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

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SOLUTION MANUALMitchell McInnesFaculty of Law, University of AlbertaManaging the LawThe Legal Aspects of Doing BusinessFifth EditionMitchell McInnesFaculty of Law, University of AlbertaIan R. KerrFaculty of Law, University of OttawaJ. Anthony VanDzerFaculty of Law, University of Ottawa

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Managing the Law, Fifth EditioniiContentsPart 1Introduction to LawChapter 1Risk Management and Sources of Law1-1Chapter 2Litigation and Alternative Dispute Resolution2-1Part 2TortsChapter 3Introduction to Torts3-1Chapter 4Intentional Torts4-1Chapter 5Miscellaneous Torts Affecting Business5-1Chapter 6Negligence6-1Part 3ContractsChapter 7The Nature and Creation of Contracts7-1Chapter 8Consideration and Privity8-1Chapter 9Representations and Terms9-1Chapter 10Contractual Defects10-1Chapter 11Discharge and Breach11-1Chapter 12Contractual Remedies12-1Chapter 13Special Contracts: Sale of Goods13-1Part 4PropertyChapter 14Real Property: Interests and Leases14-1Chapter 15Real Property: Sales and Mortgages15-1Chapter 16Personal Property: Bailment and Insurance16-1Part 5Business Law in the Digital EconomyChapter 17Intellectual Property17-1Chapter 18Electronic Commerce18-1Part 6Business OrganizationsChapter 19Agency and Other Methods of Carrying on Business19-1Chapter 20Basic Forms of Business Organizations20-1Chapter 21Legal Rules for Corporate Governance21-1Part 7Dealing with Secured Credit, Bankruptcy, and Insolvency

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Managing the Law, Fifth EditioniiiChapter 22Secured Transactions22-1Chapter 23Dealing with Bankruptcy and Insolvency23-1Part 8Government Regulation of BusinessChapter 24Government Regulation of Business24-1Part 8Government Regulation of BusinessChapter 25Individual Employment25-1Chapter 26Organized Labour26-1OnlineChapterSpecial Contracts: Negotiable InstrumentsOC-1

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Online Chapter–Special Contracts: Negotiable InstrumentsOC-1ONLINE CHAPTERSPECIAL CONTRACTS: NEGOTIABLE INSTRUMENTSCONTENTSTeaching ApproachDiscussion Boxes1. Business Decision OC.1—Consumer Bills and NotesReview QuestionsCases & ProblemsCase BriefsTEACHING APPROACHThis chapter contains several unusual features that can be exploited for educationalpurposes.First, it examines three types of negotiable instruments: cheques, bills of exchange, andpromissory notes. Although students may not be familiar with the second and third typesof instruments, they are certainly familiar with the first. Every student has dealt with acheque. Significantly, however, very few people have anything more than a passingacquaintance with the applicable rules. This chapter therefore presents an excellentopportunity to stress the goal of risk management. Do students realize, for instance, thatthey expose themselves to the risk of liability by simply signing the back of a cheque? Orthat they may be subject to criminal prosecution if they fail to properly stamp a consumernote or bill that their business received in exchange for goods or services? Morepositively, do they realize the advantages of using negotiable instruments, rather thancash, when purchasing goods or services?Second, this chapter, like the last, focuses on legislated, rather than judge-made, law. TheBills of Exchange Act, like theSale of Goods Act, was first introduced as a codification ofexisting rules. Moreover, in each case, codification reflected the legal desire to increasecertainty and efficiency in the commercial world. Students should be encouraged to bearthat history in mind as they read through the chapter. Although many of the rulesgoverning negotiable instruments may seem arbitrary and harsh, they almost invariablyserve a useful function at a deeper level. Indeed, the success of theBills of Exchange Act(subject to the introduction of new provisions governing consumer bills and notes in1970, it is virtually unchanged from its original form in 1890) is due largely to the factthat it creates an integrated and comprehensive code. Commercial parties can confidentlydeal with a negotiable instrument precisely because, given the Act, they generally knowexactly what rights that document represents.On a related note, it is interesting to ask whether judges alone could match the success oftheBills of Exchange Act. Students could be asked to reflect on the relative merits ofstatutory law. Several points arise.

