Recent Developments in Canadian Law: Bills of Exchange
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RECENT DEVELOPMENTS IN CANADIAN LAW: BILLS OF EXCHANGE Emil J. Hayek* I. INTRODUCTION ................................................... 264 II. FORM ............................................................. 265 A. Acceleration Clauses ...................................... 265 B. Sum Certain of Money ................................... 266 1989 CanLIIDocs 26 C. Interest ...................................................... 267 1. Fixed Rates .......................................... 267 2. Floating Rates ....................................... 269 D. At a Future Time .......................................... 272 E. Signing in a Representative Capacity .................. 273 III. DELIVERY ......................................................... 276 IV. CONSIDERATION .................................................. 276 V. INCOMPLETE INSTRUMENT ...................................... 277 VI. HOLDERS .......................................................... 278 VII. LIABILITIES OF PARTIES ......................................... 279 A. Accommodation Bill ........................................ 279 B. Liability of Guarantor .................................... 281 C. Notes and Mortgages ..................................... 282 * Faculty of Law, University of Ottawa. 264 Ottawa Law ReviewlRevue de droit d'Ottawa [Vol. 21:1 VIII.DEFENCES ......................................................... 283 A . Forgery ..................................................... 283 B. Non Est Factum ........................................... 284 C. Material Alteration ........................................ 284 IX . CHEQUES .......................................................... 285 A. Depository Bank as a Holder in Due Course ......... 285 B. Payment Over Countermand ............................. 287 C. Banker-Customer Relationship .......................... 288 1. Clearing a Cheque .................................. 288 1989 CanLIIDocs 26 2. Forgery and Chequing Accounts .................. 290 3. Verification Agreements ............................. 294 D. Certification ................................................ 295 I. INTRODUCTION This survey deals with negotiable instruments; bills of exchange, cheques and promissory notes. Since generally the same legal principles apply to all three types of instruments,' there is no need to draw a distinction between them, unless the legal principles discussed apply to a particular instrument only; for example, stop-payment of a cheque. The survey does not cover the general law of banking except where there is a close connection with negotiable instruments. The period surveyed is from 1985 to reports available in July, 1988. There have not been any significant developments in the law of negotiable instruments during the period surveyed, with the exception of the reaffirmation of the Macmillan doctrine by the Supreme Court of Canada and the Privy Council, discussed in Part IX, Section C2. There have been, however, some interesting applications and further elaborations of existing principles. 1 See Bills of Exchange Act, R.S.C. 1970, c. B-5, ss. 165(2) and 186(1). All subsequent references to sections pertain to this Act unless otherwise indicated. 1989] Bills of Exchange II. FoRm A. Acceleration Clauses First National Bank of Oregon v. A.H. Watson Ranching Ltd2 considered a promissory note with an acceleration clause which pro- vided that upon default the holder would be entitled to payment of the entire unpaid principal together with interest thereon to the date of payment at the option and upon demand of the holder.3 It provided further that such principal and interest in default should further bear interest at the rate stated in the promissory note from the date of default until the date of payment. This acceleration clause differed from the usual ones used in that it provided for additional interest on the unpaid principal and interest from the time of default to the time of payment. The defendant argued that "interest. .to the date of payment" would be impossible to calculate upon the demand of the holder because at the time of the demand the holder would not know when the payment would be made nor could the additional interest on outstanding principal and interest be calculated. Following Canada 1989 CanLIIDocs 26 Permanent Trust Co. v. Kowal4 Lomas J. held that this acceleration clause did not make the amount of the note uncertain. The note contained an unconditional promise to pay at a fixed time a sum certain of money. The acceleration became operative only on default and then only at the option and demand of the holder. The plaintiff (holder), in his notice of demand, asked for principal and interest