CHAPTER 20 INTRODUCTION TO NEGOTIABLES: UCC ARTICLES 3 AND 7 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 HISTORICAL OVERVIEW Negotiable instruments present in societies that have developed a commercial system. Negotiable instruments present in societies that have developed a commercial system. Negotiable instruments used to represent obligations to pay money. Negotiable instruments used to represent obligations to pay money. Negotiable documents issued in connection with commercial shipping and storage of goods. Negotiable documents issued in connection with commercial shipping and storage of goods. Negotiable instruments present in societies that have developed a commercial system. Negotiable instruments present in societies that have developed a commercial system. Negotiable instruments used to represent obligations to pay money. Negotiable instruments used to represent obligations to pay money. Negotiable documents issued in connection with commercial shipping and storage of goods. Negotiable documents issued in connection with commercial shipping and storage of goods.

© 2004 West Legal Studies in Business A Division of Thomson Learning BUSINESS LAW: Cases & Principles Davidson Knowles Forsythe 8 th Ed. 3 HISTORICAL OVERVIEW The Uniform Negotiable Instrument Law (NIL) was designed to unify and codify rules and laws regarding all negotiable commercial documents. The Uniform Negotiable Instrument Law (NIL) was designed to unify and codify rules and laws regarding all negotiable commercial documents. The Uniform Commercial Code (UCC) written to comply more readily with demands of the modern business world. The Uniform Commercial Code (UCC) written to comply more readily with demands of the modern business world. Today commercial documents are governed by UCC. Today commercial documents are governed by UCC. The Uniform Negotiable Instrument Law (NIL) was designed to unify and codify rules and laws regarding all negotiable commercial documents. The Uniform Negotiable Instrument Law (NIL) was designed to unify and codify rules and laws regarding all negotiable commercial documents. The Uniform Commercial Code (UCC) written to comply more readily with demands of the modern business world. The Uniform Commercial Code (UCC) written to comply more readily with demands of the modern business world. Today commercial documents are governed by UCC. Today commercial documents are governed by UCC.

© 2004 West Legal Studies in Business A Division of Thomson Learning BUSINESS LAW: Cases & Principles Davidson Knowles Forsythe 8 th Ed. 4 THE SCOPE OF ARTICLE 3 Covers negotiable instruments. Covers negotiable instruments. Article 3 of the Code governs negotiable instruments, but does not govern money, documents of title, or securities. Article 3 of the Code governs negotiable instruments, but does not govern money, documents of title, or securities. If negotiable instrument does not qualify, likely governed by common law provisions. If negotiable instrument does not qualify, likely governed by common law provisions. Covers negotiable instruments. Covers negotiable instruments. Article 3 of the Code governs negotiable instruments, but does not govern money, documents of title, or securities. Article 3 of the Code governs negotiable instruments, but does not govern money, documents of title, or securities. If negotiable instrument does not qualify, likely governed by common law provisions. If negotiable instrument does not qualify, likely governed by common law provisions.

© 2004 West Legal Studies in Business A Division of Thomson Learning BUSINESS LAW: Cases & Principles Davidson Knowles Forsythe 8 th Ed. 5 THE SCOPE OF ARTICLE 3 Negotiable instrument: unconditional promise or order to pay a fixed amount of money, with or without interest or other charges described in promise or order if: Negotiable instrument: unconditional promise or order to pay a fixed amount of money, with or without interest or other charges described in promise or order if: – Payable to bearer or order – 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 payment. Negotiable instrument: unconditional promise or order to pay a fixed amount of money, with or without interest or other charges described in promise or order if: Negotiable instrument: unconditional promise or order to pay a fixed amount of money, with or without interest or other charges described in promise or order if: – Payable to bearer or order – 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 payment.

