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Copyright 2004 Pearson Education Canada Inc. 21-1

CHAPTER 21CHAPTER 21

Negotiable Instruments


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Objectives ofthe ChapterObjectives ofthe ChapterIn this chapter we will examine such questions as:

What types of negotiable instruments are governed

by statute and how are they utilized?What is negotiability and what are the methods,

purposes and consequences of endorsement?

What is a holder in due course and what are the

three defences available to the parties?What is the liability of various parties to a

negotiable instrument?


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Natureand Uses ofNatureand Uses of

Negotiable InstrumentsNegotiable Instruments Negotiable instruments originated as a form of bill

of exchange.

A bill of exchange was a document made by a person instructing another person to make

payment to a third person or the bearer of the

document.

The Bills of Exchange Act governs three kinds of

negotiable instruments: bills of exchange,

promissory notes and cheques.


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Bills of Exchange (Drafts)Bills of Exchange (Drafts)

A bill of exchange is a written order by one party,the drawer, addressed to another party, the drawee,

to pay a specified amount of money to a namedparty, the payee, or to the bearer, at a fixed ordeterminable future time on demand.

There are three types of bills of exchange:

Demand drafts;

Sight drafts; and

Time drafts.


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PromissoryN

otePromissoryN

ote A promissory note is a written promise by

one party, the maker, to pay a specified

amount of money to another party, the

payee, at a fixed or determinable future time

or on demand.

A promissory note does not have to bepresented for acceptance.


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Negotiability

Negotiability

Negotiability is the special quality possessed by anegotiable instrument, namely:

A negotiable instrument may be transferred fromone holder to another without the promisor beingadvised about each new holder;

An assignee of a negotiable instrument may

sometimes acquire a better right to sue on theinstrument than its predecessor had; and

A holder may sue in its own name any other partyliable on the instrument.


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Methods of

Negotiation

Methods of

Negotiation

Negotiable instruments may be negotiated in twoways:

By endorsement and delivery; orBy delivery only.

There are various types of endorsement:

Special endorsement;

Conditional endorsement;Qualified endorsement; and

Anomalous endorsement.


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Liability ofthe Parties:Liability ofthe Parties:

The DrawerThe Drawer A drawer of a draft undertakes that when

the draft is presented it will be accepted and

paid according to its terms.

The drawer also promises that if it is

dishonored the drawer will compensate the

holder or any endorser who is compelled topay on it.


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The EndorserThe Endorser An endorser is generally liable to any holder

for the amount of the instrument if the party

that is primarily liable dishonours it.

However, if the endorser does not receive

prompt notice of the dishonour from the

holder of the instrument, the endorser willbe freed from liability.


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The Transferorby DeliveryThe Transferorby Delivery A transferor by delivery is anyone who negotiates

the instrument in bearer form. Since no

endorsement is required, a transferor by delivery isnot liable on the instrument, as an endorser, if the

party that is primarily liable is incapable of paying

it.

A transferor by delivery is liable to an immediatetransferee for such loss as the transferee would

sustain.


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The AcceptororMakerThe AcceptororMaker

By accepting a bill, a drawee undertakes to

pay it in accordance with the terms of the

acceptance.

A maker of a promissory note also

undertakes to pay the promissory note in

accordance with its terms.


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The Holderin Due CourseThe Holderin Due Course A holder in due course is one who acquires

more rights in an instrument than the

transferor had.

To obtain the rights to which the holder in

due course is entitled, he or she must satisfy

a number of conditions.


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Holderin Due Course:Holderin Due Course:

The ConditionsThe Conditions The holder in due course must satisfy the

following conditions:

The holder must have taken the instrumentcomplete and regular on its face;

The instrument must have been acquired before it

was overdue, and without notice of any dishonour;

Consideration must have been given; and

The holder must have taken the instrument in good

faith and without notice of any defect.

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