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LEARNING OBJECTIVES
By the end of this chapter, you will have a basic understanding of:
o Negotiable Instruments including
o Promissory Notes
o Bills of Exchange
o Cheques
1. INTRODUCTION
• Most business transactions involve the exchange of goods and services for
money
• Payment usually either by a bank transfer or by negotiable instrument
• The most common negotiable instruments include cheques, bills of exchange
and promissory notes
• The Negotiable Instruments Law sets out the general rules that relate to bills
of exchange, cheques and promissory notes
• The rules are very similar to the United Kingdom’s, Canada’s, America’s,
India’s & Pakistan’s
• Negotiable Instruments have their origin in centuries past where they were
developed as an alternative to the risk of carrying gold or money from market
town to market town
• They represent “money’s worth” and are considered almost good as gold
• A major advantage of a Negotiable Instrument is its transferability
• A NEGOTIABLE INSTRUMENT is a document that meets the requirements
for circulation without reference to other sources.
• The amount must be clearly specified or capable of being calculated
• The Law sets forth detailed rules with 3 general types of negotiable
instruments:
1. Cheques
2. Bills of exchange
3. Promissory Notes
• A cheque is a special type of a bill of exchange
• Much of what can be said about cheques also applies to bills of exchange
• A promissory note is distinct in both purpose and use from the other two
• Each has characteristics that make them important for the specific commercial
purpose
• the person who prepares the Bill is the Drawer
• the Drawee is the person to whom it is addressed
• Once the bill is drawn, it is sent to the Drawee for acceptance who would
write “accepted” across the face of the bill, sign and date it and return it to the
Drawer.
• the Drawee is under no obligation to accept the bill
• If it is accepted, the Drawee at this point becomes the Acceptor
• The acceptor promises at that point to pay the bill in accordance with its terms
• If the Drawee refuses to accept, the bill is said to be dishonoured
• Demand = immediate
• Sight = within 2 business days
• Term = on a fixed or determined or determinable (i.e. 60 days sight) future
date
• If it is a demand bill, payment must be immediate
• If it is a sight bill it is payable at sight or within a specified number of days
• Sight means acceptance
• Every bill is entitled to three days grace
• The drawer then would deposit the accepted bill just as he would a cheque
• At any time prior to negotiation, the drawer may transfer the bill by
endorsement. This is the act of signing the bill and delivering it to the new
holder the person ion possession of a bill is called a holder
• A holder who has paid for the bill (other than receiving it as a gift) is called a
holder for value
• An important type of holder is a holder in due course
• A holder in due course is one who receives an instrument that is
1. complete and regular on its face
2. before the bill is overdue
3. without any knowledge that the bill had previously been dishonoured
4. took the bill in good faith and for value, and
5. had no notice of any defect in the title of the person who negotiated it
3. BILL OF EXCHANGE
4. CHEQUES
5. PROMISSORY NOTES
Real Defences
Forgery
• Where the signature of any party to a bill of exchange is forged, the holder
may not enforce payment against any party whose signature was forged unless
prevented from doing so either by conduct or negligence
Incapacity of a Minor
• This defence limited to changes made to the negotiable instrument and does
not affect the enforcement of the instrument in accordance with its terms
• Where the instrument such as a cheque is altered, the holder may only be
entitle to enforce it against the maker/drawer for the original amount
• Defect of Title defences are good against all parties except a holder in due
course
• A Defect of Title defence may arise where a negotiable instrument is
obtained by fraud, duress or undue influence or by a promise not to negotiate
the instrument until after maturity
• Fraud may be a serious enough defence to constitute non est factum
• Where a person has been induced to sign a cheque on the basis of false
representations made by the payee, the defence of fraud may be raised
• The defence may also arise where there has a total failure of consideration or
where the instrument is illegal
• A Defect of Title defence may also be raised where a person is given the
responsibility to fill in the blanks on a negotiable instrument and that person
fills in the blanks incorrectly or releases the instrument when instructed not to
do so
• The defence also arises where a properly completed note or bill is stolen in
completed form the absence of delivery would constitute a good defect of title
defence against a holder, but not a holder in due course
Personal Defences
SUMMARY
ACCEPTANCE-- once the bill is drawn, it is sent to the Drawee for acceptance
who would write “accepted” across the face of the bill, sign and date it and return
it to the drawer (the person it is paying)
ACCEPTOR --If a bill of exchange is accepted, the Drawee at this point becomes
the acceptor. The acceptor promises at that point to pay the bill in accordance
with its terms
DISHONOUR, the holder of the bill of exchange must immediately notify all
endorser of the bill (and the drawer)
