LAW 603 Chapter Notes - Chapter 14: Confidence Trick, Daily Bugle, Bankers' Acceptance
Chapter 14: Negotiable Instruments
A lot of the rules that apply to regular contracts also apply to negotiable instruments –
contracts dealing with the sales of goods are governed by special rules that are intended
to make the business world operate efficiently
When you pay for something with a cheque, you are dealing with a negotiable
instrument
Many different ways of making payments – easier to use cash
Cash however can be inconvenient and dangerous – inconvenient because bulky (cash
for coffee can fit in wallet but not cash for car) – dangerous because it is usually
impossible to recover if it is lost or stolen
Essential feature of cash is that it is a currency - $20 valuable in itself, it does not simply
represent a right to acquire something else that is valuable
Person can become the owner of cash by honestly paying for it – if I steal money from
you, my dishonesty prevents me from owning the money – however, if I use that cash to
buy a stereo form a storekeeper who was unaware of the theft, I no longer own the
money; the storekeeper does
oConsequently, you cannot retrieve it from them – you can sue me, but like many
thieves, I may have disappeared, or I may be so poor that I am not worth suing
As a matter of risk management, the lesson of the story is clear: Never carry more cash
than you are prepared to do without
Other ways of making payments that are more convenient and less dangerous than cash
Negotiable Instruments: consist of a contract that contains an obligation to pay money
oyou buy a car from car dealership. Contract is created – you are required to pay
the price, and the dealer is required to transfer the car to you
oHow will you pay the price? Would be foolish to carry $20 000 in cash from your
bank to the car lot. At the same time, dealer wants more than your simple
promise under the sale agreement – therefore write out a cheque for $20 000
oThat cheque is a new contract – you have promised that $20 000 to be paid to
whoever presents the piece of paper to your bank
oConsequently, if your bank refuses to honour the cheque, the dealer can sue you
on either the sale contract or the cheque itself
oSecond option – It is easier to prove the existence of negotiable instruments
than the existence of a sales contract.
People often don’t realize that a cheque is type of contract. Many of the rules that
normally govern contracts do not apply in the same way to negotiable instruments –
Three important differences:
oConsideration: Like all contracts cheque is enforceable only if it is supported by
consideration – something of value must be given for it. Consideration cannot
consist of a promise to perform an obligation that is already owed to the same
party – however, the rule does not apply to a cheque. In dealership’s promise to
transfer a car to you acted as consideration twice: first for the sale contract and
then for your cheque
find more resources at oneclass.com
find more resources at oneclass.com
oPrivity: Normally, a contract can be enforced only by someone with privity – a
stranger, someone who did not participate in the creation of the contract,
cannot sue. Nevertheless, anyone who holds a cheque can sue on it. Suppose
dealership coincidentally owed $20000 to the Daily Bugle for a newspaper
advertisement – instead of cashing your cheque and using the money to pay its
bill, the dealer might simply sell your cheque to the newspaper – Daily Bugle
could then sue you on the cheque, even though it was not originally a party to
the contract
oAssignment: contractual obligations can generally be assigned to a stranger.
