CHAPTER 21 NEGOTIABILITY

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CHAPTER 21NEGOTIABILITY
DAVIDSON, KNOWLES FORSYTHE Business Law Cases
and Principles in the Legal Environment (8th Ed.)
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FORMAL REQUIREMENTS FOR NEGOTIABILITY ARTICLE 3

• 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.
• Missing elements removes instrument from Article
  3 and places it under common law.

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FORMAL REQUIREMENTS FOR NEGOTIABILITY ARTICLE 3

• 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.

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FORMAL REQUIREMENTS FOR NEGOTIABILITY ARTICLE 3

• 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.

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FORMAL REQUIREMENTS FOR NEGOTIABILITY ARTICLE 3

• Writing Requirement.
• Right must be tangible.
• Simplest way to prove that the right exists.
• Negotiable instruments
• Checks
• Drafts
• Certificates of Deposit or
• Notes.
• These writings have blanks and are pre-encoded
  with magnetic ink.

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FORMAL REQUIREMENTS FOR NEGOTIABILITY ARTICLE 3

• Writing Requirement.
• Commercial paper is equally valid
• When prepared on a scratch paper.
• Blank sheet of paper.
• Or any other relatively permanent thing.

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FORMAL REQUIREMENTS FOR NEGOTIABILITY ARTICLE 3

• Signature Requirement.
• Protection from fraud or trickery.
• Types of signatures
• Manual subscription.
• Any symbol executed or adopted by a party with
  present intention to authenticate a writing.
• No difference where instrument is signed.

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FORMAL REQUIREMENTS FOR NEGOTIABILITY ARTICLE 3

• Unconditional Promise or Order Requirement.
• Promise or order unconditional unless it states
• An express condition to payment.
• 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.

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FORMAL REQUIREMENTS FOR NEGOTIABILITY ARTICLE 3

• Unconditional Promise or Order Requirement.
• Promise or order is not made conditional
• By reference to another writing for a statement
  of rights.
• Because payment is limited to resort to a
  particular source of funds.

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FORMAL REQUIREMENTS FOR NEGOTIABILITY ARTICLE 3

• 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 doesnt make the promise or
  order conditional.

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FORMAL REQUIREMENTS FOR NEGOTIABILITY ARTICLE 3

• 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.

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FORMAL REQUIREMENTS FOR NEGOTIABILITY ARTICLE 3

• 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.

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FORMAL REQUIREMENTS FOR NEGOTIABILITY ARTICLE 3

• Words of Negotiability Requirement.
• Instrument must contain words of negotiability.
• Pay to the order of or
• 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.

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CONSTRUCTION AND INTERPRETATION ARTICLE 3

• Instrument contains contradictory terms
• Typewritten terms prevail over printed terms.
• Handwritten terms prevail over both.
• Words prevail over numbers.

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REQUIREMENTS FOR NEGOTIABILITY ARTICLE 7

• More relaxed in determining whether a document of
  title is negotiable.
• 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.

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REQUIREMENTS FOR NEGOTIABILITY ARTICLE 7

• 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.