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Copyright © 2014 McGraw-Hill Education (Australia) Pty Ltd
PPTs to accompany Barron, Fundamentals of Business Law 7Rev
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NEGOTIABLE INSTRUMENTS
CHAPTER 5
Copyright © 2014 McGraw-Hill Education (Australia) Pty Ltd
PPTs to accompany Barron, Fundamentals of Business Law 7Rev
•2-2
Learning objectives
At the end of 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.
Copyright © 2014 McGraw-Hill Education (Australia) Pty Ltd
PPTs to accompany Barron, Fundamentals of Business Law 7Rev
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Introduction
• Negotiable 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:
– Cheques
– Bills of exchange
Copyright © 2014 McGraw-Hill Education (Australia) Pty Ltd
PPTs to accompany Barron, Fundamentals of Business Law 7Rev
•2-4
Background to development
of negotiable instruments
• Early 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.
Copyright © 2014 McGraw-Hill Education (Australia) Pty Ltd
PPTs to accompany Barron, Fundamentals of Business Law 7Rev
•2-5
The concept of negotiability
• Assignability (transferability):
capacity to be transferred from one
person to another.
• Negotiability: assignability, plus
allows good title to pass to the
transferee.
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PPTs to accompany Barron, Fundamentals of Business Law 7Rev
•2-6
Bills of exchange
• Unconditional orders
• In writing
• Addressed 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 time
• Involve a certain sum of money
• To the order of a specified person, or to bearer
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PPTs to accompany Barron, Fundamentals of Business Law 7Rev
•2-7
Bills of exchange (cont.)
Advantages
• Proof of debt
• Easily transferred
• Safely transferred
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PPTs to accompany Barron, Fundamentals of Business Law 7Rev
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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
• Holder: (see next slide)
Copyright © 2014 McGraw-Hill Education (Australia) Pty Ltd
PPTs to accompany Barron, Fundamentals of Business Law 7Rev
•2-9
Holder of a bill of exchange
• Holder: person in possession of a bill 'to bearer'
– payee
– 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 © 2014 McGraw-Hill Education (Australia) Pty Ltd
PPTs to accompany Barron, Fundamentals of Business Law 7Rev
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Types of bill of exchange
• Inland bills
• Foreign bills
• Accommodation bills
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PPTs to accompany Barron, Fundamentals of Business Law 7Rev
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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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PPTs to accompany Barron, Fundamentals of Business Law 7Rev
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Liability of partners on a bill of
exchange
• Holder has right against:
– Acceptor
– Drawer
– Prior endorsers
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PPTs to accompany Barron, Fundamentals of Business Law 7Rev
•2-13
Meaning of acceptance
• General
• Qualified
– Conditional
– Partial
– Local
– Qualified as to time
– Qualified as to acceptance
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PPTs to accompany Barron, Fundamentals of Business Law 7Rev
•2-14
Negotiation of a bill of exchange
When transferred from one person to
another:
• Bearer bill—on delivery
• Order bill—at endorsement and on
delivery
• Payable bill—at endorsement by payee
and delivery
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PPTs to accompany Barron, Fundamentals of Business Law 7Rev
•2-15
Endorsement of a bill of exchange
• Elements
– Endorsement written
– Endorser signs
• Blank endorsement—no endorsee named (payable to bearer)
• Special endorsement—endorsee named
• Restrictive endorsement—cannot be transferred
• Conditional endorsement—contains a condition
• Sans recours endorsement—endorser not liable if
dishonoured
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PPTs to accompany Barron, Fundamentals of Business Law 7Rev
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Dishonour of a bill of exchange
• On presentation
– Non-acceptance
– Non-payment
Copyright © 2014 McGraw-Hill Education (Australia) Pty Ltd
PPTs to accompany Barron, Fundamentals of Business Law 7Rev
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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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PPTs to accompany Barron, Fundamentals of Business Law 7Rev
•2-18
Promissory note
• Use: loan transactions involving only two people
– The maker
– The payee
• Unconditional promise 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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PPTs to accompany Barron, Fundamentals of Business Law 7Rev
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Cheques—Cheques Act 1986 (Cwlth)
• Allows cheques to be drawn on financial
institutions.
