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McInnes/Kerr/VanDuzer: Managing the Law: The Legal Aspects of Doing Business, Fourth Edition
Chapter 14: Special Contracts: Negotiable Instruments
e. In the final analysis, the Bank of Gander will necessarily suffer the loss if it honoured the
cheque and paid $10 000 to Abby.
30) Roxanna bought a stereo from Sound Electronics. She paid the purchase price of $7500
by giving a promissory note to the store. The first time that Roxanna tried to operate the
stereo outside of the store, it blew up due to a defect. She therefore refuses to honour the
promissory note. Which of the following statements is TRUE?
a. Because the note was given to a company, Roxanna does not have a personal defence
that she can use against Sound Electronics if it attempts to sue her on the note.
b. The provisions in the Bills of Exchange Act dealing with consumer bills and notes would
not apply if Roxanna used a cheque to pay for the stereo.
c. Sound Electronics was required to mark the note as a "consumer note" if Roxanna
intended to use the stereo for a business purpose.
d. The provisions in the Bills of Exchange Act dealing with consumer bills and notes might
apply if Roxanna paid with a cheque that was postdated for 15 days.
e. Even if the promissory note was used for a consumer purchase, it may not be subject to
the equities if Sound Electronics negotiated it to a holder in due course without notice that
it was used for a consumer purchase.
31) Which of the following are most likely to be classified as types of negotiable
instrument?
a. promissory notes and share certificates
b. cheques and cash
c. bills of exchange and contracts of employment
d. cheques and drivers licences
e. promissory notes and airline tickets
McInnes/Kerr/VanDuzer: Managing the Law: The Legal Aspects of Doing Business, Fourth Edition
Chapter 14: Special Contracts: Negotiable Instruments
32) Which of the following represent types of endorsement that may be used in connection
with negotiable instruments under the Bills of Exchange Act?
a. special and confirming
b. qualified and promissory
c. identifying and restrictive
d. general and relative
e. conditional and wanton
33) Which of the following defences may be used against a holder of a bill of exchange?
a. set-off
b. minority
c. failure of consideration
d. contributory negligence
e. ultra vires
34) Which of the following concepts is not expressly addressed by the Bills of Exchange
Act?
a. countermand
b. certification
McInnes/Kerr/VanDuzer: Managing the Law: The Legal Aspects of Doing Business, Fourth Edition
Chapter 14: Special Contracts: Negotiable Instruments
c. postdated
d. accommodation
e. drunkenness
35) Sylvain attempted to draft a cheque in payment of a stereo that he wanted to purchase.
A court subsequently held that the cheque was invalid. That may be TRUE because
a. Sylvain did not fill in the name of the payee.
b. the cheque was postdated.
c. Sylvain used a pencil rather than a pen.
d. Sylvain wrote the name of a fictional person in the space allocated to the name of the
payee.
e. the amount was stated to be "a reasonable price for the stereo."
36) Melinda is the holder in due course of a cheque drawn on Tyson's bank account. She
therefore believes that she is entitled to receive payment from Tyson. Tyson, however,
believes that he has a good defence to her claim. That will be TRUE if Tyson can prove the
defence of
a. minority
b. drunkenness.
c. non-delivery of a completed cheque.
d. no authority.
e. failure of consideration.
McInnes/Kerr/VanDuzer: Managing the Law: The Legal Aspects of Doing Business, Fourth Edition
Chapter 14: Special Contracts: Negotiable Instruments
37) Alpha Corp appears to be the named payee of a cheque drawn by Ultimate Inc.
Ultimate, however, insists that that piece of paper cannot possibly be treated as a valid
cheque under the Bills of Exchange Act. That is TRUE if
a. the instrument was certified before being delivered.
b. the instrument had been materially altered after being drafted.
c. the instrument is drawn on Lester, who is the major shareholder of ultimate.
d. payment is to be made from an overdrawn account.
e. the instrument is postdated.
38) Hakim drafted a negotiable instrument and delivered it to Omega Ltd in payment of a
debt. Before Omega actually received a monetary benefit, the instrument was formally
accepted by another party. The instrument may be
a. a postdated cheque.
b. a cheque or a promissory note.
c. a cheque that was drawn on an overdrawn account.
d. a cheque for which the drawee bank placed an appropriate amount into a suspense
account.
e. a bill of exchange that is payable on demand.
39) Bamidele drafted a negotiable instrument and delivered it to Beta Inc in payment of a
debt. That instrument contains an acceleration clause. This means that
a. an enforceable obligation was created between the payee and the institution from whom
payment is to be made.
McInnes/Kerr/VanDuzer: Managing the Law: The Legal Aspects of Doing Business, Fourth Edition
Chapter 14: Special Contracts: Negotiable Instruments
b. the payee must present the instrument to a third party before a certain date.
c. the instrument will be worth one amount on or before a certain date, and a different
amount after that same date.
d. although the person who drafted the instrument intended to make payment in
instalments, the payee may be entitled to demand the full amount in one payment if the
acceleration clause condition is met.
e. the instrument must be a bill of exchange.
