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 amount Currency 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.