Negotiable Instruments

Chapter 26

Negotiable Instruments• Are formal written contracts used extensively in business

transactions as a substitute for money and to extend credit.

• You should be able to:

– Recognize the various instruments

– Recognize the distinction between the transfer of an instrument by assignment and negotiation

– Verify the requirements of negotiability

– Identify the parties to a note and a draft

– Recognize the types of endorsements

– Understand liability of primary and secondary parties

– Understand the HDC concept, particularly the distinction between real and personal defenses

Types of Commercial Paper• Drafts

– drawer orders drawee to pay payee– time or sight

• Checks - a form of a draft, drawn on a bank• Notes - written promise between 2 parties

– Maker and payee– Promissory note– Time notes and demand notes

• Certificates of Deposit - acknowledgment by bank of receipt of money with an engagement by bank to repay it

Definition• A negotiable instrument is an “unconditional

signed writing of a promise or order to pay a sum certain in money to order or bearer at a definite time or upon demand.”

• Requirements for Negotiability– signed

– writing

– unconditional

– promise or order to pay

– sum certain in money

– to order or bearer

– at definite time or upon demand

Signed Writing

• Signed by maker or drawer

• A writing includes printing, typing, or any other intentional reduction to a tangible form.

• The writing must be on material that has a degree of permanence and is freely transferable in the ordinary course of business

• Any form of signature

An Agent may sign.Signature can appear anywhere.

Unconditional • Must be unconditional• It will be conditional if

instrument is:– Subject to or governed

by an express condition

– Reference to another agreement

• Payment out of a particular fund is NOT a condition which would destroy negotiability.

Promise or Order to Pay• A promise is a signed

undertaking to pay an obligation, i.e.,”I promise” evidences a promise.

• Mere acknowledgement of a debt is not a promise.

• An order is a direction to pay, a request is not an order.

Sum Certain in

Money

• Variable interest rates are okay and do not destroy negotiability

• Foreign money is okay• Must be able to compute

the amount from the instrument amount

• Amount may vary depending on a particular formula and still be certain

• Interest must be provided for in the instrument

Exact amountCurrency only

To Order or Bearer

• Order paper enables a person identified in the instrument to designate the payee.

• Order paper allows the maker or drawer to transfer to a specific person– Payable to order of Y– Pay to Y or order

• Bearer Paper does not designate a specific payee; the maker or drawer agrees to pay anyone who presents the instrument for payment– Pay bearer– Pay to order or bearer– Pay to Y or bearer– Pay any person

presenting– Pay $500– Pay cash– Pay to order of cash

Payable at a Definite Time

or Upon Demand

• A promise or order that does not state any time of payment is payable on demand.

• Checks by definition are payable on demand

• At a fixed date readily ascertainable, payable at a definite time

• On lapse of a definite period after sight or acceptance

• Subject to rights of– Prepayment– Acceleration– Extension at the option of

the holder– Extension to a further

definite time at option of maker or acceptor or automatically upon or after a specified event.