Summary CLA2602_ Summarized Study Notes.

CLA2602_ Summarized Study Notes. Negotiable instruments & other methods of payment e.g. bills of exchange, cheques and promissory notes. Sources of SA Law of negotiable instruments :  Legislation – Bills of Exchange Act 34 of 1964  SA Common Law – Roman-Dutch Law (anything not covering in the Bills of Exchange Act is subject to common law)  Decisions of the SA courts  SA courts NOT bound by English case law BUT decisions in English courts can have persuasive value in SA court  Canadian, Australian and New Zealand cases also have persuasive value in SA court BUT not binding force  If no legislation or case law then relationship between parties governed by express or implied terms of the agreement.  Trade usage can also be used – e.g. in operating a cheque account then that is trade usage (i.e. term that is implied by law in a contract so therefore naturalia / naturale). Trade usage as a contractual term must be :  term must be universally and uniformly used within that particular trade  must be notorious  must be reasonable  must be certain  must not conflict with positive law (i.e. legislation or case law)  must not conflict with clear provision of the parties' contract NOT ALL negotiable instruments are instruments of payment – e.g. share warrants and certain bearer debentures (long term bond with fixed interest and normally not secured) are NOT instruments of payment. Not all instruments of payment are negotiable instruments – e.g. travelers' cheques NOT negotiable instrument. Negotiable instruments which are instruments of payment = bill of exchange, cheques & promissory notes. Only these governed by the Bills Of Exchange Act 34 of 1964 not other methods of payment (e.g. stop or debit orders) Downloaded by: mayaward | Distribution of this document is illegal S - The study-notes marketplace CTM Tutoring To be viable alternatives to cash HAVE to :  be transferable without cumbersome formalities  minimum defenses that can be raised against the person claiming payment  only exceptional circumstances can the title of the holder (who has obtained them in good faith) be open to dispute. Bills of exchange, cheques & promissory notes all have : - Simplicity of transfer (transferred either by simply handing it over or by signing the back before handing over to recipient.) - Possibility of transfer free from equities NB normally cannot transfer a better title to someone then the title that you had or anyone with defense against your claim will have the same defense against the person you transferred your claim to (i.e. person taking transfer does so subject to equities) BUT law of negotiable instruments is exception to this basic principle so therefore possible for someone to acquire a valid title to a negotiable instrument even if person he gets it from has an invalid title to it or no title at all. Negotiable instrument is therefore free from equities. Other Methods of Payment - credit cards, travelers' cheques, stop orders, debit orders, documentary letters of credit, EFT's and e-money. These are not generally transferable from one person to another therefore NOT negotiable instrument. Credit card grants credit for certain period therefore NOT negotiable instrument. Not really suitable to pay monthly debts such as rent and also advantage for supplier that normally will receive payment (bank guarantees payment provided certain conditions are met) and suppler also gets business it might not have as people are buying on credit. Bank can charge cardholders bank fees on all transactions Downloaded by: mayaward | Distribution of this document is illegal S - The study-notes marketplace CTM Tutoring Study Unit 2A Definition of a cheque Definition of a cheque :  it is an unconditional order  in writing  addressed by one person to a bank  signed by the person giving it  requiring the bank to which it is addressed to pay on demand  a certain sum of money  To a specified person or his order or to bearer. Three essential / necessary parties to a cheque :  person who gives the order (drawer / payer)  bank to whom the order is addressed (drawee bank)  person to whom payment is made (payee) i.e. the drawer draws the cheque on the drawee bank in favour of (or payable to) the payee. Note : drawer and payee can be the same person if you draw a cheque in favour of yourself) but MUST have different a drawer and drawee bank cos definition of cheque is that it has to be addressed from one person to another (the bank). Non-essential parties to a cheque – Indorser – signs the cheque over to someone else (payee) Indorsee – person who the cheque has been signed over to Relationships between parties to a cheque :  underlying relationship – reason that the cheque is drawn and relationship between parties that would cause it to be indorsed / drawn  relationship arising from the agreement to use the cheque – creditor not forced to accept cheque so therefore means that parties have expressly or tactically agreed to use cheque as method of payment so this agreement can be enforced like any other contract and creditor forced to accept cheque.  