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.
This is the prescribed textbook for your course Available NOW at your campus bookstore! Copyright 2003 McGraw-Hill Australia Pty Ltd PPTs t/a Fundamentals of Business Law 4e by Barron & Fletcher Slides prepared by Kay Fanning Copyright © 2000 McGraw-Hill Australia Negotiable instruments Chapter Copyright 2003 McGraw-Hill Australia Pty Ltd PPTs t/a Fundamentals of Business Law 4e by Barron & Fletcher Slides prepared by Kay Fanning Negotiable instrument • A contract that can be transferred from one person to another e.g Cheques Bills of exchange Copyright 2003 McGraw-Hill Australia Pty Ltd PPTs t/a Fundamentals of Business Law 4e by Barron & Fletcher Slides prepared by Kay Fanning Copyright © 2000 McGraw-Hill 5-3 Australia 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 Copyright 2003 McGraw-Hill Australia Pty Ltd PPTs t/a Fundamentals of Business Law 4e by Barron & Fletcher Slides prepared by Kay Fanning Copyright © 2000 McGraw-Hill 5-4 Australia Negotiability • Assignability (transferability): Capable of being transferred from one person to another • Negotiability: Assignable and allows good title to pass to the transferee Copyright 2003 McGraw-Hill Australia Pty Ltd PPTs t/a Fundamentals of Business Law 4e by Barron & Fletcher Slides prepared by Kay Fanning Copyright © 2000 McGraw-Hill 5-5 Australia Bill of exchange • • • • • • • Copyright 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 2003 McGraw-Hill Australia Pty Ltd PPTs t/a Fundamentals of Business Law 4e by Barron & Fletcher Slides prepared by Kay Fanning Copyright © 2000 McGraw-Hill 5-6 Australia Bill of exchange Advantages • Proof of debt • Easily transferred • Safely transferred Copyright 2003 McGraw-Hill Australia Pty Ltd PPTs t/a Fundamentals of Business Law 4e by Barron & Fletcher Slides prepared by Kay Fanning Copyright © 2000 McGraw-Hill 5-7 Australia Parties 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 made • Endorser: Person who transfers rights of payment • Endorsee: Person to whom bill is transferred • Bearer: Person in possession of bearer bill Copyright 2003 McGraw-Hill Australia Pty Ltd PPTs t/a Fundamentals of Business Law 4e by Barron & Fletcher Slides prepared by Kay Fanning Copyright © 2000 McGraw-Hill 5-8 Australia 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 Copyright 2003 McGraw-Hill Australia Pty Ltd PPTs t/a Fundamentals of Business Law 4e by Barron & Fletcher Slides prepared by Kay Fanning Copyright © 2000 McGraw-Hill 5-9 Australia Types of bill of exchange • Inland bills • Foreign bills • Accommodation bills Copyright 2003 McGraw-Hill Australia Pty Ltd PPTs t/a Fundamentals of Business Law 4e by Barron & Fletcher Slides prepared by Kay Fanning Copyright © 2000 McGraw-Hill 5-10 Australia Types of cheque Order cheques • One or more person is specified on the cheque as payee or endorsee • Negotiated by endorsement and delivery Bearer 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 delivery Crossed cheques • Specific direction to the drawee financial institution not to pay the cheque over the counter Copyright 2003 McGraw-Hill Australia Pty Ltd PPTs t/a Fundamentals of Business Law 4e by Barron & Fletcher Slides prepared by Kay Fanning Copyright © 2000 McGraw-Hill 5-24 Australia 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) Copyright 2003 McGraw-Hill Australia Pty Ltd PPTs t/a Fundamentals of Business Law 4e by Barron & Fletcher Slides prepared by Kay Fanning Copyright © 2000 McGraw-Hill 5-25 Australia Payment in due course • Dishonour of cheque Copyright 2003 McGraw-Hill Australia Pty Ltd PPTs t/a Fundamentals of Business Law 4e by Barron & Fletcher Slides prepared by Kay Fanning Copyright © 2000 McGraw-Hill 5-26 Australia 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 Copyright 2003 McGraw-Hill Australia Pty Ltd PPTs t/a Fundamentals of Business Law 4e by Barron & Fletcher Slides prepared by Kay Fanning Copyright © 2000 McGraw-Hill 5-27 Australia Revocation of financial institution’s authority to pay cheques • Countermand of payments (stop payment order) - Clear - Communicated to