Negotiable Instruments

Learning Objectives

Posted on: July 19, 2011

LEARNING OBJECTIVES – defined in Kopel, Guide to Business Law, 4ed, pg 75, with additional comments by lecturer

 1.Understand the major characteristics of negotiability

 2. Define what is meant by a cheque 

3. Identify the types of holder

Please don’t be fooled.  There is more to parts 1 to 3 than meets the eye:

You will be expected to do more than state the definition of a cheque and know the types of holder.  You must demonstrate that you understand this definition, and how cheques are used in commerce:

 –          Understand what is meant by the creation of legal obligations on the cheque itself;

–          Know the form a cheque takes – and what elements are essential to legal validity;

–          Correctly identify the parties to the cheque;

–          Correctly distinguish between a “bearer” cheque and an “order” cheque;

–          Understand how a cheque is negotiated by delivery or by indorsement & delivery;

–   Understand how payment on a cheque involves presenting the cheque for payment (at the bank) and acceptance of the obligation to pay by the bank (cheque is paid) or dishonour of the cheque (non-payment). 

– Distinguish between situations where the bank is entitled to dishonour or pay the cheque and situations where the bank must dishonour the cheque.

–          Be able to sign a cheque as the representative of someone (e.g. as a director on behalf of the company) in such a way as to order to avoid personal liability;

–          Understand when you may be liable on a cheque signed (1) fraudulently in your name and (2) without your authority but with no intention to defraud.

 4. Explain the requirements to be a holder in due course 

     Self-explanatory- but this is an important section.  You must be able to correctly ascertain whether on a given set of facts a person has become a holder in due course.

5. Distinguish between crossings and markings on cheques

You will know how to cross a cheque and how to mark it not transferable and what the effect of this is.

6. Discuss the protections offered to banks which pay out on crossed and uncrossed cheques

If the bank pays out on a cheque and it turns out that cheque was fraudulent, can the bank debit the drawer’s account, or is the bank liable for the loss?  You will have to know how the bank’s liability may be affected by the way a cheque is crossed or not crossed.

 7. Discuss the differences between absolute and relative defences

 This relates back to Holders in Due Course – who receive a cheque free of equities.  They can sue anyone who is liable on the cheque for the value of the cheque and only absolute defences can be raised against them. 

You will thus not only have to know the differences between absolute and relative defences, but on a given set of facts, you will have to know which defences are available.

8.  Distinguish cheques from:

(1)   Other types of negotiable instrument : the promissory note & the bill of exchange

(2)   Other forms of payment that are not negotiable instruments: traveller’s cheques, credit cards, stop orders, debit orders, EFT and on-line payments.

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