© 2004 West Legal Studies in Business A Division of Thomson Learning BUSINESS LAW: Cases & Principles Davidson Knowles Forsythe 8 th Ed. 6 USES OF NEGOTIABLE INSTRUMENTS Negotiable instruments serve as substitutes for money. Negotiable instruments serve as substitutes for money. Examples of negotiable instruments include: Examples of negotiable instruments include: – Checks; – Drafts; – Promissory notes; – certificates of deposit. Negotiable instruments serve as substitutes for money. Negotiable instruments serve as substitutes for money. Examples of negotiable instruments include: Examples of negotiable instruments include: – Checks; – Drafts; – Promissory notes; – certificates of deposit.

© 2004 West Legal Studies in Business A Division of Thomson Learning BUSINESS LAW: Cases & Principles Davidson Knowles Forsythe 8 th Ed. 7 CHECKS Widely used because easily written, carried, and accepted. Widely used because easily written, carried, and accepted. Safer than carrying cash. Safer than carrying cash. Types of checks: Types of checks: – Cashier’s check; – Teller’s check; – Traveler’s check; – Credit union check. Widely used because easily written, carried, and accepted. Widely used because easily written, carried, and accepted. Safer than carrying cash. Safer than carrying cash. Types of checks: Types of checks: – Cashier’s check; – Teller’s check; – Traveler’s check; – Credit union check.

© 2004 West Legal Studies in Business A Division of Thomson Learning BUSINESS LAW: Cases & Principles Davidson Knowles Forsythe 8 th Ed. 8 BANK DRAFTS Used by businesses to pay for merchandise ordered, especially when buyer and seller are in different states. Used by businesses to pay for merchandise ordered, especially when buyer and seller are in different states. Payable “at sight” or “time drafts.” Payable “at sight” or “time drafts.” Drafting accounts offer same privileges as to depositors of banks. Drafting accounts offer same privileges as to depositors of banks. Used by businesses to pay for merchandise ordered, especially when buyer and seller are in different states. Used by businesses to pay for merchandise ordered, especially when buyer and seller are in different states. Payable “at sight” or “time drafts.” Payable “at sight” or “time drafts.” Drafting accounts offer same privileges as to depositors of banks. Drafting accounts offer same privileges as to depositors of banks.

© 2004 West Legal Studies in Business A Division of Thomson Learning BUSINESS LAW: Cases & Principles Davidson Knowles Forsythe 8 th Ed. 9 PROMISSORY NOTES Used as instruments of credit. Used as instruments of credit. Proves existence of debt. Proves existence of debt. Amount owed. Amount owed. Manner of payment. Manner of payment. Other terms important to the loan agreement. Other terms important to the loan agreement. Used as instruments of credit. Used as instruments of credit. Proves existence of debt. Proves existence of debt. Amount owed. Amount owed. Manner of payment. Manner of payment. Other terms important to the loan agreement. Other terms important to the loan agreement.

© 2004 West Legal Studies in Business A Division of Thomson Learning BUSINESS LAW: Cases & Principles Davidson Knowles Forsythe 8 th Ed. 10 CERTIFICATES OF DEPOSIT Issued by a bank showing a debt owed to a depositor. Issued by a bank showing a debt owed to a depositor. Credit instruments. Credit instruments. Recognize money “borrowed” by the bank from its depositor. Recognize money “borrowed” by the bank from its depositor. Issued by a bank showing a debt owed to a depositor. Issued by a bank showing a debt owed to a depositor. Credit instruments. Credit instruments. Recognize money “borrowed” by the bank from its depositor. Recognize money “borrowed” by the bank from its depositor.