relationship on the cheque – no matter what the other rights and duties in terms of underlying relationship there are new rights and duties when a cheque is drawn – creditor may sue debtor in terms of the cheque only AFTER the cheque is drawn (not an option before cheque drawn). Essential elements of a cheque – must be :  an order Downloaded by: mayaward | Distribution of this document is illegal S - The study-notes marketplace CTM Tutoring  which is unconditional  in writing  addressed by one person to a bank  signed by the person giving it (drawer)  requiring the bank to whom it is addressed to pay on demand  a certain sum in money  to a specified person (payee) or his order or to bearer NB : ALL essential elements MUST be present in order to be a cheque – if just one absent then it is not a cheque. 1. must be an order – English case law ruled that it was NOT a cheque / bill if said "Mr Little, please to let bearer have 7 pounds and you will oblige your humble servant" 2. unconditional – cannot be dependent upon fulfillment of some condition e.g. CANNOT say "pay provided receipt form at the back is duly signed" – this would then be a condition and cheque is not valid. CAN say "the receipt on the back hereof must be signed" as that is direction for the payee and isn't part of the order to pay addressed by the drawer to the drawee bank. Cheque can indicate which fund bank should be reimbursed or can indicate particular account to be debited (in Bill of Exchange Act) 3. in writing – right to claim payment of cheque embodied in the written instrument therefore this right can be easily transferred by the transfer of the cheque (indorsment) 4. order to pay is addressed by the drawer to the drawee bank – bank must be named or indicated in the cheque with reasonable certainty. 5. signed by drawer - can be cross or mark or even stamp or seal of company 6. sum certain in money – cannot be "pay R 500 and all other monies owing on due date" or "pay R 500 and deliver a bicycle". Cheque not invalid if payment can be made with interest or by installments. Normally amount expressed in words and figures – if difference between the two then the Act says that the amount in words is payable, but banks refuse to pay in that case and cheque is returned to drawer. 7. payable on demand – not invalid if antedated, post-dated or not dated for business day 8. to payee / his order / to bearer – order to pay must indicate to whom payment must be made. Indication of payee distinguishes between order and bearer cheques – order cheque payable to a specific person or his order and bearer cheque payable to its bearer. Order cheque – payee must be named on the cheque or office he holds (e.g. Registrar of Companies, Pretoria) or can be made payable to two or more payees jointly. In absence of instructions to contrary doesn't matter is cheque is payable to person / person or order / the order of person. Bearer cheques – payment is made to the person in possession of the cheque – can say bearer / cash or bearer / cash or order or specific person or bearer. Downloaded by: mayaward | Distribution of this document is illegal S - The study-notes marketplace CTM Tutoring Can also be a "non-transferable" cheque which serves to further restrict transfer of the instrument. e.g. of cheque with all the essential elements filled in - other details are NOT essential! Non-essential elements of a cheque – elements that appear on a cheque but do not affect the validity of the cheque :  date – cheque not invalid merely because it is not dated. If dated then that is deemed to be the true date of the drawing. If not dated then date of issue of the cheque is regarded as the date of the cheque (issue = date of delivery of the fully completed cheque to a person who takes it as holder). Act says that interest runs from the date of issue of a cheque if the cheque is undated and payable with interest.  place of payment – not invalid if place of payment is not specified – normally though printed cheque states branch of the drawee bank on which cheque is drawn. If branch is shown then the cheque must be presented for payment at the branch of the drawee bank.  stamps – no longer required for validity of a cheque  without recourse / sans recours – stipulates that drawer or indorser of the cheque is limiting his liability to the holder – meaning that drawer or indorser cannot be held liable if cheque is dishonored. e.g. would say "pay person or order without recourse to me". e.g. of cheque with all the non-essential elements filled in Fictitious payees Downloaded by: mayaward | Distribution of this document is illegal S - The study-notes marketplace CTM Tutoring If payee of an order cheque is a fictitious person then cheque can be treated as a bearer cheque but note :  intention of drawer is NB in determining whether an order cheque can be treated as a bearer instrument.  