Negotiable Instruments



Negotiable Instruments

Negotiability

Able to be transferred by delivery (or indorsement) so as to give good title of instrument to the bona fide holder ( notwithstanding that transferor may have defective title: State Savings Bank of Victoria v Permewan Wright & Co Ltd (1914) 19 CLR 457 at 474 per Isaacs J.

Types of Instruments

• Cheques - payment instrument: regulated by Cheques Act 1986

• Bills of exchange - payment or credit instrument: regulated by Bills of Exchange Act 1909

• Promissory notes - payment or credit instrument: reg by Bills of Exchange Act 1909

Advantages

• Convenient payment (or credit) device – more secure.

• Not an assignment of funds (ie debt); a transfer of obligation

• Represents a ‘security’ separate from the obligations of the transaction for which they are created (ie an enforceable obligation separate from the related commercial contract)

• NB importance of consideration

TYPES

Cheque: unconditional order in writing that is addressed by a person to another person (being a bank), and is signed by the person giving it, and requires the bank to pay on demand a sum certain in money.

Bill of exchange: unconditional order in writing, addressed by one person to another, signed by the person giving it, requiring the person to whom it is addressed to pay on demand, or at a fixed or determinable future time, a sum certain in money to or to the order of a specified person, or to bearer

Promissory note: unconditional promise in writing made by one person to another, signed by the maker, engaging to pay, on demand or at a fixed or determinable future time, a sum certain in money, to or to the order of a specified person, or to bearer. OPP of BOE.

Account holder’s mandate (order)

Commonwealth Trading Bank v Reno Auto Sales [1967] VR 790

Cheque is revocable mandate – not assignment of customer’s funds.

Not contractual relationship between bank and 3rd party – no duty to pay

THUS: 3rd party cannot sue bank for non-payment.

Ceborah SNC v SIP (Industrial Products) Ltd [1976] 1 Lloyd’s Rep 271

BF holder for value of “bill of exchange” has right (exceptions) to have it treated as CASH.

Thus: pay bill of exchange first – pursue claims later.

Inflatable Toy Company Pty Ltd v State Bank of New South Wales (1994) 34 NSWLR 243

Importer (not satisfied with import) tried to prevent bank from paying bill of exchange.

Held:

o “letters of credit be treated more or less as sacrosanct and that any possibility of rendering them valueless by court action should be avoided”

o used on basis that obligations of financial institutions would be met without exception.

o One exception (refuse payment) ( notice of fraud.

Cheques

Cheques Act 1986 (Cth) s 10(1)

Cheque is an unconditional order in writing that:

is addressed by a person to another person (payee), being a financial institution (ie. Bank); and

is signed by the person giving it (payer); and

requires the financial institution to pay on demand a sum certain in money.

Negotiability

Transferable by holder endorsing and delivering cheque (ie. Payee can negotiate cheque to 3rd person/Holder to satisfy debt)

o Every cheque is transferable by neg UNTIL discharged – even if crossed: s39

o Order cheque: transferred by neg if indorsed and delivery: s40(2)

o Bearer cheque: transferred by neg if delivery: s40(3)

Holder able to sue in own name (without reference to previous holders or original drawer)

If acquired in good faith for value [ie consideration] good title obtained even if previous holder had stolen it

Types of cheques

Order cheques: payable to the named person or indorsed payee (indorsee)—CA s 21

o Pay _________ or order….

o Negotiable by indorsement to another person.

Bearer cheques: payable to person in possession—CA ss 3, 22

o Pay _________ or bearer….

o Negotiable by simply delivery to another person.

Crossing (parallel lines): CA ss 53-57

PURPOSE: provides greater protection against stolen cheque.

Parallel lines only: cheque to be paid to another bank, not in cash over the counter (ie paid into payee’s bank account): s 54

Parallel lines with writing ‘not negotiable’ between parallel lines: transferee cannot have better title than transferor and takes it subject to defects in title of transferor (ie. Take at own risk): s 55

Cheque essentials

Legal capacity:

2 If capacity to contract ( capacity to incur liability on cheque: CA s 30(1).

3 If drawn, issued, indorsed by NO capacity ( will not be liable, but cheque is still valid: s 30(3),(4)

Signature of drawer or endorser: not liable unless signed: s 31(1)

Delivery:

6 Transfer of possession from one person to another: ss 3(1) ( creates legally binding rights

7 Drawing/indorsing of cheque is NOT complete and is revocable ( UNTIL delivery: s25

o Delivery must be made by the drawer or indorser: s26

8 There is a presumption of delivery: s 28

▪ Conclusive presumption that drawer delivered cheque to holder in due course – complete contract.