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Online Chapter–Special Contracts: Negotiable InstrumentsOC-2•Stable Rules: While judges are often better able to quickly and flexibly adapt thelaw to new situations and evolving social values, there are some situations inwhich a static and conservative approach is desirable. Negotiable instrumentsprovide an excellent example of that proposition. Money could not operateproperly if it was subject to shifting rules. A $20 bill is practically useful only ifthe 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. Theyare, however, intended to serve as close approximations. Consequently, they toomust be subject to rules that remain constant over time.•Federal Statute: Unlike theSale of Goods Acts, which are enacted at theprovincial or territorial level, theBills of Exchange Actis a federal statute. ThereisonlyonesuchActanditappliesacrossthecountry.Onceagain,thatconsistency is necessary to achieve the legislative purpose. It is questionable,whether similar consistency could be achieved entirely though the courts. Adifferent set of courts operates within each jurisdiction in Canada. And as we sawin 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. Itis highly doubtful, however, that even the Supreme Court of Canada couldachieve the success of theBills of Exchange Act. The Act creates a comprehensiveand integrated scheme. The Supreme Court simply does not have the opportunityto address a topic as a whole. It generally is restricted to deciding a discrete issuebrought before it by the parties. Furthermore, unlike a statute, through whichlegislators speak with one voice, the Supreme Court often speaks through severalconcurring or dissenting voices.Although it is very long and highly complex, theBills of Exchange Act, like theSale ofGoods Act, presents an opportunity to address the nature of legislation and the skills ofstatutory interpretation. Students therefore could be directed to peruse the entire Actonline: <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 ofdiscussion boxes. The reason is very simple. Because of their complexity, the materialsare presented through a set of extended, interactive exercises. Students should beencouraged to read the chapter as a collection of stories and to put themselves withinthose 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 BOXESBusiness Decision OC.1Consumer Bills and NotesTheBills of Exchange Act’s provisions regarding consumer notes would apply in thisinstance because (1) the note was used for credit purpose, (2) the note was used topurchase goods or services from a business, and (3) Christine made the purchase as aconsumer. The analysis of Christine’s case consequently would vary depending uponwhether the note was properly marked, as required by the statute.

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Online Chapter–Special Contracts: Negotiable InstrumentsOC-3•MarkedIf the notewasmarked, then Mastiff Financing Ltd would take theinstrument subject to the equities. Christine consequently would be entitled todefend Mastiff’s action on the note by pleading Noel Exteriors Inc non-deliveryof the siding. Christine therefore would not be obliged to pay.•Not MarkedIf the notewas notmarked, andifMastiff acquired the note as aholder in due course, without notice of the underlying consumer purchase, thenMastiff would not take the instrument subject to the equities and Christine couldnot defend Mastiff’s action by pleading Noel’s lack of delivery. (If Mastiff didhave 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 mighttake some satisfaction in knowing that Noel was subject to punishment for failingto comply with the statute.REVIEW QUESTIONS1.The statement is incorrect. While each province and territory has its ownSale ofGoods Act(as discussed in Chapter 13), there is only oneBills of Exchange Act. Asobserved in Chapter 1, sections 91 and 92 of theConstitutionassign certain subjects tothe federal Parliament and to the provincial legislatures. Amongst the subjects given tothe federal jurisdiction, Section 91 includes several dealing with the country’s financialsystem:•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 oneBills of Exchange Act, which applies consistently across the country.The drafters of theConstitutionquite likely appreciated the need for consistency andcertainty in the country’s financial system. While a sale of goods involves only twopeople, a negotiable instrument is designed to be applicable amongst many parties.Consequently, while there is a separateSale of Goods Actin each jurisdiction, there isonly oneBills of Exchange Act. A person dealing with a negotiable instrument must beconfident 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 paymoney. The unique aspect of a negotiable instrument lies in the idea of “negotiation.” In

