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Managing The Law: The Legal Aspects Of Doing Business, 1st Edition Solution Manual

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    SOLUTION MANUAL Mitchell McInnes Faculty of Law, University of Alberta Managing the Law The Legal Aspects of Doing Business Fifth Edition Mitchell McInnes Faculty of Law, University of Alberta Ian R. Kerr Faculty of Law, University of Ottawa J. Anthony VanDzer Faculty of Law, University of Ottawa

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    Managing the Law , Fifth Edition ii Contents Part 1 Introduction to Law Chapter 1 Risk Management and Sources of Law 1-1 Chapter 2 Litigation and Alternative Dispute Resolution 2-1 Part 2 Torts Chapter 3 Introduction to Torts 3-1 Chapter 4 Intentional Torts 4-1 Chapter 5 Miscellaneous Torts Affecting Business 5-1 Chapter 6 Negligence 6-1 Part 3 Contracts Chapter 7 The Nature and Creation of Contracts 7-1 Chapter 8 Consideration and Privity 8-1 Chapter 9 Representations and Terms 9-1 Chapter 10 Contractual Defects 10-1 Chapter 11 Discharge and Breach 11-1 Chapter 12 Contractual Remedies 12-1 Chapter 13 Special Contracts: Sale of Goods 13-1 Part 4 Property Chapter 14 Real Property: Interests and Leases 14-1 Chapter 15 Real Property: Sales and Mortgages 15-1 Chapter 16 Personal Property: Bailment and Insurance 16-1 Part 5 Business Law in the Digital Economy Chapter 17 Intellectual Property 17-1 Chapter 18 Electronic Commerce 18-1 Part 6 Business Organizations Chapter 19 Agency and Other Methods of Carrying on Business 19-1 Chapter 20 Basic Forms of Business Organizations 20-1 Chapter 21 Legal Rules for Corporate Governance 21-1 Part 7 Dealing with Secured Credit, Bankruptcy, and Insolvency

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    Managing the Law , Fifth Edition iii Chapter 22 Secured Transactions 22-1 Chapter 23 Dealing with Bankruptcy and Insolvency 23-1 Part 8 Government Regulation of Business Chapter 24 Government Regulation of Business 24-1 Part 8 Government Regulation of Business Chapter 25 Individual Employment 25-1 Chapter 26 Organized Labour 26-1 Online Chapter Special Contracts: Negotiable Instruments OC-1

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    Online Chapter–Special Contracts: Negotiable Instruments OC-1 ONLINE CHAPTER SPECIAL CONTRACTS: NEGOTIABLE INSTRUMENTS CONTENTS Teaching Approach Discussion Boxes 1. Business Decision OC.1—Consumer Bills and Notes Review Questions Cases & Problems Case Briefs TEACHING APPROACH This chapter contains several unusual features that can be exploited for educational purposes. First, it examines three types of negotiable instruments: cheques, bills of exchange, and promissory notes. Although students may not be familiar with the second and third types of instruments, they are certainly familiar with the first. Every student has dealt with a cheque. Significantly, however, very few people have anything more than a passing acquaintance with the applicable rules. This chapter therefore presents an excellent opportunity to stress the goal of risk management. Do students realize, for instance, that they expose themselves to the risk of liability by simply signing the back of a cheque? Or that they may be subject to criminal prosecution if they fail to properly stamp a consumer note or bill that their business received in exchange for goods or services? More positively, do they realize the advantages of using negotiable instruments, rather than cash, when purchasing goods or services? Second, this chapter, like the last, focuses on legislated, rather than judge-made, law. The Bills of Exchange Act , like the Sale of Goods Act , was first introduced as a codification of existing rules. Moreover, in each case, codification reflected the legal desire to increase certainty and efficiency in the commercial world. Students should be encouraged to bear that history in mind as they read through the chapter. Although many of the rules governing negotiable instruments may seem arbitrary and harsh, they almost invariably serve a useful function at a deeper level. Indeed, the success of the Bills of Exchange Act (subject to the introduction of new provisions governing consumer bills and notes in 1970, it is virtually unchanged from its original form in 1890) is due largely to the fact that it creates an integrated and comprehensive code. Commercial parties can confidently deal with a negotiable instrument precisely because, given the Act, they generally know exactly what rights that document represents. On a related note, it is interesting to ask whether judges alone could match the success of the Bills of Exchange Act . Students could be asked to reflect on the relative merits of statutory law. Several points arise.

