CHAPTER 21 NEGOTIABILITY DAVIDSON, KNOWLES & FORSYTHE Business Law: Cases and Principles in the Legal Environment (8 th Ed.)

© 2004 West Legal Studies in Business A Division of Thomson Learning BUSINESS LAW: Cases & Principles Davidson Knowles Forsythe 8 th Ed. 2 FORMAL REQUIREMENTS FOR NEGOTIABILITY: ARTICLE 3 Negotiable instrument is a formal contract and carries rights under contract law. Negotiable instrument is a formal contract and carries rights under contract law. Instrument must meet each and every requirement in order to fall within coverage of Article 3. Instrument must meet each and every requirement in order to fall within coverage of Article 3. Missing elements removes instrument from Article 3 and places it under common law. Missing elements removes instrument from Article 3 and places it under common law.

© 2004 West Legal Studies in Business A Division of Thomson Learning BUSINESS LAW: Cases & Principles Davidson Knowles Forsythe 8 th Ed. 3 FORMAL REQUIREMENTS FOR NEGOTIABILITY: ARTICLE 3 Requirements for negotiability: Requirements for negotiability: – Payable to bearer, to order at time it is issued, or first comes into possession of a holder. – Payable on demand or at a definite time. – Does not state any other undertaking or instruction by person promising or ordering payment to do any act in addition to the payment of money.

© 2004 West Legal Studies in Business A Division of Thomson Learning BUSINESS LAW: Cases & Principles Davidson Knowles Forsythe 8 th Ed. 4 FORMAL REQUIREMENTS FOR NEGOTIABILITY: ARTICLE 3 To qualify as negotiable instrument: To qualify as negotiable instrument: – Be in writing. – Be signed by maker or drawer. – Contain an unconditional promise or order to pay. – Be payable on demand or definite time. – Be payable to order or to bearer.

© 2004 West Legal Studies in Business A Division of Thomson Learning BUSINESS LAW: Cases & Principles Davidson Knowles Forsythe 8 th Ed. 5 FORMAL REQUIREMENTS FOR NEGOTIABILITY: ARTICLE 3 Writing Requirement. Writing Requirement. – Right must be tangible. – Simplest way to prove that the right exists. – Negotiable instruments: Checks; Checks; Drafts; Drafts; Certificates of Deposit; or Certificates of Deposit; or Notes. Notes. – These writings have blanks and are pre-encoded with magnetic ink.

© 2004 West Legal Studies in Business A Division of Thomson Learning BUSINESS LAW: Cases & Principles Davidson Knowles Forsythe 8 th Ed. 6 FORMAL REQUIREMENTS FOR NEGOTIABILITY: ARTICLE 3 Writing Requirement. Writing Requirement. – Commercial paper is equally valid: When prepared on a scratch paper. When prepared on a scratch paper. Blank sheet of paper. Blank sheet of paper. Or any other relatively permanent thing. Or any other relatively permanent thing.

© 2004 West Legal Studies in Business A Division of Thomson Learning BUSINESS LAW: Cases & Principles Davidson Knowles Forsythe 8 th Ed. 7 FORMAL REQUIREMENTS FOR NEGOTIABILITY: ARTICLE 3 Signature Requirement. Signature Requirement. – Protection from fraud or trickery. – Types of signatures: Manual subscription. Manual subscription. Any symbol executed or adopted by a party with present intention to authenticate a writing. Any symbol executed or adopted by a party with present intention to authenticate a writing. – No difference where instrument is signed.

© 2004 West Legal Studies in Business A Division of Thomson Learning BUSINESS LAW: Cases & Principles Davidson Knowles Forsythe 8 th Ed. 8 FORMAL REQUIREMENTS FOR NEGOTIABILITY: ARTICLE 3 Unconditional Promise or Order Requirement. Unconditional Promise or Order Requirement. – Promise or order unconditional unless it states: An express condition to payment. An express condition to payment. The promise or order is subject to or governed by another writing. The promise or order is subject to or governed by another writing. Rights or obligations with respect to promise or order are stated in another writing. Rights or obligations with respect to promise or order are stated in another writing.