40) Stephania drafted a cheque that named Wilbur as the payee and the Bank of Alberta as
the drawee. The cheque was certified. This must mean that
a. certification was provided in response to Stephania's request.
b. certification was provided in response to Wilbur's request.
c. the cheque has already been dishonoured.
d. the cheque has been endorsed by at least one person.
e. the drawee believes that the drawer's account contains sufficient funds.
41) After buying a yacht for $1.2 million using a cheque, Kyle returns to the yacht
dealership demanding $200 000 of that money back on the grounds that his satisfaction was
not fulfilled. Kyle argues that the yacht is only worth $1 million and believes he is entitled
to the money that he overpaid. Which of the following requirements of using a negotiable
instrument did Kyle fail to consider?
a. It must be signed and written.
b. Both parties must be identified.
c. There must be a certain sum of money.
d. There must be a time of payment.
e. There must be an unconditional obligation.
McInnes/Kerr/VanDuzer: Managing the Law: The Legal Aspects of Doing Business, Fourth Edition
Chapter 14: Special Contracts: Negotiable Instruments
42) Rajiv wrote a cheque to Brett on Jan. 12, 2010 that was dated for Jan. 28, 2010. In the
summer of 2010, Rajiv lost all of his money gambling. Brett did not know this. On Nov.
29, 2010, Brett went to the bank to cash Rajiv's cheque, but the cheque was deemed invalid
and the transaction did not occur. Which of the following combinations occurred?
a. The cheque was postdated, countermanded, and certified.
b. The cheque was certified, postdated, and staledated.
c. The cheque was staledated, overdrawn, and countermanded.
d. The cheque was postdated, staledated, and overdrawn.
e. The cheque was postdated, overdrawn, and certified.
43) Jacob Benito runs a business based in Norway that sells the steel used in hockey blades.
Jacob sold $50 000 worth of steel to Wayne Lemieux of Canada on August 8, 2006. The
two parties agreed that the $50 000 would not be due until October 8, 2006 and Wayne
arranged for the payment to be made through his line of credit at ABC Trust Company.
Which of the following is true?
a. Jacob is the payee, Wayne is the drawer, and ABC is the drawee.
b. Jacob is the drawee, Wayne is the drawer, and ABC is the payee.
c. Jacob is the drawee, Wayne is the payee, and ABC is the drawer.
d. Jacob is the payee, Wayne is the drawee, and ABC is the drawer.
e. Jacob is the payee, Wayne is the drawee, and ABC is the other payee.
44) Suppose Sharwin purchased $25 000 in candles from Maggie, but expressed to Maggie
that he did not have enough cash at the time to pay it all up front. Maggie decides to accept
instalment payments from Sharwin at $5 000 each, with a clause stating that defaulted
payments give Maggie the immediate right to claim her $25 000 owing plus interest. The
negotiable instrument and its respective clause in this situation are
McInnes/Kerr/VanDuzer: Managing the Law: The Legal Aspects of Doing Business, Fourth Edition
Chapter 14: Special Contracts: Negotiable Instruments
a. a bill of exchange with a lump sum clause.
b. a certified cheque with an acceleration clause.
c. a bill of exchange with a notice of dishonor.
d. a promissory note with a notice of dishonor.
e. a promissory note with an acceleration clause.
45) When Lance made a cheque payable to Giorgio and handed it to him, he noticed
Giorgio signed his own name on the back of that cheque and indicated the money be paid to
Derek Shallins. Which of the following has occurred?
a. A qualified endorsement was created.
b. An invalid cheque was created.
c. A special endorsement was created.
d. A general endorsement was created.
e. A restrictive endorsement was created.
46) Bob signs his name on the back of a cheque he is receiving, indicating a special
endorsement to Charles. However, assuming Charles and Bob have never met and do not
know one another, Charles is reluctant to purchase that cheque from Bob. If a third party
became involved to help bring assurance to the transaction, which of the following
statements would most likely be written by the third party?
a. For deposit only
b. Guarantor for Bob
c. Pay to Bob
d. Bob hereby identified
e. Pay to Bob without recourse
McInnes/Kerr/VanDuzer: Managing the Law: The Legal Aspects of Doing Business, Fourth Edition
Chapter 14: Special Contracts: Negotiable Instruments
47) Maxim received a cheque that was specially endorsed to him under several conditions.
Alexa then acquired that same cheque from Maxim under the same conditions, and Tori
then acquired it from Alexa with those same conditions. Albert was the last and final person
to acquire the cheque which he received from Tori with the same conditions attached. If
none of the individuals listed above were involved with fraudulent or illegal activity, which
of them other than Maxim were holders in due course?
a. Alexa only
b. Alexa, Tori
c. Alexa, Tori, Albert
d. Albert only
e. Tori, Albert
48) When writing a cheque made out to Austin, Walter left visible spaces between the
numbers when he wrote them down. As a result, Austin added an extra 7 in between two of
the numbers on the cheque costing Walter $7000 more than he intended to be withdrawn
from his chequing account. Which of the following is true?
a. Since the alteration was caused by Walter's carelessness, the bank is entitled to take the
extra $7000 from the account.
b. The bank is never entitled to take extra money despite carelessness.
c. Real defenses only apply to forgery and minority, never to material alterations.
d. A defect in title defense claim will arise.
e. A personal defense claim will arise.
