Copyright © 2004 by Nelson, a division of Thomson Canada Limited CANADIAN BUSINESS AND THE LAW Second Edition by Dorothy Duplessis Steven Enman Shannon O’Byrne Sally Gunz Presentation prepared by Allan Elliott, Southern Alberta Institute of Technology

Copyright © 2004 by Nelson, a division of Thomson Canada Limited CHAPTER TWENTY-FIVE BUSINESS AND BANKING OBJECTIVES:  The relationship between a business and its bank  The legal framework of negotiable instruments  The rights and obligations of those connected with negotiable instruments  The legal challenges involved in electronic banking

Copyright © 2004 by Nelson, a division of Thomson Canada Limited THE BANKING RELATIONSHIP REGULATION OF BANKS  banks are under federal jurisdiction and are regulated through the federal Bank Act  Bank Act – the main purpose is to ensure the stability and liquidity of banks and to identify and regulate the types of business they are permitted to conduct

Copyright © 2004 by Nelson, a division of Thomson Canada Limited THE BANK-CUSTOMER AGREEMENT BANKING AGREEMENT  a contract that specifies the rights and obligations of a bank and a customer  purpose of the banking agreement  to specify who has the authority to issue instructions to the bank on behalf of the customer  to allocate the risk of loss resulting from problems with verifying the customer's authority and carrying out the customer’s instructions

Copyright © 2004 by Nelson, a division of Thomson Canada Limited DUTIES OF THE BANK AND THE CUSTOMER COMMON LAW IMPOSES ADDITIONAL DUTIES ON BOTH PARTIES TO THE BANKING CONTRACT  the bank must:  honour cheques and repay deposits  collect cheques for the customer  provide account information to the customer on a regular basis  maintain secrecy of the customer’s affairs

Copyright © 2004 by Nelson, a division of Thomson Canada Limited DUTIES OF THE BANK AND THE CUSTOMER THE CUSTOMER MUST  take reasonable steps to provide documentation as to who is authorized to give instructions to the bank in order to prevent fraud and forgery  keep authorizations current  notify the bank of any suspected problems  provide safeguards for electronic communications (including telephone, fax, and computer)

Copyright © 2004 by Nelson, a division of Thomson Canada Limited DUTIES OF THE BANK AND THE CUSTOMER MONEY LAUNDERING  the false reporting of income from criminal activity as income from legitimate business  Proceeds of Crime bill – requires banks to verify identity of customers, verify that customers are engaged in valid business activities, and to determine the source of transfers exceeding $10,000 Continued...

Copyright © 2004 by Nelson, a division of Thomson Canada Limited DUTIES OF THE BANK AND THE CUSTOMER MONEY LAUNDERING  new legislation passed in 2000 creates a mandatory reporting system in which banks, trust companies, insurance companies, and professionals must report to a new independent body (Financial Transactions and Reports Analysis Centre (FINTRAC)) any suspicious financial transactions and large cross-border currency transfers

Copyright © 2004 by Nelson, a division of Thomson Canada Limited THE BANK-CUSTOMER RELATIONSHIP RELATIONSHIP  in terms of the customer’s money on deposit with the bank, the relationship is purely that of the bank as debtor and the customer is creditor  if financial advice is provided then a fiduciary relationship exists

Copyright © 2004 by Nelson, a division of Thomson Canada Limited NEGOTIABLE INSTRUMENTS NEGOTIABLE INSTRUMENT  a written contract containing an unconditional promise or order to pay a specific sum on demand or on a specified date to a specific person or business  cheque – written order to a bank to pay money to a specified person  promissory note – a written promise to pay a specified amount to another person  bill of exchange – written order to a person to pay an amount to a specified person

Copyright © 2004 by Nelson, a division of Thomson Canada Limited STEPS IN THE CHEQUE CIRCULATION PROCESS  creator and drawer issues cheque to supplier (payee) supplier deposits cheque in its bank  supplier’s bank places cheque in supplier’s account through the cheque-clearing process, the cheque moves from the supplier’s bank to creator’s bank (drawee)  creator’s bank removes funds from creator’s account and transfers to supplier’s bank supplier’s bank recovers its funds Figure 25.2

Copyright © 2004 by Nelson, a division of Thomson Canada Limited IMPLICATIONS OF CREATING A CHEQUE ISSUING A CHEQUE  an unconditional promise to pay the specified sum to anyone who presents the cheque to the bank for payment  holder – a person who presents a negotiable instrument for payment  holder in due course – a holder in good faith without notice of defects who acquires greater rights than the parties who dealt directly with each other as the drawer and drawee

Copyright © 2004 by Nelson, a division of Thomson Canada Limited IMPLICATIONS OF CREATING A CHEQUE HOLDER  if the holder has acted in good faith there are limited arguments a creator can use to justify refusing payment NEGOTIATION  the process of transferring negotiable instruments from one person to another ENDORSEMENT  the process of signing a negotiable instrument to enable negotiation

Copyright © 2004 by Nelson, a division of Thomson Canada Limited IMPLICATIONS OF ACCEPTING A CHEQUE DELAY  accepting a cheque is equivalent to extending credit since there are several days between handing over goods and receiving payment from a cheque CERTIFICATION  the process whereby a bank guarantees payment of a cheque STOP PAYMENT  the process whereby the person who writes the cheque orders the bank not to pay the holder who presents it for payment

Copyright © 2004 by Nelson, a division of Thomson Canada Limited ENDORSEMENTS ENDORSEMENT IN BLANK  signing a cheque without any special instructions RESTRICTIVE ENDORSEMENT  signing a cheque for deposit only to a particular bank account SPECIAL ENDORSEMENT  signing a cheque and making it payable to a specific person

Copyright © 2004 by Nelson, a division of Thomson Canada Limited ELECTRONIC BANKING  financial transactions through the use of computers, telephones, or other electronic means  credit card transactions involve two contracts – one between the issuer and the user and the second between the credit card company and the merchant

Copyright © 2004 by Nelson, a division of Thomson Canada Limited ELECTRONIC BANKING RISKS  methods and potential for fraud are changed and expanded  transmission failure LESSENING RISK  banking contracts contain provisions for covering the risk of electronic transactions  international rules designed to deal with the obligations of the parties

Copyright © 2004 by Nelson, a division of Thomson Canada Limited TECHNOLOGY AND THE LAW ELECTRONIC CASH AND PAYMENT SYSTEMS ▪ ATMs, telephone banking and online banking, debit cards, electronic money, digital cash ▪ legal issues ▪ existing laws apply to paper documents ▪ risk of system crashes ▪ security and privacy of data and fraud

Copyright © 2004 by Nelson, a division of Thomson Canada Limited METHODS OF PAYMENT FORM OF PAYMENT NATURE OF PAYMENT RISK FOR PERSON ACCEPTINGPAYMENT immediate CASH money may be counterfeit or proceeds of a crime CASH CHEQUE deposited may be insufficient funds in account or cheque may be forged Figure 25.4 (continued…)

Copyright © 2004 by Nelson, a division of Thomson Canada Limited METHODS OF PAYMENT FORM OF PAYMENT NATURE OF PAYMENT RISK FOR PERSON ACCEPTINGPAYMENT CREDIT CARD DEBIT CARD CREDIT guaranteed immediate transfer payment at a later date risk is borne largely by the card provider risk is largely borne by the payment system the debtor may be unwilling to pay Figure 25.4