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    Online Chapter–Special Contracts: Negotiable Instruments OC-2 • Stable Rules : While judges are often better able to quickly and flexibly adapt the law to new situations and evolving social values, there are some situations in which a static and conservative approach is desirable. Negotiable instruments provide an excellent example of that proposition. Money could not operate properly if it was subject to shifting rules. A $20 bill is practically useful only if the holder can be confident, simply by looking at it, that it represents $20 in value. Cheques, bills of exchange, and promissory notes are not, of course, money. They are, however, intended to serve as close approximations. Consequently, they too must be subject to rules that remain constant over time. • Federal Statute : Unlike the Sale of Goods Acts , which are enacted at the provincial or territorial level, the Bills of Exchange Act is a federal statute. There is only one such Act and it applies across the country. Once again, that consistency is necessary to achieve the legislative purpose. It is questionable, whether similar consistency could be achieved entirely though the courts. A different set of courts operates within each jurisdiction in Canada. And as we saw in Chapter 2, the courts in one jurisdiction need not follow the courts in another. True, the Supreme Court of Canada is able to set precedent for all lower courts. It is highly doubtful, however, that even the Supreme Court of Canada could achieve the success of the Bills of Exchange Act . The Act creates a comprehensive and integrated scheme. The Supreme Court simply does not have the opportunity to address a topic as a whole. It generally is restricted to deciding a discrete issue brought before it by the parties. Furthermore, unlike a statute, through which legislators speak with one voice, the Supreme Court often speaks through several concurring or dissenting voices. Although it is very long and highly complex, the Bills of Exchange Act , like the Sale of Goods Act , presents an opportunity to address the nature of legislation and the skills of statutory interpretation. Students therefore could be directed to peruse the entire Act online: <http://laws-lois.justice.gc.ca/eng/acts/B-4/> The third unusual aspect of this chapter is that it does not contain the usual assortment of discussion boxes. The reason is very simple. Because of their complexity, the materials are presented through a set of extended, interactive exercises. Students should be encouraged to read the chapter as a collection of stories and to put themselves within those stories. That approach will both draw the students into the discussion and de- mystify what otherwise may appear to be an impenetrable set of rules. DISCUSSION BOXES Business Decision OC.1 Consumer Bills and Notes The Bills of Exchange Act ’s provisions regarding consumer notes would apply in this instance because (1) the note was used for credit purpose, (2) the note was used to purchase goods or services from a business, and (3) Christine made the purchase as a consumer. The analysis of Christine’s case consequently would vary depending upon whether the note was properly marked, as required by the statute.

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    Online Chapter–Special Contracts: Negotiable Instruments OC-3 • Marked If the note was marked, then Mastiff Financing Ltd would take the instrument subject to the equities. Christine consequently would be entitled to defend Mastiff’s action on the note by pleading Noel Exteriors Inc non-delivery of the siding. Christine therefore would not be obliged to pay. • Not Marked If the note was not marked, and if Mastiff acquired the note as a holder in due course, without notice of the underlying consumer purchase, then Mastiff would not take the instrument subject to the equities and Christine could not defend Mastiff’s action by pleading Noel’s lack of delivery. (If Mastiff did have such notice, then the unmarked instrument would be void in its hands.) Although it would not help her in the context of Mastiff’s action, Christine might take some satisfaction in knowing that Noel was subject to punishment for failing to comply with the statute. REVIEW QUESTIONS 1. The statement is incorrect. While each province and territory has its own Sale of Goods Act (as discussed in Chapter 13), there is only one Bills of Exchange Act . As observed in Chapter 1, sections 91 and 92 of the Constitution assign certain subjects to the federal Parliament and to the provincial legislatures. Amongst the subjects given to the federal jurisdiction, Section 91 includes several dealing with the country’s financial system: • Currency and Coinage. • Banking, Incorporation of Banks, and the Issue of Paper Money. • Savings Banks. … • Bills of Exchange and Promissory Notes. • Interest. • Legal Tender. • Bankruptcy and Insolvency. The fourth item on that list is “Bills of Exchange and Promissory Notes.” As a result, there is only one Bills of Exchange Act , which applies consistently across the country. The drafters of the Constitution quite likely appreciated the need for consistency and certainty in the country’s financial system. While a sale of goods involves only two people, a negotiable instrument is designed to be applicable amongst many parties. Consequently, while there is a separate Sale of Goods Act in each jurisdiction, there is only one Bills of Exchange Act . A person dealing with a negotiable instrument must be confident of the underlying rules regardless of where the events occur. 2. A “negotiable instrument” consists of a contract that contains an obligation to pay. The three most common examples are cheques, bills of exchange, and promissory notes. A negotiable instrument, however, is more than a simple source of an obligation to pay money. The unique aspect of a negotiable instrument lies in the idea of “negotiation.” In

