2-1 Copyright © 2014 McGraw-Hill Education (Australia) Pty Ltd PPTs to accompany Barron, Fundamentals of Business Law 7Rev This is the prescribed textbook for your course. Available NOW at your campus bookstore!

2-2 Copyright © 2014 McGraw-Hill Education (Australia) Pty Ltd PPTs to accompany Barron, Fundamentals of Business Law 7Rev NEGOTIABLE INSTRUMENTS CHAPTER 5

2-3 Copyright © 2014 McGraw-Hill Education (Australia) Pty Ltd PPTs to accompany Barron, Fundamentals of Business Law 7Rev 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.

2-4 Copyright © 2014 McGraw-Hill Education (Australia) Pty Ltd PPTs to accompany Barron, Fundamentals of Business Law 7Rev 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

2-5 Copyright © 2014 McGraw-Hill Education (Australia) Pty Ltd PPTs to accompany Barron, Fundamentals of Business Law 7Rev 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.

2-6 Copyright © 2014 McGraw-Hill Education (Australia) Pty Ltd PPTs to accompany Barron, Fundamentals of Business Law 7Rev 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.

2-7 Copyright © 2014 McGraw-Hill Education (Australia) Pty Ltd PPTs to accompany Barron, Fundamentals of Business Law 7Rev 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

2-8 Copyright © 2014 McGraw-Hill Education (Australia) Pty Ltd PPTs to accompany Barron, Fundamentals of Business Law 7Rev Bills of exchange (cont.) Advantages Proof of debt Easily transferred Safely transferred

2-9 Copyright © 2014 McGraw-Hill Education (Australia) Pty Ltd PPTs to accompany Barron, Fundamentals of Business Law 7Rev 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)

2-10 Copyright © 2014 McGraw-Hill Education (Australia) Pty Ltd PPTs to accompany Barron, Fundamentals of Business Law 7Rev 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.

2-11 Copyright © 2014 McGraw-Hill Education (Australia) Pty Ltd PPTs to accompany Barron, Fundamentals of Business Law 7Rev Types of bill of exchange Inland bills Foreign bills Accommodation bills

2-12 Copyright © 2014 McGraw-Hill Education (Australia) Pty Ltd PPTs to accompany Barron, Fundamentals of Business Law 7Rev Uses of a bill of exchange Payment of imports Payment of exports Avoidance of transfers of cash Can be discounted

2-13 Copyright © 2014 McGraw-Hill Education (Australia) Pty Ltd PPTs to accompany Barron, Fundamentals of Business Law 7Rev Liability of partners on a bill of exchange Holder has right against: –Acceptor –Drawer –Prior endorsers

2-14 Copyright © 2014 McGraw-Hill Education (Australia) Pty Ltd PPTs to accompany Barron, Fundamentals of Business Law 7Rev Meaning of acceptance General Qualified –Conditional –Partial –Local –Qualified as to time –Qualified as to acceptance

2-15 Copyright © 2014 McGraw-Hill Education (Australia) Pty Ltd PPTs to accompany Barron, Fundamentals of Business Law 7Rev 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

2-16 Copyright © 2014 McGraw-Hill Education (Australia) Pty Ltd PPTs to accompany Barron, Fundamentals of Business Law 7Rev 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

2-17 Copyright © 2014 McGraw-Hill Education (Australia) Pty Ltd PPTs to accompany Barron, Fundamentals of Business Law 7Rev Dishonour of a bill of exchange On presentation –Non-acceptance –Non-payment

2-18 Copyright © 2014 McGraw-Hill Education (Australia) Pty Ltd PPTs to accompany Barron, Fundamentals of Business Law 7Rev 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

2-19 Copyright © 2014 McGraw-Hill Education (Australia) Pty Ltd PPTs to accompany Barron, Fundamentals of Business Law 7Rev 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

