CHAPTER 20 INTRODUCTION TO NEGOTIABLES UCC ARTICLES 3

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. )

BUSINESS LAW: Cases & Principles Davidson • Knowles • Forsythe 8 th Ed. HISTORICAL OVERVIEW l Negotiable instruments present in societies that have developed a commercial system. l Negotiable instruments used to represent obligations to pay money. l Negotiable documents issued in connection with commercial shipping and storage of goods. © 2004 West Legal Studies in Business A Division of Thomson Learning 2

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

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

BUSINESS LAW: Cases & Principles Davidson • Knowles • Forsythe 8 th Ed. THE SCOPE OF ARTICLE 3 l 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 5

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

BUSINESS LAW: Cases & Principles Davidson • Knowles • Forsythe 8 th Ed. CHECKS l Widely used because easily written, carried, and accepted. l Safer than carrying cash. l 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 7

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

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

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

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

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

BUSINESS LAW: Cases & Principles Davidson • Knowles • Forsythe 8 th Ed. PAPER CONTAINING AN ORDER (“THREE-PARTY” PAPER) l Instrument contains an order to pay money and at least three parties are to fill the legal roles. l 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 13

BUSINESS LAW: Cases & Principles Davidson • Knowles • Forsythe 8 th Ed. PAPER CONTAINING AN ORDER (“THREE-PARTY” PAPER) l 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. © 2004 West Legal Studies in Business A Division of Thomson Learning 14

BUSINESS LAW: Cases & Principles Davidson • Knowles • Forsythe 8 th Ed. PAPER CONTAINING AN ORDER (“THREE-PARTY” PAPER) l 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. l Check must be drawn on a bank or payable at or through a bank and anyone may be the drawee on a draft. l © 2004 West Legal Studies in Business A Division of Thomson Learning 15

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

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

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

BUSINESS LAW: Cases & Principles Davidson • Knowles • Forsythe 8 th Ed. PAPER CONTAINING A PROMISE (“TWO-PARTY” PAPER) l (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. © 2004 West Legal Studies in Business A Division of Thomson Learning 19

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

BUSINESS LAW: Cases & Principles Davidson • Knowles • Forsythe 8 th Ed. PAPER CONTAINING A PROMISE (“TWO-PARTY” PAPER) l 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. © 2004 West Legal Studies in Business A Division of Thomson Learning 21

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

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

BUSINESS LAW: Cases & Principles Davidson • Knowles • Forsythe 8 th Ed. THE SCOPE OF ARTICLE 7 l UCC treats the topic of documents of title. l 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 24

BUSINESS LAW: Cases & Principles Davidson • Knowles • Forsythe 8 th Ed. USES AND FORMS OF DOCUMENTS OF TITLE l Essential function of document of title is reflect rights of owner when goods turned over to custody and care of bailee. l Enables owner to transfer title to goods without reclaiming possession of goods in order to make sale. l 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 25

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

BUSINESS LAW: Cases & Principles Davidson • Knowles • Forsythe 8 th Ed. USES AND FORMS OF DOCUMENTS OF TITLE – Warehouseman assumes liability for any damages to goods if damages are caused by failure to exercise reasonable care. l 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. © 2004 West Legal Studies in Business A Division of Thomson Learning 27