© 2004 West Legal Studies in Business A Division of Thomson Learning BUSINESS LAW: Cases & Principles Davidson Knowles Forsythe 8 th Ed. 9 FORMAL REQUIREMENTS FOR NEGOTIABILITY: ARTICLE 3 Unconditional Promise or Order Requirement. Unconditional Promise or Order Requirement. – Promise or order is not made conditional: By reference to another writing for a statement of rights. By reference to another writing for a statement of rights. Because payment is limited to resort to a particular source of funds. Because payment is limited to resort to a particular source of funds.

© 2004 West Legal Studies in Business A Division of Thomson Learning BUSINESS LAW: Cases & Principles Davidson Knowles Forsythe 8 th Ed. 10 FORMAL REQUIREMENTS FOR NEGOTIABILITY: ARTICLE 3 Unconditional Promise or Order Requirement. Unconditional Promise or Order Requirement. – Promise or order requires, as a condition to payment, a countersignature by a person whose specimen signature appears on the promise or order, the condition doesn’t make the promise or order conditional.

© 2004 West Legal Studies in Business A Division of Thomson Learning BUSINESS LAW: Cases & Principles Davidson Knowles Forsythe 8 th Ed. 11 FORMAL REQUIREMENTS FOR NEGOTIABILITY: ARTICLE 3 Fixed Amount of Money Requirement. Fixed Amount of Money Requirement. – Holder must know how much money is to be received when instrument is paid. – “Money” means a medium of exchange. – Instrument is presumed to be issued without interest unless specifically called for in instrument. – Instrument can call for payment of interest at a variable rate.

© 2004 West Legal Studies in Business A Division of Thomson Learning BUSINESS LAW: Cases & Principles Davidson Knowles Forsythe 8 th Ed. 12 FORMAL REQUIREMENTS FOR NEGOTIABILITY: ARTICLE 3 Determinable Time Requirement. Determinable Time Requirement. – Holder wants to know when payment is expected. – Instrument payable on demand or at a definite time. – Payee or holder able to tell when payable by looking at face amount of instrument.

© 2004 West Legal Studies in Business A Division of Thomson Learning BUSINESS LAW: Cases & Principles Davidson Knowles Forsythe 8 th Ed. 13 FORMAL REQUIREMENTS FOR NEGOTIABILITY: ARTICLE 3 Words of Negotiability Requirement. Words of Negotiability Requirement. – Instrument must contain words of negotiability. “Pay to the order of”; or “Pay to the order of”; or “Pay to bearer”. “Pay to bearer”. – Words important because law reads them as authorizing the free transfer of the instrument. – Failing to use these terms is denial of free transferability and denial of negotiability.

© 2004 West Legal Studies in Business A Division of Thomson Learning BUSINESS LAW: Cases & Principles Davidson Knowles Forsythe 8 th Ed. 14 CONSTRUCTION AND INTERPRETATION: ARTICLE 3 Instrument contains contradictory terms: Instrument contains contradictory terms: – Typewritten terms prevail over printed terms. – Handwritten terms prevail over both. – Words prevail over numbers.

© 2004 West Legal Studies in Business A Division of Thomson Learning BUSINESS LAW: Cases & Principles Davidson Knowles Forsythe 8 th Ed. 15 REQUIREMENTS FOR NEGOTIABILITY: ARTICLE 7 More relaxed in determining whether a document of title is negotiable. More relaxed in determining whether a document of title is negotiable. Document of title is negotiable if: Document of title is negotiable if: – Document states goods are to be delivered to “bearer” or or “order” of named person. – In international trade, if it runs to a named person or assigns.

© 2004 West Legal Studies in Business A Division of Thomson Learning BUSINESS LAW: Cases & Principles Davidson Knowles Forsythe 8 th Ed. 16 Every other document title is deemed nonnegotiable. Every other document title is deemed nonnegotiable. More concerned with the rights of the parties to the goods than with the rights of the parties in the documents covering the goods. More concerned with the rights of the parties to the goods than with the rights of the parties in the documents covering the goods. REQUIREMENTS FOR NEGOTIABILITY: ARTICLE 7