© 2004 West Legal Studies in Business A Division of Thomson Learning BUSINESS LAW: Cases & Principles Davidson Knowles Forsythe 8 th Ed. 11 FUNCTIONS AND FORMS Negotiable instruments have two functions: Negotiable instruments have two functions: – Designed to serve as substitute for money. – Designed to serve as credit instruments. Negotiable instrument presumed to be a contract, but not every contract is negotiable instrument. Negotiable instrument presumed to be a contract, but not every contract is negotiable instrument. Negotiable instruments must be: Negotiable instruments must be: – 1) Current in trade. – 2) Payable in money. Negotiable instruments have two functions: Negotiable instruments have two functions: – Designed to serve as substitute for money. – Designed to serve as credit instruments. Negotiable instrument presumed to be a contract, but not every contract is negotiable instrument. Negotiable instrument presumed to be a contract, but not every contract is negotiable instrument. Negotiable instruments must be: Negotiable instruments must be: – 1) Current in trade. – 2) Payable in money.

© 2004 West Legal Studies in Business A Division of Thomson Learning BUSINESS LAW: Cases & Principles Davidson Knowles Forsythe 8 th Ed. 12 Drafts and checks are orders to pay a sum of money known as order paper. Drafts and checks are orders to pay a sum of money known as order paper. Promissory notes and certificates of deposit are promises to pay a sum of money known as promise paper. Promissory notes and certificates of deposit are promises to pay a sum of money known as promise paper. Drafts and checks are orders to pay a sum of money known as order paper. Drafts and checks are orders to pay a sum of money known as order paper. Promissory notes and certificates of deposit are promises to pay a sum of money known as promise paper. Promissory notes and certificates of deposit are promises to pay a sum of money known as promise paper. FUNCTIONS AND FORMS

© 2004 West Legal Studies in Business A Division of Thomson Learning BUSINESS LAW: Cases & Principles Davidson Knowles Forsythe 8 th Ed. 13 PAPER CONTAINING AN ORDER (“THREE-PARTY” PAPER) Instrument contains an order to pay money and at least three parties are to fill the legal roles. Instrument contains an order to pay money and at least three parties are to fill the legal roles. Checks and Drafts contain order to pay money and involve three parties, which are: Checks and Drafts contain order to pay money and involve three parties, which are: – Drawer; – Drawee; and – Payee. Instrument contains an order to pay money and at least three parties are to fill the legal roles. Instrument contains an order to pay money and at least three parties are to fill the legal roles. Checks and Drafts contain order to pay money and involve three parties, which are: Checks and Drafts contain order to pay money and involve three parties, which are: – Drawer; – Drawee; and – Payee.

© 2004 West Legal Studies in Business A Division of Thomson Learning BUSINESS LAW: Cases & Principles Davidson Knowles Forsythe 8 th Ed. 14 Drafts. Drafts. – Drawer issues an instrument to a second party, the payee. – Payee expects to receive money from third party, the drawee. – Drawer issues an order to the drawee to pay a sum of money. Drafts. Drafts. – Drawer issues an instrument to a second party, the payee. – Payee expects to receive money from third party, the drawee. – Drawer issues an order to the drawee to pay a sum of money. PAPER CONTAINING AN ORDER (“THREE-PARTY” PAPER)

© 2004 West Legal Studies in Business A Division of Thomson Learning BUSINESS LAW: Cases & Principles Davidson Knowles Forsythe 8 th Ed. 15 Checks. Checks. – Special type of draft. – Differences between checks and drafts: Check is a demand instrument and a draft may be a demand or a time instrument. Check is a demand instrument and a draft may be a demand or a time instrument. Check must be drawn on a bank or payable at or through a bank and anyone may be the drawee on a draft. Check must be drawn on a bank or payable at or through a bank and anyone may be the drawee on a draft. Checks. Checks. – Special type of draft. – Differences between checks and drafts: Check is a demand instrument and a draft may be a demand or a time instrument. Check is a demand instrument and a draft may be a demand or a time instrument. Check must be drawn on a bank or payable at or through a bank and anyone may be the drawee on a draft. Check must be drawn on a bank or payable at or through a bank and anyone may be the drawee on a draft. PAPER CONTAINING AN ORDER (“THREE-PARTY” PAPER)

