Nature and Types of Negotiable Instruments CHAPTER NINETEEN Nature and Types of Negotiable Instruments

Types of Negotiable Instruments A negotiable instrument is a special form of contract. They are classifieds into two types: Order to pay – a draft or check is an order to pay. Promise to pay – a certificate of deposit or promissory note is a promise to pay. Copyright © Houghton Mifflin Company. All rights reserved.

Certificates of Deposit and Promissory Notes Certificate of deposit – a special form of note where the bank acknowledges that a certain sum has been placed on deposit The bank promises to repay the money with interest. Promissory note – a two-party negotiable instrument that is an unconditional promise by one party to the note to pay the other Can be used to borrow money Can be used to obtain goods or services Copyright © Houghton Mifflin Company. All rights reserved.

Certificates of Deposit and Promissory Notes (continued) On a promissory note, there are two parties: The maker – the person promising to pay the money The payee – the person to whom the promise to pay was made This is also the person entitled to collect the money. Copyright © Houghton Mifflin Company. All rights reserved.

Drafts and Checks A check or draft is a three-party instrument: it is a written order by one party to a second party to pay money to a third party. The parties are: Drawer – the party who writes the order for a draft. (When you write a check, this would be you.) Drawee – the party ordered to pay the money. (When you write a check, this would be the bank.) Payee – the person to whom the money will be paid. (When you write a check, this would be the person to whom you made the check payable.) Copyright © Houghton Mifflin Company. All rights reserved.

Drafts and Checks (continued) Drafts come in two types: Time draft – a draft payable at a designated future time Sight draft – a draft payable on sight or on demand of the payee. (A check drawn on a bank is a sight draft.) A check is a specialized type of draft payable on demand: A check is a draft drawn on a bank (always the drawee.) The drawer is always the depositor. The payee is the person to whom the check is payable. Copyright © Houghton Mifflin Company. All rights reserved.

Requirements for Negotiability To be a negotiable instrument, the document must meet all of the following 7 requirements: The negotiable instrument must be in writing, and the writing must be permanent and portable. The negotiable instrument must be signed by the maker or drawer. The promise or order to pay must be unconditional. A condition may excuse future performance and thus, if the condition is not met, could also render the negotiable instrument unenforceable. Copyright © Houghton Mifflin Company. All rights reserved.

Requirements for Negotiability (continued) The negotiable instrument must be for a sum certain – the amount to be paid must be clearly stated or easily calculated in money. The negotiable instrument must be payable on demand or at a definite time. Most time instruments contain an acceleration clause that activates when a debtor fails to make a monthly payment. The instrument is still consider negotiable because it is still payable at a definite date. Copyright © Houghton Mifflin Company. All rights reserved.

Requirements for Negotiability (continued) 6. The negotiable instrument must be payable to order or bearer: A bearer paper is payable to the bearer (the person in possession of the instrument). An order paper contains the words “Pay to the order of.” 7. The negotiable instrument must name the drawee with reasonable certainty. Copyright © Houghton Mifflin Company. All rights reserved.