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    Online Chapter–Special Contracts: Negotiable Instruments OC-4 this context, the word “negotiation” refers to the transfer of an instrument from one person to another. 3. Contractual obligations can generally be assigned to a stranger. Aside from being a cumbersome process, assignment requires a person who receives a contractual right through an assignment to take it subject to the equities. That means that the assignee cannot be in a better position than the assignor. For instance, if a seller assigns its rights under a sales contract to one of its suppliers, the buyer can use any defence that it could have used against the seller. The transfer of a negotiable instrument has two main advantages over the assignment of a contractual right. First, negotiation is a much simpler process than assignment. Second, and even more significantly, the rights attached to an instrument may improve as it is negotiated. Depending upon the circumstances, defences that were available against the previous owner of an instrument may not be available against a new owner. 4. The statement is not true. The person who creates a negotiable instrument is primarily liable to make payment under it. Significantly, however, other parties may become liable as well. If so, then they may be compelled to provide payment if the original drafter fails to do so. Even though someone else created a negotiable instrument, a person may become liable for payment of an instrument as a result of an endorsement . A person who endorses an instrument generally is taken to have promised people who later acquire the instrument that it will be paid. Consequently, although a party who actually made the instrument remains primarily liable, the endorser may be also be sued. There are, however, some exceptions to that general rule depending upon the nature of the endorsement. That is true, to some extent at least, with respect to identifying endorsements (in which case the endorser can be held liable only if the identification of another party is incorrect), qualified endorsements (in which case the endorser expressly disavows liability on the instrument), conditional endorsements (in which case the endorser can be held liable only if the conditional event occurs), and restrictive endorsements (in which case the endorser prevents the negotiation of the instrument to any subsequent party). Although an endorser can generally be held liable on the instrument, it can, in turn, generally look to any earlier party (including the maker of the instrument) for payment. In some situations, however, the endorser may be met by a defence ( eg if the endorsement was added after the instrument was fraudulently altered). 5. It is not true to say that a cheque becomes staledated only when the statutory limitation period lapses (usually after six years). A cheque is staledated when the payee does not seek payment within a reasonable time (usually six months), at which time banks will generally refuse to honour the cheque.

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    Online Chapter–Special Contracts: Negotiable Instruments OC-5 6. If a customer writes a cheque on an overdrawn account, the bank can choose between two options. First, as usually occurs, the bank can refuse to honour the cheque. In that case, the payee will not receive payment and the drawer’s account will not be debited. Alternatively, the bank can treat the overdrawn cheque as a request for a loan. If the bank chooses that option, it pays out the amount to the payee and then seeks repayment from the drawer. That same analysis applies even if the bank mistakenly pays out on an overdrawn account. 7. A stop payment order, or countermand, occurs when a customer orders a bank to refuse payment on a cheque that is outstanding. A stop payment order must be given in person by the drawer. Additionally, the drawer must describe the particulars of the cheque, including the date, the payee and the amount. A stop payment order may also occur automatically if the bank is notified that the drawer has died before the payee receives payment. 8. A postdated cheque is a cheque that is dated in the future. A drawer uses a cheque to instruct and authorize a drawee bank to pay money to the payee. Because the bank honours (or “cashes”) a cheque by withdrawing funds (or debiting) the drawer’s account, it can act only if it strictly complies with the drawer’s directions. A postdated cheque therefore allows the drawer to provide a cheque today, but ensure, by placing a future date on the cheque, that the payee cannot obtain payment from the drawee until that future date arrives. Because they conveniently allow a drawer to arrange today for payment in the future, postdated cheques are often used to make instalment payments. A tenant, for example, may provide a landlord with a series of postdated cheques, each dated on the first date of successive months. The drawer thereby takes care of all future obligations, while the payee is relieved of the need to seek payment each month. 9. The statement is true. The Bills of Exchange Act constitutes a codification of the rules and principles that English commercial courts developed over many years. The English statute was then copied, almost exactly, by the Canadian Parliament. Some aspects of the Canadian law of negotiable instruments nevertheless are drawn from American law. That is true of certification . The Bills of Exchange Act makes no provision for that concept. Canadian courts instead developed certification by drawing on ideas from the United States. Certification occurs when a drawee bank promises to honour a cheque. A bank normally does so by stamping the word “certified” and the date on the front of the cheque. It then deducts the appropriate amount from the drawer’s account, places those funds in a “suspense account,” and uses them to honour the cheque when it is presented for payment. Certification is treated as something akin to the payment of money. Through the process of certification, the drawee bank assures the payee that the cheque will be honoured upon

