Negotiable instruments Chapter 5

1. Negotiable instrumentsChapter 5

2. Introduction • Negotiable instrument: a document that embodies a legal right to pay the value inscribed on it. Can be transferred from one person to another, simply by delivery of the document (sometimes it requires endorsement). • “Negotiable” means that transferees receive good title NOT subject to prior defects in title. • Examples: • Cheques • Bills of exchange

3. Background to development of negotiable instruments • Merchants had to pay for purchases with precious metals – this was burdensome, there was always a risk of theft or destruction (eg. Shipwreck). • Merchants began writing orders to each other. Legal rules impeded them, e.g. the nemodat rule—’lit you cannot give what you do not have’, 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 (in fact the transferee can receive better title than the transferor.

4. 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.

5. Bills of exchange Bills of Exchange Act (Cth) 1909 • Unconditional orders • In writing • Addressed by one person (drawer) to another (drawee) • Signed by the person giving a bill (the drawer) • Pay 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

6. Bills of exchange (cont.) Advantages • Proof of debt • Easily transferred • Safely transferred For these reasons, Bills of Exchange are very popular large-scale commerce and, in particular, in international trade. The bill of exchange can be accompanied by banker’s documentary letters of credit.

7. 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)

8. Drawee Usuance of bill Payee Drawer

9. Holder of a bill of exchange • 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.

10. Uses of a bill of exchange • Payment of imports • Payment of exports • Avoidance of transfers of cash • Can be discounted (ie. cashed before maturity at a discount)

11. Liability of partners on a bill of exchange • Holder has right against • acceptor • drawer • prior endorsers

12. 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

13. Endorsement of a bill of exchange • Elements • Endorsement written • Endorser signs • Blank endorsement—No endorsee named (effectively turns an order bill into a bearer bill) • Special endorsement—Endorsee named • Conditional endorsement—Contains a condition • Sans Recours endorsement—Endorser not liable if dishonoured

14. Dishonour of a bill of exchange • On presentation: • non-acceptance • non-payment

15. 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

16. Cheques—Cheques Act 1986 (Cwlth) • Allows cheques to be drawn on financial institutions • Typically, cheques are put to a different commercial use than bills of exchange. In what ways do you think a cheque might serve a different commercial purpose to a bill of exchange?

17. Cheque: Cheques Act (Cth) 1986 • 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

18. Differences between a bill of exchange and a cheque

19. Parties involved • Drawer—Person who writes the cheque • Drawee—Bank on which cheque is being drawn • Payee—Person to whom cheque is being paid

20. 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.

21. 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

22. 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)

23. 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

24. Stale cheques Date on cheque more than 15 months earlier.

25. 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

26. 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

27. 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

28. 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

29. 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

30. Duties of drawee (financial institution) and drawer (cont.)

31. 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.

32. Sources: • M. L. Barron, ‘Business Law’ • Clive Turner, ‘Australian Commercial Law’ 26thed • Pentony et al, ‘Understanding Business Law’ 3rded