▪ Rebuttable presumption that drawer delivered cheque to holder– complete contract.

Consideration: any consideration sufficient for a contract, including an antecedent debt s 35

Invalid signatures CA s 32

Unauthorised – drawer (s32(1)):

Inoperative UNLESS:

o Person is estopped from denying genuiness/authority of sig

o Drawer ratifies/adopts sig.

Sig will be operate as sig of person (forgerer) who puts it on cheque, in favour of person (takes cheque in good faith or without notice).

Unauthorised – indorser (s32(2)):

Same as above.

Holders

Holder defined—s 3

• Holder has right to present cheque for payment, negotiation or valid discharge. Can sue on cheque in own name: s49.

holder means:

(a) in relation to a cheque payable to order—the payee or an indorsee who is in possession of the cheque as payee or indorsee, as the case may be; and

(b) in relation to a cheque payable to bearer—the bearer.

Holder in Due Course CA ss 49-52

Defects of title and personal defences: s49

Holds cheque free of defect in title of prior parties

1. May enforce payment against any person liable on cheque

Holder is a “HIDC” if: s50

Cheque transf by neg to holder and at that time:

Cheque complete and regular on face of it

Not a stale cheque (< 15 months old)

Not crossed “not neg”

Holder took in good faith, for value

Without notice of any dishonour of cheque OR any defect in title

Presumption that holder is HIDC: s51

Rebuttable presumption that holder is HIDC.

Holder who:

Derives title through a HIDC; and

Not party to any fraud/duress/illegality

Has all rights of HIDC

Discharge of cheque: CA s 78

Payment by drawee institution (ie drawer’s bank)

Renunciation of holder’s rights: holder renounces his rights against the drawer on cheque and effects this by delivering cheque back to drawer.

Cancellation: holder intentionally cancels the cheque or drawer’s signature. Must be apparent on cheque. Assumed to be intentional – unless proven to be mistake.

Material alternation/fraud: holder fraudulently alters cheque in any respect of a right/duty/liability of the drawer/indorser/drawee institution.

Dishonour of cheques

Duly presented BUT drawee institution refuses payment (refusal is communicated): s 69

Drawer/indorser liable for dishonoured cheque ( with or without notice of dishonour: s 70

May dishonour if: revoked authority of bank OR insufficient funds.

Wrongfully dishonoured: bank may be sued for breach of implied contract to pay cheque.

Liabilities of drawer and indorsers

NO liability unless cheque presented for payment: s 58

DRAWER: on presentment, cheque will be paid or (failing which) drawer will compensate holder or liable indorsers (who is compelled to pay cheque): s 71

INDORSER: on presentment, cheque will be paid or (failing which) indorser compensates holder or liable subsequent indorsers (who is compelled to pay cheque): s 73

Financial institution’s duties

When cheque duly present for payment ( drawee bank must pay/dishonour cheque as soon as reasonably practical. UNLESS it is aware of defect in holder’s title (or lack of title): s67

Example 1

D gives an uncrossed bearer cheque to P as payment for goods. T steals the cheque and hands it to G as payment for groceries.

If G takes cheque in good faith, for value without notice of theft G becomes holder in due course and is entitled to the cheque despite flaw in title—ss 49, 50

Example 2

D gives an order cheque to P. T forges P’s indorsement to transfer the cheque to G.

G doesn’t have entitlement to the cheque. S 31 signature essential to liability on cheque. See also s 40—must be indorsed by holder.

T is not drawer, or payee or endorsee.

Example 3

Example 1 with the same facts: cheque is crossed—G can become holder in due course because crossed cheque is only instruction to bank—it does not determine title rights

But if Cheque is crossed and marked non negotiable—G can never be holder in due course

Wrongfully dishonouring a cheque

S70

If wrongfully dishonoured ( bank may be liable for breach of implied contract to pay cheque.

Baker v ANZ [1958] NZLR 907

Three cheques returned by bank with the note “present again”; sufficient funds were available.

Responsibility of customer to bank

To draw cheques with reasonable care – so as not to facilitate forgery.

Gaps or spaces in cheques – breach of this duty?

PREV LAW:

Colonial Bank of Australasia Ltd v Marshall (1906) 4 CLR 196 (Privy Council):

Cheques drawn with spaces that enabled easy alteration eg £10 ( £110.

