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I am trying to understand the underlying contract of an endorsed cheque a bit better, and would love to know how the liabilities are determined in the following situation:

Alice writes a cheque to Mallory over 100 CAD. Mallory endorses the cheque to Dave. Now Mallory goes back to Alice and claims the cheque has been lost. Alice writes Mallory a new cheque, and Mallory cashes the cheque.

Dave is a bit slow and tries to cash his endorsed cheque now. It has been stopped. Dave goes to his favorite lawyer and asks him what to do.

I can think of a few possibilities:

1) The cheque is a valid contract between Alice and Dave, and a court can order Alice to pay Dave the amount of 100 CAD.

2) The liabilities follow the endorsement. That is Alice owes Mallory 100 CAD, and Mallory owes Dave 100 CAD (and usually a bank short-fuses this chain of liability).

3) Alice and Mallory are jointly liable. If Mallory is bankrupt, Alice would owe Dave 100 CAD.

4) Since Mallory committed fraud she is liable. If Mallory is bankcrupt, Dave will get nothing.

5) There is no precedence and a judge would have to come up with something to sort this out.

Note the malicious behavior happens after the cheque has been endorsed to Dave. It happens in Canada. I am afraid I do not understand http://laws.justice.gc.ca/eng/acts/B-4/FullText.html well enough to sort this out myself.

I am interested in an argument or an authoritative reference. Of course, I also appreciate your opinion. I am happy to clarify, if I use the wrong terminology.

closed as off-topic by mhoran_psprep, Dilip Sarwate, BobbyScon, Nathan L, Dheer May 22 '18 at 1:23

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    I'm voting to close this question as off-topic because it is a legal not a financial question. – mhoran_psprep May 21 '18 at 20:04
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    I'm voting to close this question as off-topic because it is not about a persona finance issue that the OP is facing, and also more about a legal issue ("Who is liable?") than a money matter. – Dilip Sarwate May 21 '18 at 20:04
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    Cheques are still used widely in north america, and understanding the potential (even theoretical) implications of drafting a cheque seem relevant to personal banking. – mna May 21 '18 at 20:28
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    While checks ('Murica) are indeed still used, your question is about the legality of using or redeeming checks rather then a personal finance approach. There's some overlap, but the question is better suited for law.stackexchange.com – BobbyScon May 21 '18 at 20:32
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    well... "The cheque is a valid contract [...]" The check is not a contract, it's payment. Probably payment related to a contract of some sort, and probably could be used to substantiate the existence of an unwritten contract, but the check is not, itself, the contract. Contracts are separate from payment. Alice owed Mallory $100, and has paid it. Mallory owes Dave $100 and apparently has not successfully paid it, what check goes to who doesn't really matter, as long as everyone is ultimately paid what they're owed. – quid May 21 '18 at 21:42
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I was taught in school -- in the United States -- that liability is reverse order of the endorsements. When Dave tries to cash the check, if the check was stopped or it bounces or whatever, Mallory is liable as the most recent endorser.

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