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    Online Chapter–Special Contracts: Negotiable Instruments OC-6 presentation. In the interests of commercial certainty, that remains true even in cases of overdrawn or countermanded cheques. A bank will not normally certify a cheque until it has determined that the drawer’s account holds sufficient funds. An appropriate amount is then removed from the drawer’s account and placed into a suspense account for the purpose of eventually honouring the cheque. However, even if something goes wrong, with the result that a cheque is mistakenly certified despite the fact that the drawer’s account does not hold sufficient funds, the bank is still required to fulfill its promise to the honour the cheque. (The bank can, of course, look in turn to the drawer for payment.) Likewise, certification precludes the bank from subsequently accepting and acting upon a drawer’s countermand or stop payment order. Once a cheque has been certified, the payee is entitled to receive money from the bank. Significantly, because of the need for commercial certainty, certification even overrides a prior countermand. 10. The first statement is true. The second statement is false. A bill of exchange is created when one person orders another person to pay a specific amount of money to someone. A cheque is created when a person orders a bank to pay a specific amount of money to someone. A cheque therefore is a type of bill of exchange. A bill of exchange may be drawn on anyone, including a bank. A cheque must be drawn on a bank. The latter is a sub-set of the former. 11. The difference between the three types of drafts concerns the time at which the payee is entitled to payment. A bill of exchange that is a demand draft is payable by the drawee as soon as it is presented by the payee. A bill of exchange that is a sight draft is like a demand draft, except that the payee is not entitled to the money until a three-day grace period has passed. And finally, a bill of exchange that is a time draft is only payable on the future date specified on the bill. 12. A promissory note is created when one person gives another person a written promise to pay a specific amount of money. Frequently, promissory notes are payable in installments. As a matter of risk management, the maker of the note should make sure that a short receipt is written on the note each time that an installment is paid. Without that sort of precaution, the maker might be forced to pay the same payment twice if the note is later negotiated to an innocent third party. 13. “Acceleration clauses” are used in association with promissory notes. A promissory note usually is payable in instalments according to a set schedule. If the maker of the note fails to meet a particular instalment, the payee is entitled to take action. Very often, however, the maker’s failure to meet one instalment provides good reason to believe that future instalments will be missed as well. It would be inconvenient if the payee were unable to sue for the future instalments until they too had actually gone into default. To avoid that situation, the note should contain an acceleration clause that states that the entire amount of the note becomes due once a single instalment is missed.

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    Online Chapter–Special Contracts: Negotiable Instruments OC-7 14. The statement is true. A cheque and a bill of exchange are used to instruct and authorize a drawee to transfer funds to the payee. Neither type of instrument automatically creates any rights that the payee may enforce against the drawee. (Through the process of certification or acceptance, however, the payee may acquire rights against the drawee.) Both types of instrument, however, do create rights that the drawer may enforce against the drawee. In contrast, a promissory note merely creates obligations and rights that the payee may enforce against the maker. That is true even though a promissory note usually indicates a third party (such as a bank) from whom the payee can expect to receive payment. The promissory note itself, however, does not create any rights or obligations touching upon the third party. (The third party, however, may be involved in related rights of obligations.) 15. A negotiable instrument is payable to bearer if any person who holds it is entitled to receive payment. The danger, of course, is that the instrument can be cashed by anyone who holds it – even someone for whom the instrument was not intended. That danger can be averted by turning the bearer instrument into an order instrument by signing the back of the cheque and indicating that the money should be paid to a particular person. The holder could do so by adding a special endorsement, such as “ Marie Pelletier - Pay to Jean Delacroix .” The holder can also avoid that danger by adding a restrictive endorsement, such as “ for deposit only .” That sort of endorsement prevents the instrument from being negotiated any further and it provides good protection against theft. And, finally, the holder obviously can protect itself from that danger simply by cashing the instrument. 16. A “bearer instrument” is a negotiable instrument that allows any person who holds it to receive payment from it. A bearer instrument also can be transferred from one party to another by simple delivery and without endorsement. An instrument may be put into bearer form in a variety of ways. (1) The person creating the instrument may make it payable “to bearer.” (2) The person creating the instrument may leave the name of the payee blank. (3) The person creating the instrument may make it payable to a fictitious person ( eg Sherlock Holmes). (4) The person creating the instrument may make it payable to “cash.” (5) A person who endorses an instrument may create a “general” or “blank” endorsement consisting of his or her signature only. 17. Liability generally cannot be imposed on an endorser unless that person received notice of dishonour. Notice of dishonour consists of a statement that the person who was primarily liable on the instrument failed to pay. Notice normally must be given very quickly – usually within one business day. However, a delay may be excused if the circumstances were beyond the person’s control. Furthermore, notice does not have to be given if: (a) the endorser cannot be reached through reasonable effort, or (b) the endorser waived the need for notice. And finally, the postal rule applies to notice of dishonour, such that notice is deemed to have occurred when the notice was placed into the mail (even if that letter never reaches its destination). If notice is not properly given to an endorser, then that endorser cannot be held liable on the instrument.