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Online Chapter–Special Contracts: Negotiable InstrumentsOC-4this context, the word “negotiation” refers to the transfer of an instrument from oneperson to another.3.Contractual obligations can generally be assigned to a stranger. Aside from beinga cumbersome process, assignment requires a person who receives a contractual rightthrough an assignment to take it subject to the equities. That means that the assigneecannot be in a better position than the assignor. For instance, if a seller assigns its rightsunder a sales contract to one of its suppliers, the buyer can use any defence that it couldhave used against the seller.The transfer of a negotiable instrument has two main advantages over the assignment of acontractual 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 isnegotiated. Depending upon the circumstances, defences that were available against theprevious 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 isprimarily liable to make payment under it. Significantly, however, other parties maybecome liable as well. If so, then they may be compelled to provide payment if theoriginal drafter fails to do so.Even though someone else created a negotiable instrument, a person may become liablefor payment of an instrument as a result of anendorsement. A person who endorses aninstrument generally is taken to have promised people who later acquire the instrumentthat it will be paid. Consequently, although a party who actually made the instrumentremains primarily liable, the endorser may be also be sued.There are, however, some exceptions to that general rule depending upon the nature ofthe endorsement. That is true, to some extent at least, with respect toidentifyingendorsements (in which case the endorser can be held liable only if the identification ofanother party is incorrect),qualifiedendorsements (in which case the endorser expresslydisavows liability on the instrument),conditionalendorsements (in which case theendorsercanbeheldliableonlyiftheconditionaleventoccurs),andrestrictiveendorsements (in which case the endorser prevents the negotiation of the instrument toany 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. Insome situations, however, the endorser may be met by a defence (egif the endorsementwas added after the instrument was fraudulently altered).5.It is not true to say that a cheque becomes staledated only when the statutorylimitation period lapses (usually after six years). A cheque is staledated when the payeedoes not seek payment within a reasonable time (usually six months), at which timebanks will generally refuse to honour the cheque.

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Online Chapter–Special Contracts: Negotiable InstrumentsOC-56.If a customer writes a cheque on an overdrawn account, the bank can choosebetween 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 bedebited. Alternatively, the bank can treat the overdrawn cheque as a request for a loan. Ifthe bank chooses that option, it pays out the amount to the payee and then seeksrepayment from the drawer. That same analysis applies even if the bank mistakenly paysout on an overdrawn account.7.A stop payment order, or countermand, occurs when a customer orders a bank torefuse payment on a cheque that is outstanding. A stop payment order must be given inperson by the drawer. Additionally, the drawer must describe the particulars of thecheque, including the date, the payee and the amount. A stop payment order may alsooccur automatically if the bank is notified that the drawer has died before the payeereceives payment.8.A postdated cheque is a cheque that is dated in the future. A drawer uses acheque to instruct and authorize a drawee bank to pay money to the payee. Because thebank honours (or “cashes”) a cheque by withdrawing funds (or debiting) the drawer’saccount, it can act only if it strictly complies with the drawer’s directions. A postdatedcheque therefore allows the drawer to provide a cheque today, but ensure, by placing afuture date on the cheque, that the payee cannot obtain payment from the drawee untilthat 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 ofsuccessive months. The drawer thereby takes care of all future obligations, while thepayee is relieved of the need to seek payment each month.9.The statement is true. TheBills of Exchange Actconstitutes a codification of therules and principles that English commercial courts developed over many years. TheEnglish statute was then copied, almost exactly, by the Canadian Parliament. Someaspects of the Canadian law of negotiable instruments nevertheless are drawn fromAmerican law. That is true ofcertification. TheBills of Exchange Actmakes no provisionfor that concept. Canadian courts instead developed certification by drawing on ideasfrom the United States.Certification occurs when a drawee bank promises to honour a cheque. A bank normallydoes so by stamping the word “certified” and the date on the front of the cheque. It thendeducts 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 forpayment.Certification is treated as something akin to the payment of money. Through the processof certification, the drawee bank assures the payee that the cheque will be honoured upon