If drawer had the intention of making payment to the payee whether fictitious or not then cheque remains an order cheque  If drawer did not intend that payment be made to the payee then order cheque is treated as a bearer instrument  If order cheque is treated as a bearer cheque then no valid signature is necessary and person who receives cheque can become the holder of it (person who is in possession of a bearer cheque). Downloaded by: mayaward | Distribution of this document is illegal S - The study-notes marketplace CTM Tutoring STUDY UNIT 3A HOLDER OF A CHEQUE CAN CLAIM PAYMENT OF THAT CHEQUE Holder of a cheque can claim payment of that cheque Holder is person who can claim payment on the cheque - i.e. PAYEE OR INDORSEE IN POSSESSION OF AN ORDER CHEQUE OR THE PERSON IN POSSESSION OF A BEARER CHEQUE, therefore NB to determining if the cheque is an order or bearer cheque before knowing if a person in possession of cheque is the holder. To qualify as holder of an order cheque, therefore have to be either the payee who is in possession of the cheque or the indorsee who is in possession of the cheque. To qualify as holder of a bearer cheque is simply anyone who is in possession of it – i.e. person 'bearing' (carrying) the cheque. Cannot be holder of bearer cheque if you don't have it in your possession. Important to know if person qualifies as the holder of the cheque because :  discharge (payment) of the cheque can only be made to the holder of the cheque  holder of the cheque doesn't have to be the lawful owner of a cheque i.e. thief can be holder of a cheque  holder of bearer cheque can be non-owner of cheque e.g. agent who receives cheque on behalf of his principal  holder MUST have possession of the cheque, therefore if someone not in possession of the cheque can't be the holder BUT just being in possession of the cheque doesn't mean qualifies as holder of an order cheque  holder of cheque is simply neutral concept, therefore being holder doesn't mean being owner or creditor of cheque – only gives holder power to sue on the cheque BUT doesn't imply that person in procession is has the rights of holder of cheque  cannot have more then one holder of a cheque at a time, BUT during "life" of cheque can have number of different holders. Note : definition of holder doesn't state that the possession of the cheque has to be lawful – even thief of bearer cheque can become the holder as is therefore the bearer and thus also the holder, BUT such person will not be able to claim on the cheque cos it wasn't delivered to him. Rights of the holder :  holder may sue on the cheque in his own name  holder can present cheque for payment Downloaded by: mayaward | Distribution of this document is illegal S - The study-notes marketplace CTM Tutoring  holder can make additions or alterations to the cheque e.g. can change an indorsement in blank to specific indorsement, cross an uncrossed cheque or add details to a crossing.  if cheque is lost then former holder can ask for a duplicate of the cheque, but may be asked for security to guard against the lost cheque being found. Duties of the holder :  holder must present the cheque for payment within 'reasonable time' to bind the drawer – normally 3 to 6 months. If holder fails to present the cheque because of circumstances beyond his control and not because of default, misconduct or negligence then can be excused. If drawee bank is insolvent then holder excused altogether from presentation for payment. If holder believes that cheque will be returned to drawer if presented still not relieved of duty to present the cheque for payment  if cheque dishonored by non-payment then holder has immediate right of recourse against drawer and indorsers provided has given him notice of the cheque being dishonored. If holder doesn't give them notice then loses the right of recourse against the drawer and indorsers. Can be excused against giving notice if circumstances beyond his control and not because of default, misconduct or negligence. Excused from giving notice of dishonor completely if  drawer has countermanded payment of the cheque  drawee bank is not bound to pay the cheque i.e. if drawer doesn't have enough money in the bank to cover the cheque. Holder in due course Holder in due course is holder who has taken a cheque "free from equities" i.e. has acquired a valid title to a cheque even though the previous owner has a defective title to the cheque or no title at all. Note : in order to be a viable alternative instrument of payment the cheque :  must have only a minimum defense held against the holder claiming payment  Title of the holder who acquired it in good faith should only be open to dispute only in exceptional circumstances. Act states in Section 28 that, unless proved otherwise, every holder of a cheque is taken to be a holder in due course. Person is a holder in due course if "holder has taken a cheque complete and regular on the face of it, under the following circumstances:  Must have become the holder of cheque before it was overdue and mustn't know if it was previously dishonored.  