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    Online Chapter–Special Contracts: Negotiable Instruments OC-8 18. A holder in due course is a person who acquired an instrument under the following conditions. • Consideration The instrument must be supported by consideration (either by the holder or by a previous holder). • Complete and Regular On Its Face The holder of the instrument must have taken it when it was complete and regular on its face – that is, the instrument must have been taken without blanks or any suspicious erasures or alterations. • Without Notice The holder must have acquired the instrument without notice of any previous dishonour. • Good Faith The holder must have taken the instrument in good faith and without notice of any defect in the title of the person who negotiated it. • Before Overdue The holder must have acquired the instrument before it was overdue. A holder in due course cannot be defeated by personal defences or defect in title defences. Only real defences are available against a holder in due course. A real defence occurs when an instrument is itself fundamentally flawed. A holder in due course is given special treatment under the Bills of Exchange Act because of the need for commercial certainty and efficiency. A holder in due course, who has not participated in the instrument’s creation, has to be assured that it represents a good contract. 19. The text identified and briefly explained seven types of endorsement. • Special Endorsement A special endorsement is created with a signature and a direction to pay a specified person ( eg “Pay to Mike O’Hara”). By doing so, the signing party is replaced by the named party as the only person entitled to receive payment. • Identifying Endorsement An identifying endorsement is created with a signature and a statement attesting to the true identity of a prior endorser ( eg “Anna Schmidt is hereby identified”). The signing party is liable on the instrument only if the attested identification is incorrect. • Qualified Endorsement A qualified endorsement is created by a signature and a disavowal of liability if the instrument is later dishonoured ( eg “pay to Isabel Minafer without recourse”). By stating that the endorsement is “without recourse,” the signing party refuses to be bound by liability if problems later arise. • Conditional Endorsement A conditional endorsement is created by a signature and an indication that liability is accepted only if some condition is satisfied ( eg “Pay to Harry Lime if he takes me to Vienna”). While a cheque or a bill of exchange cannot be conditional, an endorsement may be conditional. By