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Online Chapter–Special Contracts: Negotiable InstrumentsOC-6presentation. In the interests of commercial certainty, that remains true even in cases ofoverdrawn or countermanded cheques.A bank will not normally certify a cheque until it has determined that the drawer’saccount holds sufficient funds. An appropriate amount is then removed from the drawer’saccount and placed into a suspense account for the purpose of eventually honouring thecheque. However, even if something goes wrong, with the result that a cheque ismistakenly certified despite the fact that the drawer’s account does not hold sufficientfunds, the bank is still required to fulfill its promise to the honour the cheque. (The bankcan, of course, look in turn to the drawer for payment.)Likewise, certification precludes the bank from subsequently accepting and acting upon adrawer’s countermand or stop payment order. Once a cheque has been certified, the payeeis entitled to receive money from the bank. Significantly, because of the need forcommercial certainty, certification even overrides apriorcountermand.10.The first statement is true. The second statement is false. A bill of exchange iscreated when one person ordersanother personto pay a specific amount of money tosomeone. A cheque is created when a person orders abankto pay a specific amount ofmoney to someone. A cheque therefore is a type of bill of exchange. A bill of exchangemay be drawn on anyone, including a bank. A cheque must be drawn on a bank. Thelatter is a sub-set of the former.11.The difference between the three types of drafts concerns the time at which thepayee is entitled to payment. A bill of exchange that is a demand draft is payable by thedrawee as soon as it is presented by the payee. A bill of exchange that is a sight draft islike a demand draft, except that the payee is not entitled to the money until a three-daygrace period has passed. And finally, a bill of exchange that is a time draft is only payableon the future date specified on the bill.12.A promissory note is created when one person gives another person a writtenpromise to pay a specific amount of money. Frequently, promissory notes are payable ininstallments. As a matter of risk management, the maker of the note should make surethat a short receipt is written on the note each time that an installment is paid. Withoutthat sort of precaution, the maker might be forced to pay the same payment twice if thenote is later negotiated to an innocent third party.13.“Accelerationclauses”areusedinassociationwithpromissorynotes.Apromissory note usually is payable in instalments according to a set schedule. If themaker 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 tobelieve that future instalments will be missed as well. It would be inconvenient if thepayee were unable to sue for the future instalments until they too had actually gone intodefault. To avoid that situation, the note should contain an acceleration clause that statesthat the entire amount of the note becomes due once a single instalment is missed.

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Online Chapter–Special Contracts: Negotiable InstrumentsOC-714.The statement is true. A cheque and a bill of exchange are used to instruct andauthorizeadraweetotransferfundstothepayee.Neithertypeofinstrumentautomatically creates any rights that the payee may enforce against the drawee. (Throughthe process of certification or acceptance, however, the payee may acquire rights againstthe drawee.) Both types of instrument, however, do create rights that the drawer mayenforce against the drawee.In contrast, a promissory note merely creates obligations and rights that the payee mayenforce against the maker. That is true even though a promissory note usually indicates athird party (such as a bank) from whom the payee can expect to receive payment. Thepromissory note itself, however, does not create any rights or obligations touching uponthethirdparty.(Thethirdparty,however,maybeinvolvedinrelatedrightsofobligations.)15.A negotiable instrument is payable to bearer if any person who holds it is entitledto receive payment. The danger, of course, is that the instrument can be cashed by anyonewho holds it – even someone for whom the instrument was not intended. That danger canbe averted by turning the bearer instrument into an order instrument by signing the backof the cheque and indicating that the money should be paid to a particular person. Theholder could do so by adding a special endorsement, such as “Marie Pelletier - Pay to JeanDelacroix.” 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 beingnegotiated any further and it provides good protection against theft. And, finally, theholder obviously can protect itself from that danger simply by cashing the instrument.16.A “bearer instrument” is a negotiable instrument that allows any person whoholds it to receive payment from it. A bearer instrument also can be transferred from oneparty to another by simple delivery and without endorsement.An instrument may be put into bearer form in a variety of ways. (1) The person creatingthe instrument may make it payable “to bearer.” (2) The person creating the instrumentmay leave the name of the payee blank. (3) The person creating the instrument may makeit payable to a fictitious person (egSherlock Holmes). (4) The person creating theinstrument may make it payable to “cash.” (5) A person who endorses an instrument maycreate a “general” or “blank” endorsement consisting of his or her signature only.17.Liability generally cannot be imposed on an endorser unless that person receivednotice of dishonour. Notice of dishonour consists of a statement that the person who wasprimarily liable on the instrument failed to pay. Notice normally must be given veryquickly – usually within one business day. However, a delay may be excused if thecircumstances were beyond the person’s control. Furthermore, notice does not have to begiven if: (a) the endorser cannot be reached through reasonable effort, or (b) the endorserwaived 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 anendorser, then that endorser cannot be held liable on the instrument.

