Negotiable Instruments Chapter 26 Negotiable Instruments Are formal

Negotiable Instruments Chapter 26

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

Types of Commercial Paper • Drafts – drawer orders drawee to 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

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

Signed Writing An Agent may sign. Signature can appear anywhere. • 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

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.

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.

Sum Certain in Money Exact amount Currency only • 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

• Bearer Paper does not designate a specific To Order or payee; the maker or drawer agrees to pay Bearer anyone who presents • Order paper enables a the instrument for person identified in the payment instrument to – Pay bearer designate the payee. – Pay to order or bearer • Order paper allows the – Pay to Y or bearer maker or drawer to – Pay any person transfer to a specific presenting person – Pay $500 – Payable to order of Y – Pay to Y or order – Pay cash – Pay to order of cash

Payable at a Definite Time or Upon Demand • A promise or order that does not state any time of payment is payable on demand. • Checks by definition are payable on 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.