Essay Questions
1) Although you agreed to sell a widget to me, you are concerned about actually receiving
payment. Discuss the main advantages and disadvantages of receiving payment from me in
the form of cash or a simple cheque.
McInnes/Kerr/VanDuzer: Managing the Law: The Legal Aspects of Doing Business, Fourth Edition
Chapter 14: Special Contracts: Negotiable Instruments
2) Identify and briefly explain three major differences between a negotiable instrument and
a regular contract.
McInnes/Kerr/VanDuzer: Managing the Law: The Legal Aspects of Doing Business, Fourth Edition
Chapter 14: Special Contracts: Negotiable Instruments
3) Francine bought a widget from Simon. In payment of the purchase price, she gave him a
cheque for $10 000 drawn on her account at the Bank of Waterloo. Because Francine's
account was overdrawn, the bank dishonoured the cheque when Simon presented it for
payment. Identify two grounds upon which Simon can sue Francine. Briefly explain which
option is easier.
4) The Bills of Exchange Act and the Sale of Goods Act both arose as codifications of
judge-made rules. Furthermore, the original legislation in each case was intended to
increase certainty and efficiency in the commercial world. There is, however, a major
difference between the two statutes. One generally provides default rules that the parties are
free to accept or reject. The other does not allow the parties to freely opt in and out of its
sections. Which of the two statutes is less flexible and why?
McInnes/Kerr/VanDuzer: Managing the Law: The Legal Aspects of Doing Business, Fourth Edition
Chapter 14: Special Contracts: Negotiable Instruments
5) Shauna drew a cheque on her account at the Bank of Whitehorse. That cheque passed
through several people before Kyle acquired possession of it. Because Shauna's account
was overdrawn, the Bank of Whitehorse dishonoured the cheque when Kyle presented it for
payment. Kyle realizes that there is no point in suing Shauna because she simply does not
have any money. Is there anyone else to whom Kyle can look for payment? Do you require
any additional information in order to fully answer this question?
6) Jordan bought a widget from Sara. He paid the purchase price of $25 000 by giving her a
cheque drawn upon his account at the Bank of Saskatoon. The facts involve three contracts.
Identify those contracts and briefly explain the rights that each involves.
McInnes/Kerr/VanDuzer: Managing the Law: The Legal Aspects of Doing Business, Fourth Edition
Chapter 14: Special Contracts: Negotiable Instruments
7) Briefly compare and contrast a postdated cheque and a staledated cheque. Can a cheque
ever become both postdated and staledated?
8) Krystyne bought a widget from Ryan. As payment, she gave him a cheque for $10 000
that was drawn on her account at the Bank of Windsor. Because she discovered that the
widget was defective, Krystyne countermanded her cheque before Ryan presented it for
payment. Due to a clerical error, the bank nevertheless honoured the cheque and paid $10
000 to Ryan. Is the bank entitled to debit Krystyne's account? Do you have enough
information to answer that question?
McInnes/Kerr/VanDuzer: Managing the Law: The Legal Aspects of Doing Business, Fourth Edition
Chapter 14: Special Contracts: Negotiable Instruments
9) Dina drew a cheque on her account at the Bank of Brockville and named Gary as the
payee. What process could be used to make the cheque into "something equivalent to
money"? Explain the nature and effect of that process.
10) You are the manager of the York Trust Company. Nadia, one of the company's
customers, has drawn a bill of exchange upon her account with the company. That bill is for
$50 000 and it names Seth as the payee. The bill is due on August 31. On June 1, Seth
appears at your office seeking acceptance of the bill. Describe the process and effect of
acceptance. As a matter of risk management, what special precaution should you exercise if
you decide to accept the bill on behalf of the trust company?
11) What is the difference between a demand draft, a sight draft, and a time draft?
McInnes/Kerr/VanDuzer: Managing the Law: The Legal Aspects of Doing Business, Fourth Edition
Chapter 14: Special Contracts: Negotiable Instruments
12) What is an "acceleration clause"? When and why is such a clause inserted into a
negotiable instrument?
13) Identify two types of endorsements that may be used by a person who is not the holder
of a negotiable instrument. Provide an example of each.
McInnes/Kerr/VanDuzer: Managing the Law: The Legal Aspects of Doing Business, Fourth Edition
Chapter 14: Special Contracts: Negotiable Instruments
14) Chris fraudulently induced Lucianna into drawing a cheque for $10 000. Chris then
negotiated the cheque to Kenneth, who is a holder in due course. Is Kenneth entitled to
receive payment on the cheque? Do you need any more information before answering that
question? Explain your answer.
15) Milosz is the holder in due course of a cheque that has been negotiated several times.
Identify a situation in which he may be subject to the equities if he seeks to enforce the
instrument against the drawer.
McInnes/Kerr/VanDuzer: Managing the Law: The Legal Aspects of Doing Business, Fourth Edition
Chapter 14: Special Contracts: Negotiable Instruments
