Luật học - Chapter 5: Negotiable instruments

This is the prescribed textbook for your course.Available NOW at your campus bookstore!NEGOTIABLE INSTRUMENTSCHAPTER 5Learning objectivesAt the end of this chapter you should understand:the historical origins of negotiable instrumentsthe difference between ‘negotiability’ and ‘assignability’the parties to, uses for and liabilities pertaining to and processes surrounding:bills of exchangepromissory notescheques.IntroductionNegotiable instrument: a document with legal rights attached to it. Can be transferred from one person to another, simply by delivery of the document (sometimes it requires endorsement). Examples:ChequesBills of exchangeBackground to development of negotiable instrumentsEarly merchants had to pay for goods and services by carrying around large quantities of coins. Merchants began writing orders to each other. Legal rules impeded them, e.g. the nemo dat rule—you cannot transfer better title to goods than you have.To overcome nemo dat an exception developed for negotiable instruments—these can be transferred from one person to another and the transferee receives good title, even if the transferor did not have good title.The concept of negotiabilityAssignability (transferability): capacity to be transferred from one person to another.Negotiability: assignability, plus allows good title to pass to the transferee.Bills of exchangeUnconditional ordersIn writingAddressed by one person (drawer) to another (drawee)Signed by the person giving a bill (the drawer)Paid on demand, or at a fixed or determinable future timeInvolve a certain sum of moneyTo the order of a specified person, or to bearerBills of exchange (cont.)AdvantagesProof of debtEasily transferredSafely transferredParties to a bill of exchange Drawer: person responsible for creating bill (creditor)Drawee: person to whom bill addressed (acceptor)Payee: person to whom payment is to be madeEndorser: person who transfers rights of paymentEndorsee: person to whom bill is transferredBearer: person in possession of bearer billHolder: (see next slide)Holder of a bill of exchangeHolder: person in possession of a bill 'to bearer'payeeendorseeHolder for value: person in possession of bill for which value has been givenHolder in due course: person in possession of billthat is complete and regulartaken in good faith and for valueno notice of any defect of transferorno notice of previous dishonour.Types of bill of exchangeInland billsForeign billsAccommodation billsUses of a bill of exchangePayment of importsPayment of exportsAvoidance of transfers of cashCan be discountedLiability of partners on a bill of exchangeHolder has right against: AcceptorDrawerPrior endorsersMeaning of acceptanceGeneralQualifiedConditionalPartialLocalQualified as to timeQualified as to acceptanceNegotiation of a bill of exchangeWhen transferred from one person to another:Bearer bill—on deliveryOrder bill—at endorsement and on deliveryPayable bill—at endorsement by payee and deliveryEndorsement of a bill of exchangeElementsEndorsement writtenEndorser signsBlank endorsement—no endorsee named (payable to bearer)Special endorsement—endorsee namedRestrictive endorsement—cannot be transferredConditional endorsement—contains a conditionSans recours endorsement—endorser not liable if dishonouredDishonour of a bill of exchange On presentationNon-acceptanceNon-paymentDischarge of a bill of exchangePayment in due courseBill is paid by acceptorAcceptor becomes holderBill is cancelledHolder waives rights under the billBill is alteredPromissory noteUse: loan transactions involving only two peopleThe makerThe payeeUnconditional promise by one person to anotherSigned by the makerOn demand or at a fixed or determinable future timeCertain sum of moneyCheques—Cheques Act 1986 (Cwlth)Allows cheques to be drawn on financial institutions.Contract involving cheques:Honour customer’s cheque Creditor Debtor Bank Charges CustomerCheque holderChequeUnconditional orderAddressed to another person (financial institution)Signed by person giving chequeOrder to pay on demandOrder to pay a certain sum in moneyDifferences between a bill of exchange and a chequeBill of exchangeChequePayable on demand, or at a fixed or determinable future date Payable on demand Drawn on anyone Drawn on a financial institution Can’t be crossed (always negotiable) Can be crossed Continuing security Presented for payment within a reasonable time Obligation from acceptance of bill Ongoing relationship Substantial trading transactions Day-to-day transactionsParties involvedDrawer: person who writes the chequeDrawee: bank on which cheque is being drawnPayee: person to whom cheque is being paidPresentation of chequesLiability rests with drawer or endorser.Drawee institution: institution upon which the cheque is drawnCollecting institution: institution at which the cheque is presentedTypes of chequeOrder chequesOne person or more is specified on the cheque as payee or endorsee.Negotiated by endorsement and deliveryBearer cheque(converted to order cheque by deleting 'or bearer')No person is specified in the cheque as payee or endorsee, or the words 'to bearer' appear on the cheque.Negotiated by deliveryCrossed chequesSpecific direction to the drawee financial institution not to pay the cheque over the counter.Crossed cheques NOT NEGOTIABLETo be paid into an account.Assignable and negotiable if:taken in good faithfor valuenot aware of any defect of titlegood title passes regardless of what title giver had.AssignableTitle the giver had (nemo dat rule applies)Capacity to incur liabilityCheque drawn, issued or endorsed by a person without capacity will not place liability on the person for the cheque.Signature on the chequeTo be valid, cheque must be signed by drawer.Unauthorised signatures on cheques:Wholly inoperative on the drawer or endorser. Exceptions:estoppelratificationagentStale chequesDate on cheque more than 15 months earlierDishonoured chequesCustomer revokes institution’s authorityInsufficient funds in account‘Stop payment’ orderAccount subject to garnishee orderCustomer deadCustomer bankruptMaterial alteration of a chequeEndorsement of chequesWrittenPlaced on chequeSigned by endorser(s)Name misspelt—endorsee may adopt the misspelling and add own proper signatureEndorsements in order of appearance on chequeHolder in due courseHas right to:present cheque for paymentnegotiate itgive a valid dischargesue on cheque.Holder in due course (cont.)Definition:Cheque negotiated by holderCheque complete and regular on face of itCheque not staleCheque not crossed 'not negotiable’Cheque taken in good faith for valueCheque without notice of dishonour or defect of transferor’s title i.e. holder has legal right to paymentLiability of parties to a chequeLiability of drawer: for value of cheque at time of issueLiability of endorser: to holder or subsequent endorsers onlyLiability of 'strangers': a person who is willing to 'back the cheque' is liable as an endorserLiability on dishonour: sum ordered to be paid plus amount of interestDischarge of liabilitiesPayment in due courseRenunciation of rights by the holderCancellation of the cheque or drawer’s signatureMaterial alteration of the chequeDuties of drawee (financial institution) and drawerRespective parties will not be liable if duties followed.Duty to act in good faith and without negligenceCollecting institution also has duty to act in good faith and without negligence.Duties of drawee (financial institution) and drawer (cont.)Drawee—financial institutionDrawerAct in good faith and without negligence.Take reasonable care when drawing cheques to eliminate possibility of fraudulent alterations.If amount fraudulently altered, pay original amount.Take reasonable care to ensure cheques are not accessible for forgery.If crossed cheque, must be paid into account.If forged signature, customer’s account cannot be debited.If paying on endorsee’s signature, acting in good faith and without negligence.Revocation of a financial institution’s authority to pay chequesCountermand of payments (stop payment order):ClearCommunicated to responsible officialGiven before cheque presented for paymentNotice of incapacityNotice of drawer’s mental capacityNotice of drawer’s deathUnless notice not received from entitled person within 10 days of drawee bank becoming aware of drawer’s death