Negotiable Instruments

1
Negotiable Instruments

• Chapter 26

2
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

3
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

4
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

5
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.
6
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.

7
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.

8
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
9
To Order or Bearer

• 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

• 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

10
Payable at a Definite Time or Upon 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.

• A promise or order that does not state any time
  of payment is payable on demand.
• Checks by definition are payable on demand