Deck 19: Negotiable Instruments

Question 1

The Bills of Exchange Act governs which of the following kinds of instruments?

A)bills of exchange only
B)bills of exchange and negotiable instruments
C)drafts only
D)bills of exchange,promissory notes,and cheques
E)bills of exchange,negotiable instruments,and cheques

Answer 1

D

Question 2

Which of the following defences is available to the drawer of a cheque who is being sued by a holder in due course of a negotiable instrument?

A)The cheque was obtained through breach of contract.
B)The payee was negligent.
C)The drawer's signature was a forgery.
D)The cheque was obtained through misrepresentation.
E)A and B

Answer 2

C

Question 3

Use the fact situation above to answer the question. When Edward delivers the cheque to Albert,the cheque becomes

A)a bearer cheque.
B)an assignment cheque.
C)a promissory note.
D)an endorsement cheque.
E)all of the above

Answer 3

A

Question 4

On April 5,Tim gave Winnie a cheque for $3000 drawn on his bank account to pay for a horse.The cheque was postdated to April 15.On April 7,the horse died,and Tim stopped payment on the cheque.On April 12,Winnie took Tim's cheque to Big Bank and endorsed it.Big Bank gave her cash in the face amount of the cheque.When Big Bank sent the cheque for clearing,Tim's bank refused to honour the cheque because of the stop payment Tim had placed on it and returned the cheque to Big Bank.Which of the following statements is TRUE?

A)A postdated cheque is not a negotiable instrument.
B)One cannot stop payment on a cheque.
C)Tim is not liable to Big Bank because he put a stop payment on the cheque before Winnie endorsed it over to Big Bank.
D)Only Winnie is liable to Big Bank.
E)Tim is liable to Big Bank because Big Bank is a holder in due course of a negotiable instrument.

Question 5

A prepares and signs a promissory note,but leaves the amount blank.The note is subsequently stolen by B,who fills in the amount and negotiates it to C.C now looks for payment from A,who refuses.If C sues A

A)A will successfully defend the lawsuit on the basis of lack of delivery of an incomplete instrument.
B)A will be liable to C because C is now the payee of the note.
C)A will successfully defend the lawsuit on the basis of lack of capacity.
D)A will successfully defend C's lawsuit on the basis that B committed a fraud.
E)A will be liable to C because C is a holder in due course.

Question 6

A demand draft is

A)a bill of exchange that is payable within a stipulated period,after presentation.
B)a bill of exchange on which the expression demand draft is written.
C)a bill of exchange that is payable within a stipulated period,after the date stated on the instrument.
D)a bill of exchange that is payable immediately upon presentation without any days of grace.
E)a bill of exchange that is payable at sight.

Question 7

Use the fact situation above to answer the question. When Albert advised the bank that the cheque was lost and put the stop payment on it,he then asked the bank to replace it with another certified cheque.The bank responded by telling Albert that it would only replace the cheque if Albert entered into an indemnity agreement with the bank indemnifying the bank in the event the cheque was found and presented for payment.In this case

A)the bank can refuse to replace the lost certified cheque because it always has the right to refuse to honour any negotiable instrument.
B)the bank can refuse to replace the lost certified cheque unless Albert agrees to give it the indemnity agreement.
C)the bank cannot refuse to replace the lost certified cheque with another one because Albert is the original drawer.
D)the bank cannot refuse to replace the lost certified cheque because the stop payment is effective to protect the bank if the original certified cheque is presented for payment.
E)none of the above

Question 8

Sight drafts can be used as

A)certificates of deposit.
B)promissory notes.
C)collection devices.
D)share certificates.
E)finance notes.

Question 9

On a piece of paper,A writes a memo that sets out the name of his bank,his bank account number,and a statement indicating that the bank is required to pay to B whatever amount B desires.A then puts his signature at the bottom and gives the memo to B.In this case,the memo is

A)a cheque.
B)a negotiable instrument.
C)a promissory note.
D)a bill of exchange.
E)none of the above

Question 10

The bank on which a cheque is drawn is called

A)the accepting bank.
B)the certifying bank.
C)the promissory note bank.
D)the drawee bank.
E)the drawer bank.

Question 11

Jack writes a note for Mary.The note states,"I,Jack,promise to pay you,Mary,$500.00 on January 4,2003,or anytime after that date when a demand is made." Jack has given Mary a

A)maker note.
B)promissory note.
C)certificate note.
D)certification.
E)promise in a note.

Question 12

A forges his signature on a cheque made in favour of B,who then endorses it to the order of C.C then endorses the cheque to the order of D,who has no way of knowing that the cheque has been forged.In this case

A)D is the holder in due course of the cheque.
B)D is the payee of the cheque.
C)D is the endorser of the cheque.
D)D is not a holder in due course of the cheque.
E)D is the assignee of the cheque.