Must have taken the cheque in good faith and for value. At the time of the cheque being negotiated to him, holder must have no notice of any defect in the title of the person who negotiated the cheque. Requirements that person should meet in order to be holder in due course :  person must be a holder of the cheque Downloaded by: mayaward | Distribution of this document is illegal S - The study-notes marketplace CTM Tutoring  Cheque must have been negotiated to him (i.e. NOT payee of an order cheque as cheque is issued to payee so therefore not negotiated to him – order cheque can only be negotiated by indorsing and delivering it to the recipient.) Payee of bearer cheque may qualify as holder in due course as bearer cheque is negotiated by delivery only so first delivery of the cheque can legally constitute both the issue and negotiation of the cheque.  cheque must be complete and regular on the face of the cheque when received - therefore the cheque must contain all the essential formal elements of a cheque and its appearance mustn't suggest that there might be an earlier holder who may have a defense claim or real right on the cheque – i.e. there should be nothing on the cheque to imply that something improper took place during previous dealings with the cheque.  Person must take the cheque before its due date - although cheque payable on demand and so no specific date of payment, it must be presented within a reasonable period after its issue.  person must take the cheque without knowing that it has been dishonored in the past  Person must take the cheque in good faith – i.e. must act honestly when acquiring the cheque even if negligently. If person is suspicious about any aspect of the cheque and doesn't make further inquiries in case suspicions confirmed then not acting honestly.  Person mustn't know of any defect in the title of the person who transfers the cheque to him – i.e. must know if predecessor acquired the cheque by means of fraud or some other unlawful manner, or where the cheque has been acquired for some unlawful counter performance. so simply lack of knowledge of the predecessor's defective title that is decisive  Person must have taken the cheque for value – i.e. cannot be as a gift, but only if have given or done something in exchange for cheque. Special position of the holder in due course :  holder in due course holds the cheque free from equities – so rights of a holder in due course are not affected by any defect in the title of the person from whom he has received the cheque. i.e. when person qualifies as a holder in due course then he has peace of mind that is protected against defenses which are not clear from the face of the cheque. So basically holder in due course can acquire ownership in cheque even when he acquires it from a non-owner.  as holder in due course holds the cheque free from equities he can enforce payment of the cheque against all parties liable on the cheque Downloaded by: mayaward | Distribution of this document is illegal S - The study-notes marketplace CTM Tutoring  As holder in due course holds the cheque free from equities, no relative defenses can be raised against him. Relative defense is defense that prior parties may have among themselves. Downloaded by: mayaward | Distribution of this document is illegal S - The study-notes marketplace CTM Tutoring STUDY UNIT 4A FUNCTIONS OF SIGNATURES ON CHEQUES Functions of signatures on cheques Party only liable on a cheque when:  signs the cheque (either as drawer, endorser or in any other capacity which indicates willingness to incur liability on the cheque)  delivers the cheque Note : liability as a party to a cheque determined by same principals as capacity to contract – i.e. if minor acts with consent of his guardian then may be liable on cheque. Note : Act states that when cheque is drawn or indorsed by minor or corporation with the capacity to incur liability on a cheque, then this drawing or indorsement entitles the holder to receive payment of the cheque and to enforce it against any other party. Signature is not necessarily initials or surname - can also be initials or "cross" or rubber stamp. Doesn't have to be in person's own hand – can be written by someone else acting by or under person's authority or natural person acting on behalf of juristic person for 'company signature'. No-one can be liability for a cheque if signature doesn't appear in the cheque, but fact that someone has handled a cheque or that his name appears on the cheque (i.e. as payee) doesn't automatically result in liability for that person.