• HELD: mere fact of spaces is NOT sufficient breach.

London Joint Stock Bank Ltd v Macmillan [1918] AC 777

Dishonest employee clerk presents cheque to customer for signature. Words line left blank. Clerk amends cheque £2 ( £120. Employer sued bank for return of money.

• HELD: bank NOT liable. Customer has duty to take reasonable/ordinary precautions against forgery. Alteration in amount direct result of that breach ( liable to bear loss.

• CF: this is stricter than Colonial v Marshall.

CURRENT LAW:

Commonwealth Trading Bank of Australia v Sydney Wide Stores Pty Ltd (1981) 35 ALR 513

SWW had cheque account with CTB. Had cheques signed and made out to CAS (Computer Accounting Services). Employee changed to pay CASH or order. SWW argued CTB neg in paying their cheques. CTB argue SWW neg in making cheques payable to CAS not C.A.S. or actual name.

HELD: duty on customer to take usual and reasonable precautions to prevent a fraudulent alteration.

Between banker and customer: customer should bear responsibility for the loss when it is his careless drawing of the cheque that facilitates that loss through forgery

Marshall imposes heavy burden on banks: NOT followed.

a) Macmillan ensures that drawer (by neg) will not increase risk of loss through fraud: APPLIED.

• THUS: duty to take reasonable care NOT to leave gaps/spaces which would facilitate fraudulent increase.

Knowledge of forgery of signature Macmillan applied;

Greenwood v Martins Bank Ltd [1933] AC 51

Husband knew wife forged sig on cheques from his account. Estopped from denying genuine signature.

• HELD: duty to disclose forgeries that they are aware of ( allow bank to recover money.

National Australia Bank Ltd v Hokit Pty Ltd (1996) 39 NSWLR 377

Employee of family companies used to sign her employer’s name (with his knowledge) for company purposes. Also signed for her own benefit.

• HELD: duty does not extend to take reasonale precautions in management of their business to prevent forged cheques being presented for payment or to cheque bank statements to notify bank of unauthorised debits.

Approved: Greenwood (obligation to inform bank of forgeries as soon as known); Macmillan (obligation to draw cheques so as to minimise possibility of forgery)

Varker v The Commercial Banking Co of Sydney Ltd [1972] 2 NSWLR 967

V banks $98K in cheque account. Does cheque so M change $140 to $6,140.

Held: customer breach duty to bank, bank breach duty to customer

Stopping a cheque

Commonwealth Trading Bank v Reno Auto Sales [1967] VR 790

P changes mind about car purchase. Wife calls bank, talks to receptionist and instructs to hold cheque (wait for confirmation from husband). Receptionist fail to pass on message.

HELD: not effective countermand of cheque. Need precise instruction to responsible officer of bank.

Bank and Payee (not contractual rel)

Barclays Bank Ltd v WJ Simms Son & Cooke Ltd [1979] 3 All ER 522

Bank pays cheque after countermand by mistake.

HELD: bank's payment is without mandate – cannot debit customer’s account. Bank entitled to recover money from the payee.

1. If a person pays money to another under a mistake of fact which causes him to make the payment, he is prima facie entitled to recover it as money paid under a mistake of fact.

2. His claim may however fail if:

(a) the payer intends that the payee shall have the money at all events, whether the fact be true or false, or is deemed in law so to intend;

(b) the payment is made for good consideration, in particular if the money is paid to discharge, and does discharge, a debt owed to the payee (or a principal on whose behalf he is authorised to receive the payment) by the payer or by a third party by whom he is authorised to discharge the debt;

(c) the payee has changed his position in good faith, or is deemed in law to have done so.

Commercial Bank of Australia Ltd. v Younis [1979] 1 NSWLR 444

Cheque stopped by drawer. Payment of cheque refused by drawer’s bank. But done anyway in error.

Held: for person to recover money paid under mistake of fact, it is sufficient if the mistake was fundamental to the payment, even though the payer would not have been liable to pay it, if the supposed fact had existed. Bank’s negligence irrelevant.

Bank of NSW v Murphett [1983] VR 489

House and bus deposit paid by cheque. Changed mind – stop by phone and writing. Cheque paid by mistake.

Held: bank who mistakenly overlooks notice of countermand by customer ( can recover money from payee. Apply Barclays v Simms.

