CANADIAN BUSINESS

AND THE LAW

Second Edition
by

Dorothy Duplessis
Steven Enman
Shannon OByrne
Sally Gunz

Presentation prepared by
Allan Elliott, Southern Alberta Institute of Technology

Copyright 2004 by Nelson, a division of Thomson Canada Limited.

25-1

CHAPTER TWENTY-FIVE
BUSINESS AND BANKING
OBJECTIVES:
The relationship between a business and its
bank
The legal framework of negotiable
instruments
The rights and obligations of those
connected with negotiable instruments
The legal challenges involved in electronic
banking
Copyright 2004 by Nelson, a division of Thomson Canada Limited.

25-2

THE BANKING RELATIONSHIP

REGULATION OF BANKS
banks are under federal jurisdiction and are
regulated through the federal Bank Act
Bank Act the main purpose is to ensure
the stability and liquidity of banks and to
identify and regulate the types of business
they are permitted to conduct

Copyright 2004 by Nelson, a division of Thomson Canada Limited.

25-3

THE BANK-CUSTOMER
AGREEMENT
BANKING AGREEMENT
a contract that specifies the rights and
obligations of a bank and a customer
purpose of the banking agreement
to specify who has the authority to issue
instructions to the bank on behalf of the
customer
to allocate the risk of loss resulting from
problems with verifying the customer's
authority and carrying out the
customers instructions
Copyright 2004 by Nelson, a division of Thomson Canada Limited.

25-4

DUTIES OF THE BANK AND THE

CUSTOMER
COMMON LAW IMPOSES ADDITIONAL
DUTIES ON BOTH PARTIES TO THE
BANKING CONTRACT
the bank must:

honour cheques and repay deposits

collect cheques for the customer
provide account information to the customer on
a regular basis
maintain secrecy of the customers affairs

Copyright 2004 by Nelson, a division of Thomson Canada Limited.

25-5

DUTIES OF THE BANK AND THE

CUSTOMER
THE CUSTOMER MUST
take reasonable steps to provide
documentation as to who is authorized to
give instructions to the bank in order to
prevent fraud and forgery
keep authorizations current
notify the bank of any suspected problems
provide safeguards for electronic
communications (including telephone, fax,
and computer)
Copyright 2004 by Nelson, a division of Thomson Canada Limited.

25-6

DUTIES OF THE BANK AND THE

CUSTOMER
MONEY LAUNDERING
the false reporting of income from criminal
activity as income from legitimate business
Proceeds of Crime bill requires banks to
verify identity of customers, verify that
customers are engaged in valid business
activities, and to determine the source of
transfers exceeding $10,000

Copyright 2004 by Nelson, a division of Thomson Canada Limited.

Continued...

25-7

DUTIES OF THE BANK AND THE

CUSTOMER
MONEY LAUNDERING
new legislation passed in 2000 creates a
mandatory reporting system in which
banks, trust companies, insurance
companies, and professionals must report to
a new independent body (Financial
Transactions and Reports Analysis Centre
(FINTRAC)) any suspicious financial
transactions and large cross-border
currency transfers
Copyright 2004 by Nelson, a division of Thomson Canada Limited.

25-8

THE BANK-CUSTOMER
RELATIONSHIP
RELATIONSHIP
in terms of the customers money on
deposit with the bank, the relationship is
purely that of the bank as debtor and the
customer is creditor
if financial advice is provided then a
fiduciary relationship exists

Copyright 2004 by Nelson, a division of Thomson Canada Limited.

25-9

NEGOTIABLE INSTRUMENTS
NEGOTIABLE INSTRUMENT
a written contract containing an
unconditional promise or order to pay a
specific sum on demand or on a specified
date to a specific person or business
cheque written order to a bank to pay
money to a specified person
promissory note a written promise to pay
a specified amount to another person
bill of exchange written order to a person
to pay an amount to a specified person
Copyright 2004 by Nelson, a division of Thomson Canada Limited.