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Online Chapter–Special Contracts: Negotiable InstrumentsOC-818.A holder in due course is a person who acquired an instrument under thefollowing conditions.•ConsiderationThe instrument must be supported by consideration (eitherby the holder or by a previous holder).•Complete and Regular On Its FaceTheholderoftheinstrumentmusthavetaken it when it was complete and regular on its face – that is, the instrument musthave been taken without blanks or any suspicious erasures or alterations.•Without NoticeThe holder must have acquired the instrument withoutnotice of any previous dishonour.•Good FaithThe holder must have taken the instrument in good faith andwithout notice of any defect in the title of the person who negotiated it.•Before OverdueThe holder must have acquired the instrument before it wasoverdue.A holder in due course cannot be defeated by personal defences or defect in titledefences. Only real defences are available against a holder in due course. A real defenceoccurs when an instrument is itself fundamentally flawed.A holder in due course is given special treatment under theBills of Exchange Actbecauseof the need for commercial certainty and efficiency. A holder in due course, who has notparticipated in the instrument’s creation, has to be assured that it represents a goodcontract.19.The text identified and briefly explained seven types of endorsement.•Special EndorsementA special endorsement is created with a signatureand 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 toreceive payment.•Identifying EndorsementAn identifying endorsement is created with asignature and a statement attesting to the true identity of a prior endorser (eg“AnnaSchmidtisherebyidentified”).Thesigningpartyisliableontheinstrument only if the attested identification is incorrect.•Qualified EndorsementAqualifiedendorsementiscreatedbyasignature 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 problemslater arise.•Conditional EndorsementA conditional endorsement is created by asignature and an indication that liability is accepted only if some condition issatisfied (eg“Pay to Harry Lime if he takes me to Vienna”). While a cheque or abill of exchange cannot be conditional, an endorsement may be conditional. By