Question 13

Use the fact situation above to answer the question. In this case,if the certified cheque is negotiated

A)Albert's advice to the bank of the loss of the cheque discharges the bank from having to honour it.
B)being certified,no stop payment can be put on the cheque and the bank must honour it.
C)Albert can put a stop payment on the cheque and the bank will not have to honour it.
D)the bank can put a stop payment on the cheque and the bank will not have to honour it.
E)none of the above

Question 14

Delivery of a negotiable instrument in payment

A)is only a conditional discharge.
B)is an acceptance.
C)is a guarantee of payment.
D)completely discharges the debt.
E)indemnifies the payor.

Question 15

Use the fact situation above to answer the question. If instead of Edward signing the back of the cheque in his name,before Edward gives the cheque to Albert,Edward signs the cheque over to Albert and then gives it to him,then Albert becomes

A)the endorsee and holder of the cheque.
B)the assignor and endorsee of the cheque.
C)the promissor and holder of the cheque.
D)the payor and bearer of the cheque.
E)all of the above

Question 16

Jack provides James with a cheque in payment for the delivery of goods.Later,when Jack checks the goods,he realizes that James has delivered the wrong goods.Jack wishes to cancel the cheque.Jack may go to the bank and request a

A)cancel document.
B)negotiable instrument.
C)de-certification order
D)stop payment order.
E)stop payee document.

Question 17

Albert,a supplier of goods,owes George $2000.00.Albert gives George a note for $2000.00 payable in 60 days.A couple of weeks later,George buys $800.00 worth of goods from Albert.If George has not paid Albert the $800.00 by the time the 60 days has expired and Albert claims payment of the $2000.00 note

A)Albert need not honour the note until George has paid him the $800.00.
B)Albert must honour the note and pay the $2000.00.
C)Albert can deduct,or set-off,the $800.00 owed by George against the $2000.00 that he owes and pay George $1200.00.
D)Albert need not honour the $2000.00 note until a reasonable time after the 60 days expires.
E)none of the above

Question 18

Albert owes George a sum of money and gives George a cheque made out to George for the amount he owes.In this case,George is

A)the payor of the cheque.
B)the assignor of the cheque.
C)the payee of the cheque.
D)the holder of the cheque.
E)the endorser of the cheque.

Question 19

S,the accountant for a railway company,forged the signature of the company's signing officer on a company cheque.The cheque was payable on the company's account and made out to another company controlled by S.The agreement between the company and its bank had no provision requiring the company to verify the monthly statements sent it by the bank for any discrepancies.Eventually,the company discovered the forgery and demanded that the bank return the money to its account,but the bank refused.In a lawsuit by the company against the bank for recovery of its money

A)the bank will succeed because it simply honoured the cheques,which were negotiable instruments.
B)the bank will successfully defend the lawsuit because the cheques were forged by the company's accountant.
C)the company will succeed because there was no agreement between the bank and the company requiring the company to verify its statements.
D)the company will succeed but on a quantum meruit basis only.
E)the bank will succeed because the company owed the bank a duty to maintain internal audit controls,which would have found the problem.

Question 20

The formal requirements of negotiable instruments include each of the following EXCEPT

A)they must be in writing and signed by the creator or drawer.
B)there must be an unconditional obligation to pay a fixed amount of money.
C)they must indicate a specific time when payment is due.
D)they must indicate whether the payment is for money or assets.
E)they must be a transfer of the whole obligation.

Question 21

A minor who makes a cheque payable to a holder is always liable to the holder.

Question 22

Only real defences can be used to block the claim of a holder in due course.

Question 23

Presentment of a bill is necessary where the bill of exchange is payable at sight,or after sight,because there is the need to determine the time at which payment is due.

Question 24

Joseph obtains a draft that states as follows: "pay to the order of Joseph Daniels the sum of $1000." Joseph wants to negotiate this instrument to Jack Spratt to pay a debt owing to Jack.To negotiate this instrument,Joseph must

A)indicate accepted on the draft and then deliver it to Jack.
B)endorse and deliver the instrument to Jack.
C)present the instrument to Jack's bank and have it accepted and then transfer it to Jack.
D)endorse and present the instrument to Jack's bank.
E)hand over the draft to Jack and get a receipt.

Question 25

A court will impose liability for payment if all of the following are true EXCEPT

A)the instrument was presented for payment.
B)it was dishonoured.
C)prompt notice of the dishonour was given to the defendant.
D)a lawsuit was commenced within the limitation period.
E)a notice of arbitration was served on the endorser.

Question 26

On the death of a maker or acceptor of a bill of exchange,her or his liability passes to her or his personal representatives.