© 2004 West Legal Studies in Business A Division of Thomson Learning BUSINESS LAW: Cases & Principles Davidson Knowles Forsythe 8 th Ed. 16 Checks (cont’d). Checks (cont’d). – The Order. Demand drawee that payment be made. Demand drawee that payment be made. The order is the word pay. The order is the word pay. – The Drawer. Person who draws order instrument, gives the order to the drawee, and issues the instrument to the payee. Person who draws order instrument, gives the order to the drawee, and issues the instrument to the payee. Checks (cont’d). Checks (cont’d). – The Order. Demand drawee that payment be made. Demand drawee that payment be made. The order is the word pay. The order is the word pay. – The Drawer. Person who draws order instrument, gives the order to the drawee, and issues the instrument to the payee. Person who draws order instrument, gives the order to the drawee, and issues the instrument to the payee. PAPER CONTAINING AN ORDER (“THREE-PARTY” PAPER)

© 2004 West Legal Studies in Business A Division of Thomson Learning BUSINESS LAW: Cases & Principles Davidson Knowles Forsythe 8 th Ed. 17 Checks (Cont’d). Checks (Cont’d). – The Drawee. Party to whom the order on the draft is directed and is expected to make payment to the payee. Party to whom the order on the draft is directed and is expected to make payment to the payee. – The Payee. Person to whom the instrument is originally issued. Person to whom the instrument is originally issued. Checks (Cont’d). Checks (Cont’d). – The Drawee. Party to whom the order on the draft is directed and is expected to make payment to the payee. Party to whom the order on the draft is directed and is expected to make payment to the payee. – The Payee. Person to whom the instrument is originally issued. Person to whom the instrument is originally issued. PAPER CONTAINING AN ORDER (“THREE-PARTY” PAPER)

© 2004 West Legal Studies in Business A Division of Thomson Learning BUSINESS LAW: Cases & Principles Davidson Knowles Forsythe 8 th Ed. 18 PAPER CONTAINING A PROMISE (“TWO-PARTY” PAPER) Instrument contains a promise and only two parties are necessary to fulfill legal roles involved on the instrument. Instrument contains a promise and only two parties are necessary to fulfill legal roles involved on the instrument. Negotiable instrument involves notes and certificates of deposit. Negotiable instrument involves notes and certificates of deposit. Two parties are: Two parties are: – Maker, and – Payee. Instrument contains a promise and only two parties are necessary to fulfill legal roles involved on the instrument. Instrument contains a promise and only two parties are necessary to fulfill legal roles involved on the instrument. Negotiable instrument involves notes and certificates of deposit. Negotiable instrument involves notes and certificates of deposit. Two parties are: Two parties are: – Maker, and – Payee.

© 2004 West Legal Studies in Business A Division of Thomson Learning BUSINESS LAW: Cases & Principles Davidson Knowles Forsythe 8 th Ed. 19 (Promissory) Notes. (Promissory) Notes. – Oldest form of negotiable instrument. – Used as credit instrument. – May call for whole or installment payments. – May specify the payment of interest in addition to the principal. – May have interest included in the principal. – May be interest free. – May recite details about collateral. (Promissory) Notes. (Promissory) Notes. – Oldest form of negotiable instrument. – Used as credit instrument. – May call for whole or installment payments. – May specify the payment of interest in addition to the principal. – May have interest included in the principal. – May be interest free. – May recite details about collateral. PAPER CONTAINING A PROMISE (“TWO-PARTY” PAPER)

© 2004 West Legal Studies in Business A Division of Thomson Learning BUSINESS LAW: Cases & Principles Davidson Knowles Forsythe 8 th Ed. 20 (Promissory) Notes. (Promissory) Notes. – Element of Notes: The promise. The promise. Words of negotiability. Words of negotiability. The payee. The payee. Amount borrowed. Amount borrowed. Signature of the maker. Signature of the maker. (Promissory) Notes. (Promissory) Notes. – Element of Notes: The promise. The promise. Words of negotiability. Words of negotiability. The payee. The payee. Amount borrowed. Amount borrowed. Signature of the maker. Signature of the maker. PAPER CONTAINING A PROMISE (“TWO-PARTY” PAPER)

