Twomey  Jennings
Anderson’s Business Law and the Legal Environment, Comprehensive 20e
Anderson’s Business Law and the Legal Environment, Standard 20e
Business Law: Principles for Today’s Commercial Environment 2e
Chapter 28
Negotiable Instruments
Copyright © 2008 by West Legal Studies in Business
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Definitions
• An instrument or piece of
commercial paper is a
transferable, written, signed
promise or order to pay a specified
sum of money.
– An instrument is negotiable when it
contains the terms required by the
UCC.
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Definitions
• The term party may refer to a
natural person or to an entity, such
as a corporation, an
unincorporated enterprise, a
government, or a bank account.
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Types of Negotiable
Instruments and Parties
• (1) Promissory Notes.
• (2) Certificates of deposit is a promise to
pay by a bank.
• (3) Drafts (which includes checks)
– In addition to ordinary checks, there are also
cashier’s checks and teller’s checks.
– A bank money order is a check even though
it bears the words money order.
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Promissory Note
March 31, 2004
Six months after date debtor undersigned hereby
promise to pay to the order of Galactic Games, