CHAPTER 21 NEGOTIABILITY DAVIDSON KNOWLES FORSYTHE Business Law
CHAPTER 21 NEGOTIABILITY 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. FORMAL REQUIREMENTS FOR NEGOTIABILITY: ARTICLE 3 l Negotiable instrument is a formal contract and carries rights under contract law. l Instrument must meet each and every requirement in order to fall within coverage of Article 3. l Missing elements removes instrument from Article 3 and places it under common law. © 2004 West Legal Studies in Business A Division of Thomson Learning 2
BUSINESS LAW: Cases & Principles Davidson • Knowles • Forsythe 8 th Ed. FORMAL REQUIREMENTS FOR NEGOTIABILITY: ARTICLE 3 l 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 3
BUSINESS LAW: Cases & Principles Davidson • Knowles • Forsythe 8 th Ed. FORMAL REQUIREMENTS FOR NEGOTIABILITY: ARTICLE 3 l 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 4
BUSINESS LAW: Cases & Principles Davidson • Knowles • Forsythe 8 th Ed. FORMAL REQUIREMENTS FOR NEGOTIABILITY: ARTICLE 3 l Writing Requirement. – Right must be tangible. – Simplest way to prove that the right exists. – Negotiable instruments: Checks; l Drafts; l Certificates of Deposit; or l Notes. l – These writings have blanks and are pre-encoded with magnetic ink. © 2004 West Legal Studies in Business A Division of Thomson Learning 5
BUSINESS LAW: Cases & Principles Davidson • Knowles • Forsythe 8 th Ed. FORMAL REQUIREMENTS FOR NEGOTIABILITY: ARTICLE 3 l Writing Requirement. – Commercial paper is equally valid: When prepared on a scratch paper. l Blank sheet of paper. l Or any other relatively permanent thing. l © 2004 West Legal Studies in Business A Division of Thomson Learning 6
BUSINESS LAW: Cases & Principles Davidson • Knowles • Forsythe 8 th Ed. FORMAL REQUIREMENTS FOR NEGOTIABILITY: ARTICLE 3 l Signature Requirement. – Protection from fraud or trickery. – Types of signatures: Manual subscription. l Any symbol executed or adopted by a party with present intention to authenticate a writing. l – No difference where instrument is signed. © 2004 West Legal Studies in Business A Division of Thomson Learning 7
BUSINESS LAW: Cases & Principles Davidson • Knowles • Forsythe 8 th Ed. FORMAL REQUIREMENTS FOR NEGOTIABILITY: ARTICLE 3 l Unconditional Promise or Order Requirement. – Promise or order unconditional unless it states: An express condition to payment. l The promise or order is subject to or governed by another writing. l Rights or obligations with respect to promise or order are stated in another writing. l © 2004 West Legal Studies in Business A Division of Thomson Learning 8
BUSINESS LAW: Cases & Principles Davidson • Knowles • Forsythe 8 th Ed. FORMAL REQUIREMENTS FOR NEGOTIABILITY: ARTICLE 3 l Unconditional Promise or Order Requirement. – Promise or order is not made conditional: By reference to another writing for a statement of rights. l Because payment is limited to resort to a particular source of funds. l © 2004 West Legal Studies in Business A Division of Thomson Learning 9
BUSINESS LAW: Cases & Principles Davidson • Knowles • Forsythe 8 th Ed. FORMAL REQUIREMENTS FOR NEGOTIABILITY: ARTICLE 3 l 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 10
BUSINESS LAW: Cases & Principles Davidson • Knowles • Forsythe 8 th Ed. FORMAL REQUIREMENTS FOR NEGOTIABILITY: ARTICLE 3 l 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 11
BUSINESS LAW: Cases & Principles Davidson • Knowles • Forsythe 8 th Ed. FORMAL REQUIREMENTS FOR NEGOTIABILITY: ARTICLE 3 l 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 12
BUSINESS LAW: Cases & Principles Davidson • Knowles • Forsythe 8 th Ed. FORMAL REQUIREMENTS FOR NEGOTIABILITY: ARTICLE 3 l Words of Negotiability Requirement. – Instrument must contain words of negotiability. “Pay to the order of”; or l “Pay to bearer”. l – 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 13
BUSINESS LAW: Cases & Principles Davidson • Knowles • Forsythe 8 th Ed. CONSTRUCTION AND INTERPRETATION: ARTICLE 3 l 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 14
BUSINESS LAW: Cases & Principles Davidson • Knowles • Forsythe 8 th Ed. REQUIREMENTS FOR NEGOTIABILITY: ARTICLE 7 l More relaxed in determining whether a document of title is negotiable. l 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 15
BUSINESS LAW: Cases & Principles Davidson • Knowles • Forsythe 8 th Ed. REQUIREMENTS FOR NEGOTIABILITY: ARTICLE 7 l Every other document title is deemed nonnegotiable. l More concerned with the rights of the parties to the goods than with the rights of the parties in the documents covering the goods. © 2004 West Legal Studies in Business A Division of Thomson Learning 16
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