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    Online Chapter–Special Contracts: Negotiable Instruments OC-9 inserting a condition, the signing party indicates a willingness to bear the risk of liability only if the specified condition is met. • Accommodation Endorsement An accommodation endorsement is created by a signature and a guarantee of another party’s liability ( eg “Guarantor for Isabel Minafer”). The endorsement is “accommodating” in the sense that the signing party, by accepting the risk of liability, adds credibility to a prior endorser’s promise to pay in the event of dishonour. The signing party does not possess the instrument in question, but rather helps the holder of the instrument to deal with it. • General Endorsement A general endorsement is created by a simple signature. The signing party thereby accepts the risk of liability. • Restrictive Endorsement A restrictive endorsement is created by a signature and an indication that the instrument can be used for deposit to a bank account only ( eg “For deposit only”). The signing party thereby ensures that, aside from deposit into an account, the instrument will not be negotiated any further. 20. The difference between a defect in title defence and a real defence is critically important. A defect in title defence can be used against an immediate party or a holder, but not against a holder in due course. In contrast, a real defence can be used against an immediate party, a holder, or a holder in due course. There are four defences that may be either a defect in title defence or a real defence, depending upon the circumstances. • Fraud or Duress Fraud or duress is usually a defect in title defence. If the drawer can show that the instrument was made as a result of fraud or duress, the drawer can avoid liability. In that situation, a simple holder does not receive good title to the instrument. Fraud may also be a real defence if it amounts to non est factum . For example, if the drawer, who was blind, infirm, or illiterate, was tricked into signing a cheque because the drawer thought it was being asked for its autograph, a real defence would probably be available against even a holder in due course. • Insanity or Intoxication The title will also be defective if the holder knew or ought to have known that the drawer was drunk or insane when it drafted the instrument. While insanity normally creates a defect in title defence, it can also lead to a real defence if the person who purportedly created the instrument was legally declared to be mentally incompetent. • Absence of Delivery If there is an absence of delivery, a defect in title can occur. That could happen, for example, if the drafted instrument was taken from the drawer’s desk without permission. Under similar circumstances, the drawer would have a real defence if it did not deliver the instrument and if the instrument was incomplete when it was taken. • Discharge or Renunciation Finally, if an instrument has been discharged or cancelled, a defect in title defence arises. Consequently, the drawer would not have to make payment to the holder. Furthermore, discharge or renunciation would amount to a real defence, and hence would be available even against a

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    Online Chapter–Special Contracts: Negotiable Instruments OC-10 holder in due course, if the renunciation or discharge was apparent from the face of instrument itself ( eg by being stamped “paid”). CASES AND PROBLEMS 1. Hibbing Music Inc (HMI) is correct and Helstrom is incorrect. It is true that the assignment of a contractual debt is received subject to the equities. If, instead of endorsing the cheque and delivering the instrument to the company, Zimmerman had simply assigned to the company his right to contractual payment from Helstrom, then HMI would receive those contractual rights subject to the equities. Helstrom could then use against the company any defence that she could use against Zimmerman. And since Zimmerman’s breach of contract reduced the value of the guitar to $7500, HMI could not receive payment of the full $10 000 from Helstrom. A cheque, however, is a negotiable instrument. In order to facilitate the movement of negotiable instruments, and the flow of commerce, the legal system allows a cheque to improve as it is passed through the process of endorsement. It does so by allowing the cheque to be received, in good faith, at face value. A cheque drawn for $10 000 therefore entitles the holder to that amount even if the named payee breached the underlying contract with the drawer. While the drawer has a good contractual claim against the payee in breach, the holder of the instrument is not subject to the equities and therefore is entitled to the full face value of the instrument. In this instance, Helstrom should have countermanded, or placed a stop payment order, on the cheque once she realized that Zimmerman had breached the underlying contract. If the bank accepted that countermand, it no longer would have Helstrom’s authority to debit her account and it consequently would dishonour the cheque by refusing to “cash” it in HMI’s favour. The company could then sue Zimmerman, either on his original underlying debt or on his endorsement on the cheque. Zimmerman, in turn, could sue Helstrom on either their underlying contract or on her cheque, but in either event, he would be subject to her counterclaim for breach of contract. 2. The note is unenforceable for the simple reason that Gilles was a minor when he made it. Furthermore, since it does not appear that the snowboard represented a necessity of life from Gilles perspective, Eva cannot sue him on the sales contract either. This exercise contains a couple of red herrings (irrelevant facts or false leads). First, Eva clearly gave consideration for the note. It therefore is irrelevant that the board was stolen from Gilles before he fully paid for it. Second, although this was a consumer purchase, the Act’s requirements appear to have been met. The note therefore would not be void on that ground. 3. This question requires students to do two things: (a) determine whether or not the Bergman agency is a holder in due course, and (b) determine whether or not Bjorn has a good defence against the enforcement of the cheque.

