Question

Sam purchased a bike from ABC Bike Company. Sam gave the bike company a check for $400, the price of the bike. ABC negotiates the check to Atlantic Electric , who takes the check in good faith, for value and without notice of a claim or defense. Sam later discovers that ABC delivered the wrong bike to him and refuses to honor the check. In a conflict between Sam and Atlantic Electric, who wins? Why?

Answer 1

In a conflict between Sam and Atlantic Electric, Atlantic Electric wins.

Issue: Sam gives a check to ABC Bike Company for the purchase of a bike. The check is negotiated to Atlantic Electric Company, who takes the check in good faith, for value, and without notice of a defect in title. It turns out that the wrong bike had been delivered to Sam, and therefore he refuses to honor the check when presented. A conflict breaks out between Sam and Atlantic Electric.

Law: A check is a negotiable instrument, and the law pertaining to negotiable instruments recognizes the privileges enjoyed by a holder in due course. All prior parties would be liable to a holder in due course till the instrument is duly discharged,and the holder in due course is not affected by any defect in title of a prior party. A negotiable instrument is an exception to the rule of Nemo Dat Quod Non Habet, i.e one cannot give what he does not have. If a person does not have a valid titles, he cannot convey one. But if a negotiable instrument is negotiated to a holder in due course, the latter gets a title free of any defects in that of the endorser.

Application : Atlantic Electric had obtained the instrument from ABC before its maturity, in good faith, without notice of any claim or defence, and the instrument is otherwise complete and regular on its face. Therefore, Atlantic Electric is a holder in due course, and the defect in ABC's title to the check does not affect them. Every prior party is liable to Atlantic until the check is discharged by payment. Hence, Atlantic is entitled to be paid by Sam, the drawer of the check. If Sam does not pay, ABC is liable to pay Atlantic.

Conclusion: Atlantic Electric wins.