Bills of Exchange Act 1909

8 Bill of exchange defined

(1) A bill of exchange is an unconditional order in writing, addressed by one person to another, signed by the person giving it, requiring the person to whom it is addressed to pay on demand, or at a fixed or determinable future time, a sum certain in money to or to the order of a specified person, or to bearer.

(2) An instrument which does not comply with these conditions, or which orders any act to be done in addition to the payment of money, is not a bill of exchange.

Example:

|Perth, 1 January 2004 |

|$100,000 |

|183 days after sight, pay B or order the sum of AUD$100,000 for value received. |

|To: A |

|Accepted [signed A] _________ |

|[signed B] _________ |

Characteristics:

More secure than cash

Used in international trade eg shipping

May be negotiated before maturity at a discount

Independent of contract

Unlike cheques - both a payment instrument and a credit instrument

Cheque is a type of bill of exchange

‘a sum certain in money’

• Is certain EVEN if required to be paid with interest/charges, by stated instalments (incl with provision that upon default, all is payable), according to rate of exchange: s14(1)

Rosenhain v The Commonwealth Bank of Australia (1922) 31 CLR 46

• Bill of exchange worded: ‘...pay to the order of Caravel Company Incorporated £1471 10s 7p value received, with interest at the rate of 8%...sixty days after sight...until arrival of payment in London’

• Held: NOT certain – difficult to determine exact date the funds would arrive in London.

Negotiatiability

May be bearer bills or order bills.

Bearer bills – no indorsement to be neg to another person (just delivery is ok)

Order bills – must be indorsed to be neg.

Liability of Parties

Requires:

Signature

28 Signature essential to liability

Person NOT liable (as drawer/acceptor) UNLESS:

5 Person signs a bill in a trade name or an assumed name ( liable as if signed in own name

6 Sig of name of firm is = sig of all persons liable as partners in that firm.

Acceptance

22 Definition and requisites of acceptance

(1) The acceptance of a bill is the signification by the drawee of his assent to the order of the drawer.

(2) An acceptance is invalid unless it complies with the following conditions, namely:

(a) It must be written on the bill and be signed by the drawee. The mere signature of the drawee, without additional words, is sufficient.

(b) It must not express that the drawee will perform his promise by any other means than the payment of money.

Liability of Acceptor

59 Liability of acceptor

By accepting it:

Engages that they will pay according to tenor of his acceptance;

Is precluded from denying to a holder in due course the genuineness of drawer’s signature and existence/capacity.

a) Is NOT precluded from denying validity of indorsements;

Liability of drawer

60(1) Liability of drawer or indorser

By drawing it:

Engages that on due presentment ( shall be accepted and paid according to its tenor

If dishonoured ( compensate holder (or indorses who is compelled to pay) provided that requisite proceedings on dishonour are duly taken;

Is precluded from denying to a holder in due course - existence of the payee and his then capacity to indorse.

Liability of indorser

60(2) Liability of drawer or indorser

By indorsing it:

Engages that on due presentment ( shall be accepted and paid according to its tenor

If dishonoured ( compensate the holder (or a subsequent indorser who is compelled to pay it) provided that the requisite proceedings on dishonour are duly taken;

Is precluded from denying to a holder in due course - the genuineness and regularity in all respects of the drawer’s signature and all previous indorsements; and

Is precluded from denying to his immediate or a subsequent indorsee ( bill was (at the time of his indorsement) valid and subsisting bill (and he had good title)

Holders

Holder: the person in possession of the bill (s4)

1 Can sue in their own name but absence of consideration means they cannot sue immediately preceding indorser

Holder for value – where negotiated with consideration (given something for bill) AND any subsequent older after consideration given.

1 Can sue in own name and can sue any preceding indorser

Holder in due course -

Can receive better title than prior holder

34 Holder in due course

Is a holder – taken bill:

2 Complete and regular on the face of it;

3 Before overdue;

4 Without notice of dishonour;

5 In good faith and for value;

1 Without notice at time bill neg – of defect in title of transferor.

s34(2) Defective – obtained bill/acceptance by fraud, duress, force, fear, unlawful means, illegal consideration

s34(3): Holder who gets title through HIDC (not party to fraud/illegality) ( has all rights of HIDC.

Discharge

64 Payment in due course

(1) A bill is discharged by payment in due course by or on behalf of the drawee or acceptor.

Payment in due course - payment made at or after maturity of the bill to the holder (in good faith and without notice that his title to the bill is defective).

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