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    Online Chapter–Special Contracts: Negotiable Instruments OC-11 The Bergman agency is probably not a holder in due course. First, although the facts are unclear, Bergman perhaps knew or should have known that the bank had already dishonoured the cheque. Second, Bergman received the cheque when it was already overdue. The cheque was negotiated in December, even though it had been drafted in February. If Bergman was a holder in due course, it would only be subject to real defences. Bjorn’s insanity therefore would not be an effective defence unless Bjorn’s condition had been the subject of a legal declaration. If Bergman was simply a holder, and not a holder in due course, it would be subject to real defences and to defect in title defences. Even if Bibi was not aware of Bjorn’s mental condition when he drafted the cheque, she probably should have been. If that is true, then she received a defective title to the instrument. And finally, if Berman was not a holder in due course, it inherited that defect when it bought the cheque from Bibi. Bjorn could therefore use the insanity defence against Bergman in the same way that he could have used it against Bibi. 4. Although Hussein Electronics will be able to compel payment from Roger, it will not receive payment from the bank. In drawing the cheque, Roger broke three of the rules that govern negotiable instruments. Those rules are base don the need that a negotiable instrument, which may pass through many hands before being presented for payment, must tell a complete and unequivocal story on its face. § A cheque must be for a sum certain . It must be possible to know, simply by looking at the cheque, how much it is worth. Roger, however, stated the amount payable to be “either $1500 or $2000.” § Although a bill of exchange may be a time draft ( ie payable some time after its date), a cheque must be payable on demand. Roger, however, made the cheque “payable six months after date.” (It would, however, have been possible for Roger to postdate the cheque by dating it with a day a month in advance.) § A cheque must contain unconditional obligation . A holder must be able to know, from the face of the document, whether or not it is valuable. Roger, however, made “payment conditional upon quality of computer.” 5. It is important to appreciate that Munt’s actions will have several types of legal consequences. • Rent Debt Payment by cheque creates conditional discharge of a debt. Accordingly, when Munt provided Singh with a cheque for $15 000, the overdue debt of $15 000 was discharged. That debt subsequently came back into full effect, however, when the bank dishonoured the instrument. Munt therefore remains fully liable to Singh for her rent. • Liability on Cheque By drafting a cheque, Munt created an alternative basis of liability in Singh’s favour. While she cannot “double recover,” Singh now has the option of suing Munt (1) for $15 000 on the revived underlying rent debt, or (2) for $15 000 on the cheque itself.

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    Online Chapter–Special Contracts: Negotiable Instruments OC-12 • Overdrawn Cheque—Bank By drafting an overdrawn cheque, Munt effectively requested a loan from the Bank of Cambridge. Upon receipt of that request (in the form of the cheque), the bank had an option. (1) If it chose to lend funds to Munt, it could honour the cheque, provide payment to Singh, and then seek repayment on the loan from Munt. Alternatively, as it actually chose to do, the bank could deny the request for a loan, dishonour the cheque, and refuse payment to Singh. • Overdrawn Cheque—Criminal Law Overdrawn cheques usually arise by accident and error. The drawer mistakenly believes that the account holds sufficient funds to cover the cheque. In this instance, however, Munt knew at the outset that her account did not hold sufficient funds. In such circumstances, Munt creates the crime of false pretences under s 362(4) of the Criminal Code . 6. This case deals with defences. Consequently, it is first necessary to classify Benjamin’s status. Since he gave value for the cheque, received an instrument that was complete and regular on its face, acted in good faith and without notice of dishonour or defect, and acquired the instrument before it was overdue, he qualifies as a holder in due course. It is also necessary to determine who might be liable on the cheque. Sam is potentially liable on the basis of his endorsement. Kate is potentially liable on the basis of her signature as drawer. It then becomes necessary to determine whether either Sam or Kate have a good defence to Benjamin’s claim for payment on the cheque. Sam obviously has no defence to the claim. He acted with full knowledge of his own impropriety. Kate, in contrast, may be able to resist an action on the cheque. As a holder in due course, Benjamin can only be defeated by a real defence ( ie a defence that arises from the fact that the instrument itself is fatally flawed). On the basic facts as stated, however, the only problem with the cheque is that Kate did not deliver it to Sam. And lack of delivery is only a defect in title defence ( ie a defence that arises from the fact that the instrument was not properly obtained). Benjamin therefore would be entitled to receive payment from Kate. (If Kate was, in fact, required to provide payment to Benjamin, she could in turn sue Sam. She most likely would use the tort of conversion, as discussed in Chapter 4, and receive compensation for her loss.) The situation would be different, however, if Kate had not added an amount to the cheque that Sam found in her desk drawer. We will assume that Sam added that information before negotiating the instrument to Benjamin. There are two possibilities. First, if Sam added the information in such a way as to make the cheque look suspicious, Benjamin would not qualify as a holder in due course. He therefore would be subject to even a defect in title defence if he sued Kate. Second, if Sam added the amount in a non- suspicious manner, Benjamin could qualify as a holder in due course. He would,

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