responsible official - Given before cheque presented for payment • Notice of incapacity - Notice of drawer’s mental capacity • Notice of drawer’s death - Unless notice not received from entitled person within 10 days of drawee bank becoming aware of drawer’s death Copyright 2003 McGraw-Hill Australia Pty Ltd PPTs t/a Fundamentals of Business Law 4e by Barron & Fletcher Slides prepared by Kay Fanning Copyright © 2000 McGraw-Hill 5-28 Australia Capacity to incur liability • Cheque drawn, issued or endorsed by a person without capacity will not place liability on the person for the cheque Copyright 2003 McGraw-Hill Australia Pty Ltd PPTs t/a Fundamentals of Business Law 4e by Barron & Fletcher Slides prepared by Kay Fanning Copyright © 2000 McGraw-Hill 5-29 Australia Signature on the cheque • To be valid, cheque must be signed by drawer, unless: - Estoppel - Ratification - Agent Copyright 2003 McGraw-Hill Australia Pty Ltd PPTs t/a Fundamentals of Business Law 4e by Barron & Fletcher Slides prepared by Kay Fanning Copyright â 2000 McGraw-Hill 5-30 Australia Stale cheque ã Date on cheque more than 15 months earlier Copyright 2003 McGraw-Hill Australia Pty Ltd PPTs t/a Fundamentals of Business Law 4e by Barron & Fletcher Slides prepared by Kay Fanning Copyright © 2000 McGraw-Hill 5-31 Australia 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 Copyright 2003 McGraw-Hill Australia Pty Ltd PPTs t/a Fundamentals of Business Law 4e by Barron & Fletcher Slides prepared by Kay Fanning Copyright © 2000 McGraw-Hill 5-32 Australia Holder in due course Has right to: • Present cheque for payment • Negotiate it • Give a valid discharge • Sue on cheque Copyright Pay Dishonour 2003 McGraw-Hill Australia Pty Ltd PPTs t/a Fundamentals of Business Law 4e by Barron & Fletcher Slides prepared by Kay Fanning Copyright © 2000 McGraw-Hill 5-33 Australia 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 Copyright 2003 McGraw-Hill Australia Pty Ltd PPTs t/a Fundamentals of Business Law 4e by Barron & Fletcher Slides prepared by Kay Fanning Copyright © 2000 McGraw-Hill 5-34 Australia Discharge of liabilities • Payment in due course Copyright 2003 McGraw-Hill Australia Pty Ltd PPTs t/a Fundamentals of Business Law 4e by Barron & Fletcher Slides prepared by Kay Fanning Copyright © 2000 McGraw-Hill 5-35 Australia 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 Copyright 2003 McGraw-Hill Australia Pty Ltd PPTs t/a Fundamentals of Business Law 4e by Barron & Fletcher Slides prepared by Kay Fanning Copyright © 2000 McGraw-Hill 5-36 Australia Duties of drawee (financial institution) and drawer Respective parties will not be liable if duties followed • To act in good faith and without negligence • Collecting institution: to act in good faith and without negligence Copyright 2003 McGraw-Hill Australia Pty Ltd PPTs t/a Fundamentals of Business Law 4e by Barron & Fletcher Slides prepared by Kay Fanning Copyright © 2000 McGraw-Hill 5-37 Australia Duties of drawee (financial institution) and drawer Drawee – financial institution Act in good faith and without negligence If amount fraudulently altered, pay original amount 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 Copyright Drawer Take reasonable care when drawing cheques to eliminate possibility of fraudulent alterations Take reasonable care to ensure cheques are not accessible for forgery 2003 McGraw-Hill Australia Pty Ltd PPTs t/a Fundamentals of Business Law 4e by Barron & Fletcher Slides prepared by Kay Fanning Copyright © 2000 McGraw-Hill 5-38 Australia ... McGraw-Hill Australia Pty Ltd PPTs t/a Fundamentals of Business Law 4e by Barron & Fletcher Slides prepared by Kay Fanning Copyright © 2000 McGraw-Hill 5- 15 Australia Dishonour of a bill of exchange... McGraw-Hill 5- 6 Australia Bill of exchange Advantages • Proof of debt • Easily transferred • Safely transferred Copyright 2003 McGraw-Hill Australia Pty Ltd PPTs t/a Fundamentals of Business Law. .. 2003 McGraw-Hill Australia Pty Ltd PPTs t/a Fundamentals of Business Law 4e by Barron & Fletcher Slides prepared by Kay Fanning Copyright © 2000 McGraw-Hill 5- 35 Australia Liability of parties