outstanding at the time of demand and interest thereafter on the outstanding principal. He did not ask for interest on outstanding interest. In thus setting out the amount demanded in the notice, the plaintiff removed any possible ambiguity. The rationale of this case is that an ambiguous acceleration clause will not render an otherwise certain bill or note invalid for uncertainty when the holder removes the ambiguity of the acceleration clause by making a definite demand after default. Default is a condition precedent for activating an acceleration clause. In Fraga Enterprises Ltd v. Wright5 Richard C.J.Q.B.T.D. found that no default occurred even though the payments were not made on the due date. In this case a promissory note, containing a standard acceleration clause stating that default in any payment would render the entire unpaid balance payable upon demand, stipulated that payment was due on May 1. On May 1 the makers posted the necessary cheques to the holders who received them on May 4. The following 2 (1984), 34 Alta L.R. (2d) 110 (Q.B.), Lomas J. 3 Italics added. 4 (1981), 32 O.R. (2d) 37, 120 D.L.R. (3d) 691 (H.C.) and see E. Hayek, Recent Developments in Canadian Law: Bills of Exchange (1985) 17 OTTAWA L. REv. 589 at 595. 5 (1987), 82 N.B.R. (2d) 270, 208 A.P.R. 270 (Q.B.T.D.). Ottawa Law Review/Revue de droit d'Ottawa [Vol. 21:1 day the holders made a demand for the payment of the balance outstanding. Richard J. held that by mailing the cheques on May 1, the due date, the makers complied with the promissory note and were not in default. To hold otherwise would be to tolerate and encourage oppressive practice without any merit. The acceleration clause was not so precisely worded as to permit a finding of default when cheques were mailed on the due date. It would appear, according to this reasoning, that where a promissory note simply contains a schedule of payments, there is no default when cheques or other means of payment are mailed on the due date. The Court also held that section 42, which provides that three days of grace are added to the time of payment as fixed by the bill, applies also to promissory notes by virtue of subsec- tion 186(1). Consequently there was no default as the cheques were received on May 4, the last of the three days of grace. B. Sum Certain of Money The Bills of Exchange Act provides that a bill must be for a sum 1989 CanLIIDocs 26 certain of money.6 This requirement causes problems when parties draw a bill or note in connection with commercial transactions provid- ing for flexible payment schedules, interest rates etc. A number of cases dealing with these issues have come before the courts. Gravelbourg Savings v. Bissonnette7 concerned a promissory note made for a sum certain of money with a fixed rate of interest repayable by monthly instalments, commencing in 1980 and ending in 1983. The problem which arose here was that the exact dates of the first and last instalments were left blank. In spite of these blanks, the Court held that the instrument was a valid promissory note. The amount payable was a sum certain, as the principal and the interest rate were clearly set out. The interest ran from the date of the notes and the amount payable could be calculated at any point in time. Although the first and last payments could have been made at any time during 1980 and 1983 respectively, this did not alter the fact that the note was for a sum certain. In Dawson v. Tomljenovich9 the British Columbia Court of Appeal refused to rule whether a note for a fixed amount with the proviso "the makers agree to pay all costs of collection, including attorney fees", was a valid note on the ground that the relevant legal issues were not adequately argued and therefore further hearing would be required. Esson J.A. stated that all Canadian cases to which he was 6 Ss. 17 and 28. 7 (1985), 43 Sask. R. 241 (Q.B.). 8 Bills of Exchange Act, R.S.C. 1970, c. B-5, s. 28(3), not referred to in the judgment in this context, says that ... unless the instrument otherwise provides, interest runs from the date of the bill.. 9 (1986), 7 B.C.L.R. (2d) 139 (C.A.). 19891 Bills of Exchange referred supported the proposition that the language of the note ren- dered the sum uncertain. He continued by stating that the Canadian cases were "not of binding authority and are sparsely reasoned on this question". Therefore, it was open to the Court to apply American jurisprudence which arrived at an opposite conclusion. Esson J.A.'s statement that the Canadian cases on point are not binding is surprising. A possible explanation is that all of the cases referred to were from other provinces. However, at least two of the cases referred to were at the appellate level in an area of law within federal jurisdiction. Further, the reference to the American jurisdiction was prompted