• Contract involving cheques:
Honour customer’s
cheque
Creditor
Bank
Debtor
Charges
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PPTs to accompany Barron, Fundamentals of Business Law 7Rev
Customer
Cheque
holder
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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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PPTs to accompany Barron, Fundamentals of Business Law 7Rev
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Differences between a bill of
exchange and a cheque
Bill of exchange
Cheque
• Payable 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 transactions
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PPTs to accompany Barron, Fundamentals of Business Law 7Rev
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Parties involved
• Drawer: person who writes the cheque
• Drawee: bank on which cheque is being
drawn
• Payee: person to whom cheque is being paid
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PPTs to accompany Barron, Fundamentals of Business Law 7Rev
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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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PPTs to accompany Barron, Fundamentals of Business Law 7Rev
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Types of cheque
Order cheques
• One person or more 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.
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PPTs to accompany Barron, Fundamentals of Business Law 7Rev
•2-25
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 giver had.
• Assignable
– Title the giver had (nemo dat rule applies)
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PPTs to accompany Barron, Fundamentals of Business Law 7Rev
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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.
Copyright © 2014 McGraw-Hill Education (Australia) Pty Ltd
PPTs to accompany Barron, Fundamentals of Business Law 7Rev
•2-27
Signature on the cheque
• To be valid, cheque must be signed by
drawer.
• Unauthorised signatures on cheques:
– Wholly inoperative on the drawer or endorser.
Exceptions:
 estoppel
 ratification
 agent
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PPTs to accompany Barron, Fundamentals of Business Law 7Rev
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Stale cheques
Date on cheque more than 15 months earlier
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PPTs to accompany Barron, Fundamentals of Business Law 7Rev
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Dishonoured cheques
• Customer revokes institution’s authority
• Insufficient funds in account
• ‘Stop payment’ order
• Account subject to garnishee order
• Customer dead
• Customer bankrupt
• Material alteration of a cheque
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PPTs to accompany Barron, Fundamentals of Business Law 7Rev
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Endorsement of cheques
• Written
• Placed on cheque
• Signed by endorser(s)
• Name misspelt—endorsee may adopt the
misspelling and add own proper signature
• Endorsements in order of appearance on
cheque
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PPTs to accompany Barron, Fundamentals of Business Law 7Rev
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Holder in due course
Has right to:
• present cheque for payment
• negotiate it
• give a valid discharge
• sue on cheque.
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PPTs to accompany Barron, Fundamentals of Business Law 7Rev
•2-32
Holder in due course (cont.)
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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PPTs to accompany Barron, Fundamentals of Business Law 7Rev
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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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PPTs to accompany Barron, Fundamentals of Business Law 7Rev
•2-34
Discharge of liabilities
• Payment in due course
• Renunciation of rights by the holder
• Cancellation of the cheque or drawer’s
signature
• Material alteration of the cheque
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PPTs to accompany Barron, Fundamentals of Business Law 7Rev
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Duties of drawee (financial
institution) and drawer
• Respective parties will not be liable if
duties followed.
• Duty to act in good faith and without
negligence
• Collecting institution also has duty to act in
good faith and without negligence.
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PPTs to accompany Barron, Fundamentals of Business Law 7Rev
•2-36
Duties of drawee (financial
institution) and drawer (cont.)
Drawee—financial institution Drawer
Act in good faith and without
negligence.
Take reasonable care when drawing
cheques to eliminate possibility of
fraudulent alterations.
If amount fraudulently altered, pay Take reasonable care to ensure
original amount.
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.
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PPTs to accompany Barron, Fundamentals of Business Law 7Rev
•2-37
Revocation of a 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
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PPTs to accompany Barron, Fundamentals of Business Law 7Rev
•2-38