ENDORSEMENT—the act of making your “mark” on the back of a cheque for the
purpose of negotiation
HOLDER FOR VALUE—a holder who was given value for a negotiable
instrument
NEGOTIABLE INSTRUMENTS are promises to pay and are not legal tender
NOTICE OF DISHONOUR – notice to all parties that a bill of exchange has been
dishonoured by non-payment
SET-OFF is the most common defence raised. That is the party claiming the set-
off is alleging that the plaintiff owes the defendant money as well
3. How many days grace is one entitled to when presenting a bill of exchange?
5. What is a maker?
8. What is the difference between a real defence and a defect of title defence?
9. Old Mrs. Pyl was 79 years old and living in a retirement home. She received a
notice in the mail that she had won a prize. She called the number stated in the
letter. “A nice young man” named Christopher made an appointment to see her to
deliver the prize to her personally the very next day. While he was there, he
demonstrated the wonderful new vacuums that he happened to sell. Boy, could
that thing suck! Mrs. Pyl was very impressed. However, the young man told Mrs.
Pyl that in order to receive her prize (which were a few tea towels and an ashtray),
she had to buy the vacuum for $1,800. She willingly wrote out a cheque. When
her daughter came to visit her later that afternoon, Mrs. Pyl proudly displayed her
new acquisitions. Her daughter became very upset. What can be done now?
10. Describe the document, sometimes referred to as a bill of exchange that is the
instrument normally used in international commerce for payment.
a. Bill of lading is a document in which one party, the Drawer directs another
party, the Drawee to make a payment.
b. Bill of exchange which is a document in which one party, the Drawer
directs another party, the Drawee to make a payment.
c. Stamp of credit worthiness is a document in which one party, the Drawer
directs another party, the Drawee to make a payment.
d. Open note issued by the Importer’s Bank.
11. Define a ‘bill of exchange’?
a. A bill of exchange is an unconditional order in writing, signed by the
exporter and drawn on the importer demanding payment of the indicated
sum of money on a specified date.
b. A bill of exchange is a conditional order in writing, signed by the exporter
and drawn on the importer demanding payment of the indicated sum of
money on a specified date.
c. A bill of exchange is an unconditional sales contract in writing, signed by
the exporter and addresses to the importer demanding payment against
delivery of the goods.
d. A bill of exchange is a conditional order in writing, signed by the exporter
and drawn on the importer demanding payment of the indicated sum of
money on a date to be specified later.
12. Jane Harris signs a cheque on her account at the Bank of Nova Scotia to Michael
King. Which of the following is true?
a. The Bank of Nova Scotia is the drawer.
b. Jane Harris is the drawer.
c. The Bank of Nova Scotia is the Drawee.
d. both A and B
e. both B and C
14. Lou Gaudette writes a cheque to Judy Atkinson for services rendered. What is
Lou called in relation to the cheque?
a. Payee
b. endorser
c. holder in due course
d. drawer
e. payor
TRUE/FALSE
15. Few business transactions involve the exchange of good and services for money.
16. Negotiable instrument is not a viable method of payment in Canada.
17. A cheque is a special type of bill of exchange.
18. The drawee is obligated to accept a bill.
19. A minor cannot incur liability on a negotiable instrument.
20. The most effective defenses are “real defenses”.
21. Absence of consideration may be a personal defense.
TRUE/FALSE
15. F
16. F
17. T
18. T But if he does not accept, he is said to have dishonoured the bill.
19. T A minor does not have the legal capacity.
20. T Real defences are available against all holders including a holder in due
course.
21. T