Question 27

The difference between a cheque and draft is that

A)the drawee on a cheque is a bank or financial institution,whereas the drawee of a draft may be a financial institution or bank.
B)a cheque is a bill of exchange drawn against a bank that is payable on demand,whereas a draft is not payable on demand.
C)a cheque is a bill of exchange drawn against a person that is payable on demand,whereas a draft is drawn against a financial institution.
D)a cheque is not a negotiable instrument,whereas a draft is a negotiable instrument.
E)a cheque is a bill of exchange,whereas a draft is not a bill of exchange.

Question 28

Liability of the drawer,acceptor,or maker on a bill of exchange is dependent on

A)the delivery of the bill.
B)the negotiation of the bill.
C)the presentment of the bill.
D)the signing of the bill.
E)the signing and delivery of the bill.

Question 29

Negotiable instruments began as a form of bill of exchange.

Question 30

A remote party who fails to meet the standards of a holder in due course is subject to real defences only.

Question 31

A person who negotiates an instrument in bearer form is known as

A)transferor.
B)transferee.
C)a transferor by delivery.
D)a transferee by delivery.
E)delivering party.

Question 32

Liability of the drawee on a bill of exchange is dependent on

A)the signing and delivery of the bill.
B)the acceptance and delivery of the bill.
C)the signing of the bill.
D)the negotiation of the bill.
E)the presentment of the bill.

Question 33

Many retail businesses have taken steps to minimize the risks associated with negotiable instruments.These steps include

A)not presenting any instrument for payment.
B)not accepting accommodation bills.
C)acting as a factor.
D)not accepting cheques or bills of exchange as payment for goods.
E)signing all drafts without recourse.

Question 34

The two classes of negotiable instruments are

A)promissory notes and drafts.
B)promissory notes and cheques.
C)those governed by the Bills of Exchange Act and those governed by other statutes and other laws.
D)sight drafts and time drafts.
E)those governed by the Bills of Exchange Act and share certificates.

Question 35

Tina gave Zach a cheque for $1000 to pay for a TV.Zach took the cheque to Cash Mart,he endorsed it,and Cash Mart paid him $950.Cash Mart is a holder in due course of a negotiable instrument.

Question 36

A buyer on consumer credit has no defence against a finance company that sues him as holder of his promissory note.

Question 37

Which of the following is NOT a real defence to an action on a bill?

A)misrepresentation
B)incapacity of contract because of infancy
C)cancellation of the instrument
D)alteration of the instrument
E)absence of delivery when the instrument is incomplete when taken

Question 38

Where a bill of exchange is payable at sight,or after sight,presentment is necessary.

Question 39

A holder in due course who suffers a loss arising from a forged endorsement can recover from the party who acquired the instrument immediately following the forgery.

Question 40

Delivery of a bill may be actual or

A)incomplete.
B)ineffective.
C)constructive.
D)by notification.
E)pretend.

Question 41

Negotiability is the special quality possessed by negotiable instruments.

Question 42

Sight drafts can be used as collection devices.

Question 43

Explain the purposes of endorsement.

Question 44

Delivery of a bill may be actual or constructive.

Question 45

Explain the consequences when a document is not negotiable by reason of a condition.

Question 46

Explain how time drafts can be used as a means of finance for a business drawing them.

Question 47

If a holder takes an instrument knowing it is defective,he is still a "protected" holder in due course if he acts promptly in correcting the defect.

Question 48

A promissory note is not a bill of exchange.

Question 49

Explain why putting a stop payment on a cheque may not be binding on a bank.

Question 50

A promissory note is presented for acceptance.

Question 51

Explain the difference between negotiable instruments and other contracts.

Question 52

Explain the effect of certification of a cheque.

Question 53

Who is a holder in due course,and what are the requirements that must be met for a holder to be a holder in due course?

Question 54

Describe the difference between a bearer instrument and an order instrument.

Question 55

Given that the majority of negotiable instruments are now being replaced by electronic transactions and,further,that there is a movement toward digital currency and transactions,will the old method of doing business using bills of exchange and negotiable instruments one day find itself outdated and will such legislation become obsolete?

Question 56

Who is the drawer of a bill?

Question 57

Liability of the drawee on a bill of exchange is dependent on the acceptance and delivery of the bill.

Question 58

What is a time draft?

Question 59

Certification is an undertaking by the bank to pay the amount of the cheque to the drawer when it is presented for payment.

Question 60

Who is a drawee?

Question 61

Negotiable instruments are different from other contracts.Explain this difference.

Question 62

Briefly identify two modern alternatives that are reducing the reliance on paper negotiable instruments and cash.

Question 63

A court in British Columbia decided that a promissory note payable at a variable interest rate (e.g.,prime + 1% per annum)was not a negotiable instrument.Why might the court make this decision? How might the decision affect the rights of a third party obtaining the promissory note through endorsement?

Question 64

Explain the nature of the liability of a drawer on a draft and cheque.

Question 65

Briefly identify the loophole closed by the Bills of Exchange Act to address the unfairness related to the general rules of negotiable instruments to consumers.