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.