1. Copyright © 2004 by Nelson, a division of Thomson Canada Limited. 25-1 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

2. Copyright © 2004 by Nelson, a division of Thomson Canada Limited. 25-2 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

3. Copyright © 2004 by Nelson, a division of Thomson Canada Limited. 25-3 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

4. Copyright © 2004 by Nelson, a division of Thomson Canada Limited. 25-4 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

5. Copyright © 2004 by Nelson, a division of Thomson Canada Limited. 25-5 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

6. Copyright © 2004 by Nelson, a division of Thomson Canada Limited. 25-6 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)

7. Copyright © 2004 by Nelson, a division of Thomson Canada Limited. 25-7 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...

8. Copyright © 2004 by Nelson, a division of Thomson Canada Limited. 25-8 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

9. Copyright © 2004 by Nelson, a division of Thomson Canada Limited. 25-9 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

10. Copyright © 2004 by Nelson, a division of Thomson Canada Limited. 25-10 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

11. Copyright © 2004 by Nelson, a division of Thomson Canada Limited. 25-11 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

12. Copyright © 2004 by Nelson, a division of Thomson Canada Limited. 25-12 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

13. Copyright © 2004 by Nelson, a division of Thomson Canada Limited. 25-13 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

14. Copyright © 2004 by Nelson, a division of Thomson Canada Limited. 25-14 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

15. Copyright © 2004 by Nelson, a division of Thomson Canada Limited. 25-15 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

16. Copyright © 2004 by Nelson, a division of Thomson Canada Limited. 25-16 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

17. Copyright © 2004 by Nelson, a division of Thomson Canada Limited. 25-17 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

18. Copyright © 2004 by Nelson, a division of Thomson Canada Limited. 25-18 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

19. Copyright © 2004 by Nelson, a division of Thomson Canada Limited. 25-19 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…)

20. Copyright © 2004 by Nelson, a division of Thomson Canada Limited. 25-20 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