Lecture Fundamentals of business law (4th): Chapter 5 - Margaret L. Barron, Richard J.A. Fletcher

Chapter 5 - Negotiable instruments. In this chapter you should understand: the historical origins of negotiable instruments; the difference between ‘negotiability’ and ‘assignability’; the parties to, uses for and liabilities pertaining to and processes surrounding: bills of exchange, promissory notes, cheques.

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This is the prescribed textbook for your course.

Available NOW at your campus bookstore!

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by Barron & Fletcher Slides prepared by Kay Fanning

Negotiable instruments

Chapter 5

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Negotiable instrument

• A contract that can be transferred

from one person to another.

e.g Cheques

Bills of exchange

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by Barron & Fletcher Slides prepared by Kay Fanning 5-4

Nemo dat rule

• You cannot transfer better title to

goods than what you already have.

Exception: Negotiable instruments - can be transferred from one person to another and that person receives

good title, even if the transferor did

not have good title

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• Assignability (transferability):

Capable of being transferred from one person to another.

• Negotiability: Assignable and allows

good title to pass to the transferee.

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Bill of exchange

• An unconditional order

• In writing

• Addressed by one person (drawer) to

another (the drawee)

• Signed by the person giving it (the drawer)

• Pay on demand, or at a fixed or

determinable future time

• Involves a certain sum of money

• To the order of a specified person, or to

bearer

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Parties to a bill of exchange

• Drawer: Person responsible for creating bill

• Endorsee: Person to whom bill is transferred.

• Bearer: Person in possession of bearer bill.

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Parties to a bill of exchange -

holders

• Holder: Person in possession of a bill “to bearer”

Payee or Endorsee.

• Holder for value: Person in possession of bill

for which value has been given.

• Holder in due course: Person in possession of

bill

- that is complete and regular

- taken in good faith and for value

- no notice of any defect of transferor

- no notice of previous dishonour

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Types of bill of exchange

• Inland bills

• Foreign bills

• Accommodation bills

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Uses of a bill of exchange

• Payment of imports

• Payment of exports

• Avoidance of transfers of cash

• Can be discounted

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Liability of partners on a bill

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Negotiation of a bill of

exchange

When transferred from one person to another:

• Bearer bill - on delivery

• Order bill - endorsement and on

delivery

• Payable bill - endorsement by payee

and delivery

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• Special endorsement: Endorsee named

• Restrictive endorsement: Cannot be transferred

to anyone else

• Conditional endorsement: Contains a condition

• Sans Recours endorsement: Endorser not liable

if dishonoured

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Dishonour of a bill of

exchange

• On presentation: - non-acceptance

- non-payment

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Discharge of a bill of

exchange

Payment in due course

• Bill is paid by acceptor

• Acceptor becomes holder

• Bill is cancelled

• Holder waives rights under the bill

• Bill is altered

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• By one person to another

• Signed by the maker

• On demand or at a fixed or determinable future time

•Certain sum of money

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Cheques (Cheque Act 1986 (Cwlth))

• Allows cheques to be drawn on

financial institutions

• Contract involving cheques:

honour customer’s

cheque Creditor Debtor

Bank charges

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Cheque

Unconditional order

Addressed to another person

(financial institution)  Signed by person giving cheque

Order to pay on demand

 Order to pay a certain sum in money

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Differences between a bill of exchange

within a reasonable time

•Obligation from

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Presentation of cheques

Liability rests with drawer or endorser.

• Drawee institution - Institution upon

which the cheque is drawn.

• Collecting institution - Institution at

which the cheque is presented.

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Types of cheque

Order cheques

• One or more person is specified on the cheque as payee

or endorsee.

• Negotiated by endorsement and delivery.

bearer”)

• No person is specified in the cheque as payee or

endorsee, or the words “to bearer” appear on the cheque.

• Negotiated by delivery.

Crossed cheques

• Specific direction to the drawee financial institution not to pay the cheque over the counter.

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Crossed cheques

NOT NEGOTIABLE

• To be paid into an account

• Assignable and negotiable if:

- taken in good faith

- for value

- not aware of any defect of title

- good title passes regardless of what title the giver had

• Assignable

- title the giver had (nemo dat rule applies)

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Payment in due course

• Dishonour of cheque

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Dishonour of cheques

• Revocation by customer of

institution’s authority

• Insufficient funds in account

• Stop payment order

• Account subject to garnishee order

• Customer’s death

• Customer’s bankruptcy

• Material alteration of a cheque

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Revocation of financial institution’s

authority to pay cheques

• Countermand of payments (stop payment order)

• Notice of incapacity

• Notice of drawer’s death

person within 10 days of drawee bank becoming aware of drawer’s death.

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Capacity to incur liability

• Cheque drawn, issued or endorsed by

a person without capacity will not

place liability on the person for the

cheque

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Signature on the cheque

• To be valid, cheque must be signed

by drawer, unless:

- Estoppel

- Ratification

- Agent

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Stale cheque

• Date on cheque more than 15 months earlier.

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Endorsement of cheques

• Written

• Placed on cheque

• Signed by endorser(s)

• Name misspelt – endorser signs

wrong name and right name

e.g signature and name of endorsee

• Endorsements in order of appearance

on cheque

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Holder in due course

Has right to:

• Present cheque for payment

• Negotiate it

• Give a valid discharge

• Sue on cheque

Pay Dishonour

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Holder in due course

Definition:

• Cheque negotiated by holder

• Cheque complete and regular on face of it

• Cheque not stale

• Cheque not crossed “not negotiable”

• Cheque taken in good faith for value

• Cheque without notice of dishonour or

defect of transferor’s title

i.e holder has legal right to payment

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Discharge of liabilities

• Payment in due course

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Liability of parties to a

cheque

• Liability of drawer: For value of cheque

at time of issue

• Liability of endorser: To holder or

subsequent endorsers only

• Liability of “strangers”: A person who

is willing to “back the cheque” is liable as

an endorser.

• Liability on dishonour: Sum ordered to

be paid plus amount of interest.

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Duties of drawee

(financial institution) and

drawer

Act in good faith and without

fraudulent alterations.

If amount fraudulently altered, pay

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.

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