be specially marked “consumer purchase”