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Online Chapter–Special Contracts: Negotiable InstrumentsOC-9inserting a condition, the signing party indicates a willingness to bear the risk ofliability only if the specified condition is met.•Accommodation EndorsementAn accommodation endorsement is createdby a signature and a guarantee of another party’s liability (eg“Guarantor forIsabel Minafer”). The endorsement is “accommodating” in the sense that thesigning party, by accepting the risk of liability, adds credibility to a priorendorser’s promise to pay in the event of dishonour. The signing party does notpossess the instrument in question, but rather helps the holder of the instrument todeal with it.•General EndorsementAgeneralendorsementiscreatedbyasimplesignature. The signing party thereby accepts the risk of liability.•Restrictive EndorsementA restrictive endorsement is created by asignature and an indication that the instrument can be used for deposit to a bankaccount only (eg“For deposit only”). The signing party thereby ensures that, asidefrom 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 criticallyimportant. 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 animmediate party, a holder, or a holder in due course. There are four defences that may beeither a defect in title defence or a real defence, depending upon the circumstances.•Fraud or DuressFraud or duress is usually a defect in title defence. If thedrawer can show that the instrument was made as a result of fraud or duress, thedrawer can avoid liability. In that situation, a simple holder does not receive goodtitle to the instrument. Fraud may also be a real defence if it amounts tonon estfactum. For example, if the drawer, who was blind, infirm, or illiterate, wastricked into signing a cheque because the drawer thought it was being asked for itsautograph, a real defence would probably be available against even a holder indue course.•Insanity or IntoxicationThe title will also be defective if the holder knew orought to have known that the drawer was drunk or insane when it drafted theinstrument. While insanity normally creates a defect in title defence, it can alsolead to a real defence if the person who purportedly created the instrument waslegally declared to be mentally incompetent.•Absence of DeliveryIf there is an absence of delivery, a defect in title can occur.That could happen, for example, if the drafted instrument was taken from thedrawer’s desk without permission. Under similar circumstances, the drawer wouldhave a real defence if it did not deliver the instrumentandif the instrument wasincomplete when it was taken.•Discharge or RenunciationFinally, if an instrument has been discharged orcancelled, a defect in title defence arises. Consequently, the drawer would nothave to make payment to the holder. Furthermore, discharge or renunciationwould amount to a real defence, and hence would be available even against a

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Online Chapter–Special Contracts: Negotiable InstrumentsOC-10holder in due course, if the renunciation or discharge was apparent from the faceof instrument itself (egby being stamped “paid”).CASES AND PROBLEMS1.Hibbing Music Inc (HMI) is correct and Helstrom is incorrect. It is true that theassignment of a contractual debt is received subject to the equities. If, instead ofendorsing the cheque and delivering the instrument to the company, Zimmerman hadsimply assigned to the company his right to contractual payment from Helstrom, thenHMI would receive those contractual rights subject to the equities. Helstrom could thenuse against the company any defence that she could use against Zimmerman. And sinceZimmerman’s breach of contract reduced the value of the guitar to $7500, HMI could notreceive payment of the full $10 000 from Helstrom.A cheque, however, is a negotiable instrument. In order to facilitate the movement ofnegotiable instruments, and the flow of commerce, the legal system allows a cheque toimprove as it is passed through the process of endorsement. It does so by allowing thecheque to be received, in good faith, at face value. A cheque drawn for $10 000 thereforeentitles the holder to that amounteven ifthe named payee breached the underlyingcontract with the drawer. While the drawer has a good contractual claim against the payeein breach, the holder of the instrument is not subject to the equities and therefore isentitled 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. Ifthe bank accepted that countermand, it no longer would have Helstrom’s authority todebit her account and it consequently would dishonour the cheque by refusing to “cash” itin HMI’s favour. The company could then sue Zimmerman, either on his originalunderlying debt or on his endorsement on the cheque. Zimmerman, in turn, could sueHelstrom on either their underlying contract or on her cheque, but in either event, hewould be subject to her counterclaim for breach of contract.2.The note is unenforceable for the simple reason that Gilles was a minor when hemade it. Furthermore, since it does not appear that the snowboard represented a necessityof 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, Evaclearly gave consideration for the note. It therefore is irrelevant that the board was stolenfrom 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 onthat ground.3.This question requires students to do two things: (a) determine whether or not theBergman agency is a holder in due course, and (b) determine whether or not Bjorn has agood defence against the enforcement of the cheque.

