smyth_busadmin_10e_ch21_ird
TRANSCRIPT
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Copyright 2004 Pearson Education Canada Inc. 21-1
CHAPTER 21CHAPTER 21
Negotiable Instruments
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Copyright 2004 Pearson Education Canada Inc. 21-2
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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Copyright 2004 Pearson Education Canada Inc. 21-3
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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Copyright 2004 Pearson Education Canada Inc. 21-4
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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Copyright 2004 Pearson Education Canada Inc. 21-5
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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Copyright 2004 Pearson Education Canada Inc. 21-7
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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Copyright 2004 Pearson Education Canada Inc. 21-8
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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Copyright 2004 Pearson Education Canada Inc. 21-9
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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Copyright 2004 Pearson Education Canada Inc. 21-10
Liability ofthe Parties:Liability ofthe Parties:
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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Copyright 2004 Pearson Education Canada Inc. 21-11
Liability ofthe Parties:Liability ofthe Parties:
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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Copyright 2004 Pearson Education Canada Inc. 21-12
Liability ofthe Parties:Liability ofthe Parties:
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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Copyright 2004 Pearson Education Canada Inc. 21-13
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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Copyright 2004 Pearson Education Canada Inc. 21-14
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.