© 2004 West Legal Studies in Business A Division of Thomson Learning BUSINESS LAW: Cases & Principles Davidson Knowles Forsythe 8 th Ed. 21 Certificate of Deposit. Certificate of Deposit. – Special type of note issued by a bank as acknowledgement of money received, with promise to repay the money. – Not a savings account. – Commonly is a time deposit of money with a bank. – Pays higher interest. – Becoming extinct. Certificate of Deposit. Certificate of Deposit. – Special type of note issued by a bank as acknowledgement of money received, with promise to repay the money. – Not a savings account. – Commonly is a time deposit of money with a bank. – Pays higher interest. – Becoming extinct. PAPER CONTAINING A PROMISE (“TWO-PARTY” PAPER)

© 2004 West Legal Studies in Business A Division of Thomson Learning BUSINESS LAW: Cases & Principles Davidson Knowles Forsythe 8 th Ed. 22 Certificates of Deposit. Certificates of Deposit. – The Promise. Maker of the instrument promises to pay an amount of money to the payee or to a holder. Maker of the instrument promises to pay an amount of money to the payee or to a holder. – The Maker Makes promise to pay to the order of (the payee). Makes promise to pay to the order of (the payee). Issues the instrument to the payee. Issues the instrument to the payee. Pays the instrument upon proper presentment. Pays the instrument upon proper presentment. – The Payee Party to whom the instrument is originally issued. Party to whom the instrument is originally issued. Certificates of Deposit. Certificates of Deposit. – The Promise. Maker of the instrument promises to pay an amount of money to the payee or to a holder. Maker of the instrument promises to pay an amount of money to the payee or to a holder. – The Maker Makes promise to pay to the order of (the payee). Makes promise to pay to the order of (the payee). Issues the instrument to the payee. Issues the instrument to the payee. Pays the instrument upon proper presentment. Pays the instrument upon proper presentment. – The Payee Party to whom the instrument is originally issued. Party to whom the instrument is originally issued. PAPER CONTAINING A PROMISE (“TWO-PARTY” PAPER)

© 2004 West Legal Studies in Business A Division of Thomson Learning BUSINESS LAW: Cases & Principles Davidson Knowles Forsythe 8 th Ed. 23 Certificates of Deposit. Certificates of Deposit. – Elements of Certificate of Deposit: Date of issue. Date of issue. Amount of “deposit” in numbers and words. Amount of “deposit” in numbers and words. The payee. The payee. Maturity date. Maturity date. The amount to be paid. The amount to be paid. Signature of maker. Signature of maker. Certificates of Deposit. Certificates of Deposit. – Elements of Certificate of Deposit: Date of issue. Date of issue. Amount of “deposit” in numbers and words. Amount of “deposit” in numbers and words. The payee. The payee. Maturity date. Maturity date. The amount to be paid. The amount to be paid. Signature of maker. Signature of maker. PAPER CONTAINING A PROMISE (“TWO-PARTY” PAPER)

© 2004 West Legal Studies in Business A Division of Thomson Learning BUSINESS LAW: Cases & Principles Davidson Knowles Forsythe 8 th Ed. 24 THE SCOPE OF ARTICLE 7 UCC treats the topic of documents of title. UCC treats the topic of documents of title. Specifies rights and duties of all parties in handling of documents of title, whether negotiable or nonnegotiable. Specifies rights and duties of all parties in handling of documents of title, whether negotiable or nonnegotiable. – Part 2 deals with warehouse receipts. – Part 3 deals with bills of lading. – Part 5 deals with the negotiation and transfer of a document of title. UCC treats the topic of documents of title. UCC treats the topic of documents of title. Specifies rights and duties of all parties in handling of documents of title, whether negotiable or nonnegotiable. Specifies rights and duties of all parties in handling of documents of title, whether negotiable or nonnegotiable. – Part 2 deals with warehouse receipts. – Part 3 deals with bills of lading. – Part 5 deals with the negotiation and transfer of a document of title.