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Online Chapter–Special Contracts: Negotiable InstrumentsOC-11The Bergman agency is probably not a holder in due course. First, although the facts areunclear, Bergman perhaps knew or should have known that the bank had alreadydishonoured the cheque. Second, Bergman received the cheque when it was alreadyoverdue. The cheque was negotiated in December, even though it had been drafted inFebruary.If Bergman was a holder in due course, it would only be subject to real defences. Bjorn’sinsanity therefore would not be an effective defence unless Bjorn’s condition had beenthe subject of a legal declaration.If Bergman was simply a holder, and not a holder in due course, it would be subject toreal defences and to defect in title defences. Even if Bibi was not aware of Bjorn’s mentalcondition when he drafted the cheque, she probably should have been. If that is true, thenshe received a defective title to the instrument. And finally, if Berman was not a holder indue course, it inherited that defect when it bought the cheque from Bibi. Bjorn couldtherefore use the insanity defence against Bergman in the same way that he could haveused it against Bibi.4.Although Hussein Electronics will be able to compel payment from Roger, it willnot receive payment from the bank. In drawing the cheque, Roger broke three of the rulesthat govern negotiable instruments. Those rules are base don the need that a negotiableinstrument, 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 asum certain. It must be possible to know, simply bylooking at the cheque, how much it is worth. Roger, however, stated the amountpayable to be “either $1500 or $2000.”§Although a bill of exchange may be atime draft(iepayable some time after itsdate), a cheque must be payable on demand. Roger, however, made the cheque“payable six months after date.” (It would, however, have been possible for Rogertopostdatethe cheque by dating it with a day a month in advance.)§A cheque must containunconditional 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 legalconsequences.•Rent DebtPayment by cheque createsconditionaldischarge of a debt.Accordingly, when Munt provided Singh with a cheque for $15 000, theoverdue debt of $15 000 was discharged. That debt subsequently cameback into full effect, however, when the bank dishonoured the instrument.Munt therefore remains fully liable to Singh for her rent.•Liability on ChequeBy drafting a cheque, Munt created an alternativebasis 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 revivedunderlying rent debt, or (2) for $15 000 on the cheque itself.

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Online Chapter–Special Contracts: Negotiable InstrumentsOC-12•Overdrawn Cheque—BankBydraftinganoverdrawncheque,Munteffectively requested a loan from the Bank of Cambridge. Upon receipt ofthat request (in the form of the cheque), the bank had an option. (1) If itchose to lend funds to Munt, it could honour the cheque, provide paymentto 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 LawOverdrawnchequesusuallyarise by accident and error. The drawer mistakenly believes that theaccount holds sufficient funds to cover the cheque. In this instance,however, Munt knew at the outset that her account did not hold sufficientfunds. In such circumstances, Munt creates the crime of false pretencesunder s 362(4) of theCriminal Code.6.This case deals with defences. Consequently, it is first necessary to classifyBenjamin’s status. Since he gave value for the cheque, received an instrument that wascomplete and regular on its face, acted in good faith and without notice of dishonour ordefect, and acquired the instrument before it was overdue, he qualifies as a holder in duecourse.It is also necessary to determine who might be liable on the cheque. Sam is potentiallyliable on the basis of his endorsement. Kate is potentially liable on the basis of hersignature as drawer.It then becomes necessary to determine whether either Sam or Kate have a good defenceto Benjamin’s claim for payment on the cheque. Sam obviously has no defence to theclaim. He acted with full knowledge of his own impropriety. Kate, in contrast, may beable to resist an action on the cheque.As a holder in due course, Benjamin can only be defeated by areal defence(iea defencethat arises from the fact that the instrument itself is fatally flawed). On the basic facts asstated, however, the only problem with the cheque is that Kate did notdeliverit to Sam.And lack of delivery is only adefect in title defence(iea defence that arises from the factthat the instrument was not properly obtained). Benjamin therefore would be entitled toreceive payment from Kate. (If Kate was, in fact, required to provide payment toBenjamin, she could in turn sue Sam. She most likely would use the tort of conversion, asdiscussed in Chapter 4, and receive compensation for her loss.)The situation would be different, however, if Kate had not added an amount to the chequethat Sam found in her desk drawer. We will assume that Sam added that informationbefore negotiating the instrument to Benjamin. There are two possibilities. First, if Samadded the information in such a way as to make the cheque look suspicious, Benjaminwould not qualify as a holder in due course. He therefore would be subject to even adefect 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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