25-10

STEPS IN THE CHEQUE

CIRCULATION PROCESS
creator and drawer issues cheque to supplier (payee)
supplier deposits cheque in its bank

suppliers bank places cheque in suppliers account

through the cheque-clearing process, the
cheque moves from the suppliers bank to creators
bank (drawee)
creators bank removes funds from creators account and
transfers to suppliers bank
suppliers bank recovers its funds
Copyright 2004 by Nelson, a division of Thomson Canada Limited.

Figure 25.2

25-11

IMPLICATIONS OF CREATING A
CHEQUE
ISSUING A CHEQUE
an unconditional promise to pay the
specified sum to anyone who presents the
cheque to the bank for payment
holder a person who presents a negotiable
instrument for payment
holder in due course a holder in good faith
without notice of defects who acquires
greater rights than the parties who dealt
directly with each other as the drawer and
drawee
Copyright 2004 by Nelson, a division of Thomson Canada Limited.

25-12

IMPLICATIONS OF CREATING A
CHEQUE
HOLDER
if the holder has acted in good faith there
are limited arguments a creator can use to
justify refusing payment

NEGOTIATION
the process of transferring negotiable
instruments from one person to another

ENDORSEMENT
the process of signing a negotiable
instrument to enable negotiation
Copyright 2004 by Nelson, a division of Thomson Canada Limited.

25-13

IMPLICATIONS OF ACCEPTING A
CHEQUE
DELAY
accepting a cheque is equivalent to extending
credit since there are several days between
handing over goods and receiving payment from
a cheque

CERTIFICATION

the process whereby a bank guarantees payment

of a cheque

STOP PAYMENT

the process whereby the person who writes the

cheque orders the bank not to pay the holder
who presents it for payment

Copyright 2004 by Nelson, a division of Thomson Canada Limited.

25-14

ENDORSEMENTS
ENDORSEMENT IN BLANK
signing a cheque without any special
instructions

RESTRICTIVE ENDORSEMENT
signing a cheque for deposit only to a
particular bank account

SPECIAL ENDORSEMENT
signing a cheque and making it payable to a
specific person
Copyright 2004 by Nelson, a division of Thomson Canada Limited.

25-15

ELECTRONIC BANKING
ELECTRONIC BANKING
financial transactions through the use of
computers, telephones, or other electronic
means
credit card transactions involve two
contracts one between the issuer and the
user and the second between the credit card
company and the merchant

Copyright 2004 by Nelson, a division of Thomson Canada Limited.

25-16

ELECTRONIC BANKING
RISKS
methods and potential for fraud are
changed and expanded
transmission failure

LESSENING RISK
banking contracts contain provisions for
covering the risk of electronic transactions
international rules designed to deal with the
obligations of the parties
Copyright 2004 by Nelson, a division of Thomson Canada Limited.

25-17

TECHNOLOGY AND THE LAW

ELECTRONIC CASH AND PAYMENT
SYSTEMS
ATMs, telephone banking and online banking,
debit cards, electronic money, digital cash
legal issues
existing laws apply to paper documents
risk of system crashes
security and privacy of data and fraud

Copyright 2004 by Nelson, a division of Thomson Canada Limited.

25-18

METHODS OF PAYMENT
FORM OF PAYMENT

NATURE OF
PAYMENT

RISK FOR PERSON

ACCEPTINGPAYMENT

CASH
CASH
immediate
money may be
counterfeit or
proceeds of a crime

CHEQUE
deposited

may be insufficient funds

in account or cheque may
be forged

Copyright 2004 by Nelson, a division of Thomson Canada Limited.

Figure 25.4 (continued)

25-19

METHODS OF PAYMENT
FORM OF PAYMENT

NATURE OF
PAYMENT

RISK FOR PERSON

ACCEPTINGPAYMENT

CREDIT CARD
guaranteed
DEBIT CARD

CREDIT

immediate
transfer
payment at a
later date

Copyright 2004 by Nelson, a division of Thomson Canada Limited.

risk is borne largely

by the card provider
risk is largely borne
by the payment system

the debtor may

be unwilling to pay
Figure 25.4

25-20