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Summary CML2010S Exam Notes: Methods of payment
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textbook and lecture summary of the methpds of payment section Textbook D Collier-Reed and K Lehmann (eds) Basic Principles of Business Law (2nd ed; 2010)
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Business Law 2SECTION 1: METHODS OF PAYMENT
,Cheques
Definitions
Bill of exchange (BOE)
Unconditional order in writing
Addressed by one person to another
o Addressed to to a specific person or his order to bearer
Signed by the person giving it
Requiring the person to whom it is addressed to payment
o When
On demand
At a fixed or determined time in the future
o How much
A sum certain in money.
Cheque
A bill of exchange
Drawn on a bank payable demand
Negotiation
Process by which
Right to payment
o Which is embodied in the cheque,
Is transferred
o From one person to another
Instrument
A document embodying a right.
Indisputably
His rights and title cannot be contested.
Order instrument
There is a title on the cheque.
Bearer instrument
It is not made out to a specific person.
,Negotiable instrument
Definition
A document entitling the holder to a payment of a sum of money
Key Concepts
Transferrability
o If payable by bearer
Transferable by delivery
o If payable to order
Endorsement and delivery
Holder then becomes indisputably entitled to payment.
Holder in due course
o A transferee who takes an instrument by
Negotiation
Implies that if it is not made to that person they cannot negotiate.
In good faith
Honestly
Must not have realized that there was something amiss
For value
Some kind of quid pro quo in exchange.
Unimpeachable title to that instrument
o Even if the person before
Had no title
Had adefective title
o The current holder has full title
Herefore is not held for any defence
True holder
o The person who takes delivery of the cheque
If there is the intention that he/she receives ownership of the cheque
Therfore not every holder will be the true holder
o Example
A thief
He is the holder
But it was not negotiated to him
There was no intention to pass ownership
He is therfore not the true holder
,Key concepts of a cheque as a negotiable instrument
2 Broad Key Concepts
Instrument is a source of obligations
o The instrument is the cheque
Instrument is readily transferable
o This means it is negotiable
Possession
Instrument
o Document embodying rights.
Person against whom the rights are exercisable has a duty/obligation to honour the
instrument
o In this case the drawer
o Drawer definition
person who takes out the cheque
this person undertakes a payment obligation
they have guaranteed the cheque will be paid.
Possession of instrument
o To possess the right one must possess the instrument
Essential to enforce the rights
This is different from normal contracts such as a lease
To transfer a right one must transfer instrument
This is negotiation
o Mere possession not always sufficient
In certain cases
Possession of an instrument doesn’t necessarily = possession of a right
,2 essential characteristics of Negotiability
Negotiation defintion
Process by which
Right to payment
o Which is embodied in the cheque,
Is transferred
o From one person to another
1. Simplicity of transfer
Title = ownership of the instrument
Simplicity of transfer def
o the ease the title can be passed from one person to another
By delivery
bearer
By delivery and endorsement
in the form of a signature
order
2. Reliability of transfer
To be reliable, must be free from defects/equities
o The transfer of a legal right must be
free of any legal defect that might limit the right
o Remedies for cheques with defects
Rei vindictio not applicable
Usually used, but not for cheques
It tries to restore proprietary interest, to which it belongs
For cheques it is different
because you take transfer free from equities
Transfer free from equities ensures
o Reliability
o Assurance of payment
o A cheque that can substituted for cash
Used to pay a third party
,Negotiation vs. Cession
Negotiation
Rights transferred
o Free from equities
Transfer of right
o Requires transfer of document
Multiple parties can become liable on the instrument by signing
o Drawer is liable
o But all subsequent endorsers accept liability
Endorsed by signing guarantees payment by debtor
Cession
Rights transferred
o Subject with equities
Transfer of rights
o Occurs independently of document
Only one debtor liable
o The person from whom performance may be claimed
Cedent does not guarantee payment of the debt by the debtor
Example
o Donald owes me R100
o I owe Sue R100
o I can cede my claim to Sue.
,Necessary/Essential Parties
General Idea
Bill must contain these 3 parties to be valid
o Drawer
o Drawee
o Payee
3 Parties
Drawer
Creates the BOE or cheque
o He gives the order that the money is to be paid
Creates the obligation that
o The cheque will be paid on presentment by the payee
o Otherwise the drawer will compensate any endorsers
Drawee (bank)
The person to whom the order to pay is addressed
In the case of a cheque, the drawee is the bank
Payee
The person to whom payment is to be made
Don’t have to be different people
General
Usually the drawer, drawee and the payee are different people
But that is not always the case
Examples
Same drawer and payee
o X draws a bill on Y payable to himself
Same drawee and the payee
o X draws a bill on Y payable to Y
Same drawer and drawee
o X may draw a bill on himself payable to Y
o The cheque can be treated as a note/bill
At the option of the holder
, Non-Essential parties to the validity of a BOE/cheque
Banks
Drawee=bank
o Pay the payee
Collecting bank
o Collects or receives payment
o On behalf of a holder
o From a drawee bank
Endorser
The payee of a cheque becomes the endorser of a cheque
Happens when when
o He/she signs it in order to transfer it to another party
Not all cheques must be endorsed to be negotiated
Endorsee
Person that a cheque has been endorsed to
o in the case of special endorsement
endorsee’s name appears above the endorsers signature
There are different ways to endorse a cheque
Bearer
The person in possession of a cheque
o Which is payable to him/her
The person who is in possession of the bearer instrument
Holder
Can be a holder in 3 ways:
o Payee
The 1st holder or the bill
Only the payee while in possession of it
o Endorsee who is in possession of the bill
o Bearer
Gives the right to
o claim payment
o sue in own name for payment
o negotiate
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