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 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
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
To Order or
Bearer
• 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
• 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
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.