© 2004 West Legal Studies in Business A Division of Thomson Learning BUSINESS LAW: Cases & Principles Davidson Knowles Forsythe 8 th Ed. 25 USES AND FORMS OF DOCUMENTS OF TITLE Essential function of document of title is reflect rights of owner when goods turned over to custody and care of bailee. Essential function of document of title is reflect rights of owner when goods turned over to custody and care of bailee. Enables owner to transfer title to goods without reclaiming possession of goods in order to make sale. Enables owner to transfer title to goods without reclaiming possession of goods in order to make sale. Owner can negotiate document of title, in so doing, owner also transfers title to goods to person receiving the negotiation. Owner can negotiate document of title, in so doing, owner also transfers title to goods to person receiving the negotiation. Essential function of document of title is reflect rights of owner when goods turned over to custody and care of bailee. Essential function of document of title is reflect rights of owner when goods turned over to custody and care of bailee. Enables owner to transfer title to goods without reclaiming possession of goods in order to make sale. Enables owner to transfer title to goods without reclaiming possession of goods in order to make sale. Owner can negotiate document of title, in so doing, owner also transfers title to goods to person receiving the negotiation. Owner can negotiate document of title, in so doing, owner also transfers title to goods to person receiving the negotiation.

© 2004 West Legal Studies in Business A Division of Thomson Learning BUSINESS LAW: Cases & Principles Davidson Knowles Forsythe 8 th Ed. 26 Warehouse Receipts. Warehouse Receipts. – Issued by a person who takes goods for storage. – Contain at least: Location of warehouse. Location of warehouse. Date the receipt for the goods is issued. Date the receipt for the goods is issued. Number of the receipt. Number of the receipt. Statement whether stored goods delivered to bailor, bearer, named person, that person’s order. Statement whether stored goods delivered to bailor, bearer, named person, that person’s order. Fees and expenses for storage. Fees and expenses for storage. Description of goods or the packages stored. Description of goods or the packages stored. Signature of warehouseman or agent. Signature of warehouseman or agent. Warehouse Receipts. Warehouse Receipts. – Issued by a person who takes goods for storage. – Contain at least: Location of warehouse. Location of warehouse. Date the receipt for the goods is issued. Date the receipt for the goods is issued. Number of the receipt. Number of the receipt. Statement whether stored goods delivered to bailor, bearer, named person, that person’s order. Statement whether stored goods delivered to bailor, bearer, named person, that person’s order. Fees and expenses for storage. Fees and expenses for storage. Description of goods or the packages stored. Description of goods or the packages stored. Signature of warehouseman or agent. Signature of warehouseman or agent. USES AND FORMS OF DOCUMENTS OF TITLE

© 2004 West Legal Studies in Business A Division of Thomson Learning BUSINESS LAW: Cases & Principles Davidson Knowles Forsythe 8 th Ed. 27 – Warehouseman assumes liability for any damages to goods if damages are caused by failure to exercise reasonable care. Bills of Lading. Bills of Lading. – Issued by carrier who is transporting goods. – Consignor arranges transportation. – Consignee receives goods. – Carrier is issuer of bill of lading. – Carrier liable for any mis-description or irregularity unless properly qualified by words. – Warehouseman assumes liability for any damages to goods if damages are caused by failure to exercise reasonable care. Bills of Lading. Bills of Lading. – Issued by carrier who is transporting goods. – Consignor arranges transportation. – Consignee receives goods. – Carrier is issuer of bill of lading. – Carrier liable for any mis-description or irregularity unless properly qualified by words. USES AND FORMS OF DOCUMENTS OF TITLE