However, assignment is a cumbersome process. A person who receives a
contractual right through an assignment takes it subject to the equities. The
assignee cannot be in a better position than the assignor. Dealership assigned its
rights under the sale contract to the Daily Bugle – if newspaper sued you for the
price, you could use any defence that you could have used against the
dealership. Suppose dealership breached the contract by selling you a car that
required $5000 in repairs – if the purchase price was $20000, you would have to
pay only $15000 to the newspaper – the situation would be different if the
dealership sold your cheque to the Daily Bugle. The most remarkable thing about
negotiable instruments is that, depending on your circumstances, oy can
improve as it is passed from one person to the next. Consequently, the
newspaper might be able to recover $20 000 from you even though your car was
defective – you would have to sue the dealership for breach of contract if you
wanted to be paid $5000 for the repairs
Negotiable instrument therefore represents a compromise between a simple contract
and money – is more valuable than a simple contract because, like money, it is
negotiable -it can be easily transferred from one party to another in a way that may
remove any defects
The Daily Bugle acquired clear title to the cheque that you had given to the car
dealership, just as the storekeeper became the owner of that cash that I have stolen
from you in earlier example
At the same time, negotiable instrument is not actually money – it is a contract that is
intended to eventually result in the payment of money. Consequently, it carries the
major risk that is associated with every contract: non-preference
While it is often much better to use on negotiable instrument than on simple contract,
enforcement is ultimately necessary in any event – and if a cheque is created by a
person who simply does not have any assets, it may be a worthless piece of paper –
coins and bills, in contrast, are never worthless. They have value in themselves
The Bills of Exchange Act
Negotiable instruments and sales of goods both involve contracts that are critically
important in the business world. Furthermore, because of the need for commercial
certainty, both have been codified
find more resources at oneclass.com
find more resources at oneclass.com
When the British Parliament introduced the Sale of Goods Act in 1893, it adopted the
rules that judges had developed over many years – the legislature’s aim was to ensure
that the economy ran smoothly – the same process occurred for negotiable instruments
In 1882, the British Parliament enacted the Bills of Exchange Act, which formally
adopted rules that judges had developed over several centuries – the legislature’s
intention was to increase economic efficiency by providing business people with
comprehensive set of rules regarding non-monetary payments
The Canadian Parliament once again followed the British model and introduced its own
Bill of Exchange Act in 1890 – with a few exceptions, that statute has hardly changed in
more than a century
Although both statutes were motivated by similar concerns, they are quite different in
some ways – the most important difference is that the Bills of Exchange Act is much less
flexible than the Sale of Goods Act
The Sale of Goods Act is relatively simple statute that provides default rules – parties are
generally free to pick and choose amongst those rules, even if they accept some and
reject others, their contracts can still fall within the Act
Bills of Exchange Act is a much longer and more complicated statute – furthermore, it
contains a large number of rules that a contract must satisfy – if those requirements are
not met, the Act does not apply
That difference arises because a sale of goods normally involves only two parties,
whereas negotiable instruments are designed to freely transferred amongst many
people – consequently, there is an even greater need for certainty with negotiable
instruments
IF I did not participate in the creation of a cheque, for instance, I may not be willing to
buy it unless I can be assumed, by simply looking at that piece of paper, that it is
valuable
Types of Negotiable Instruments
There are many varieties of negotiable instruments
Share certificates, for instance, are sometimes placed into that category
The Bills of exchange Act applies to only three types of negotiable instruments: cheques,
bills of exchange, and promissory notes
Five requirements must always be met before the Act can apply – each requirement
serves the goal of certainty – a negotiable instrument must tell a complete story – a
business person cannot be expected to look behind it
oSigned and written: although most contracts can be created orally, a negotiable
instrument must be signed and written – reason is obvious: a promise cannot be
clearly passed from one person to the next unless it is in writing
oParties identified: parties must be clearly identified. It must be possible to
immediately determine who is required to make the payment – that information
is important when time comes to “cash” the instrument. However, it is also
useful in deciding whether to buy a document in the first place. A cheque
find more resources at oneclass.com
find more resources at oneclass.com
Document Summary
A lot of the rules that apply to regular contracts also apply to negotiable instruments contracts dealing with the sales of goods are governed by special rules that are intended to make the business world operate efficiently. When you pay for something with a cheque, you are dealing with a negotiable instrument. Many different ways of making payments easier to use cash. Cash however can be inconvenient and dangerous inconvenient because bulky (cash for coffee can fit in wallet but not cash for car) dangerous because it is usually impossible to recover if it is lost or stolen. Essential feature of cash is that it is a currency - valuable in itself, it does not simply represent a right to acquire something else that is valuable. As a matter of risk management, the lesson of the story is clear: never carry more cash than you are prepared to do without.