2-20 Copyright © 2014 McGraw-Hill Education (Australia) Pty Ltd PPTs to accompany Barron, Fundamentals of Business Law 7Rev Cheques—Cheques Act 1986 (Cwlth) Allows cheques to be drawn on financial institutions. Contract involving cheques: Honour customer’s cheque Creditor Debtor Bank Charges Customer Cheque holder

2-21 Copyright © 2014 McGraw-Hill Education (Australia) Pty Ltd PPTs to accompany Barron, Fundamentals of Business Law 7Rev 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

2-22 Copyright © 2014 McGraw-Hill Education (Australia) Pty Ltd PPTs to accompany Barron, Fundamentals of Business Law 7Rev Differences between a bill of exchange and a cheque Bill of exchangeCheque 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

2-23 Copyright © 2014 McGraw-Hill Education (Australia) Pty Ltd PPTs to accompany Barron, Fundamentals of Business Law 7Rev Parties involved Drawer: person who writes the cheque Drawee: bank on which cheque is being drawn Payee: person to whom cheque is being paid

2-24 Copyright © 2014 McGraw-Hill Education (Australia) Pty Ltd PPTs to accompany Barron, Fundamentals of Business Law 7Rev 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

2-25 Copyright © 2014 McGraw-Hill Education (Australia) Pty Ltd PPTs to accompany Barron, Fundamentals of Business Law 7Rev 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.

2-26 Copyright © 2014 McGraw-Hill Education (Australia) Pty Ltd PPTs to accompany Barron, Fundamentals of Business Law 7Rev 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)

2-27 Copyright © 2014 McGraw-Hill Education (Australia) Pty Ltd PPTs to accompany Barron, Fundamentals of Business Law 7Rev Capacity to incur liability Cheque drawn, issued or endorsed by a person without capacity will not place liability on the person for the cheque.

2-28 Copyright © 2014 McGraw-Hill Education (Australia) Pty Ltd PPTs to accompany Barron, Fundamentals of Business Law 7Rev 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

2-29 Copyright © 2014 McGraw-Hill Education (Australia) Pty Ltd PPTs to accompany Barron, Fundamentals of Business Law 7Rev Stale cheques Date on cheque more than 15 months earlier

2-30 Copyright © 2014 McGraw-Hill Education (Australia) Pty Ltd PPTs to accompany Barron, Fundamentals of Business Law 7Rev 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

2-31 Copyright © 2014 McGraw-Hill Education (Australia) Pty Ltd PPTs to accompany Barron, Fundamentals of Business Law 7Rev 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

2-32 Copyright © 2014 McGraw-Hill Education (Australia) Pty Ltd PPTs to accompany Barron, Fundamentals of Business Law 7Rev Holder in due course Has right to: present cheque for payment negotiate it give a valid discharge sue on cheque.

2-33 Copyright © 2014 McGraw-Hill Education (Australia) Pty Ltd PPTs to accompany Barron, Fundamentals of Business Law 7Rev 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

2-34 Copyright © 2014 McGraw-Hill Education (Australia) Pty Ltd PPTs to accompany Barron, Fundamentals of Business Law 7Rev 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

2-35 Copyright © 2014 McGraw-Hill Education (Australia) Pty Ltd PPTs to accompany Barron, Fundamentals of Business Law 7Rev 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

2-36 Copyright © 2014 McGraw-Hill Education (Australia) Pty Ltd PPTs to accompany Barron, Fundamentals of Business Law 7Rev 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.

2-37 Copyright © 2014 McGraw-Hill Education (Australia) Pty Ltd PPTs to accompany Barron, Fundamentals of Business Law 7Rev Duties of drawee (financial institution) and drawer (cont.) Drawee—financial institutionDrawer Act in good faith and without negligence. Take reasonable care when drawing cheques to eliminate possibility of fraudulent alterations. If amount fraudulently altered, pay original amount. Take reasonable care to ensure 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.

2-38 Copyright © 2014 McGraw-Hill Education (Australia) Pty Ltd PPTs to accompany Barron, Fundamentals of Business Law 7Rev 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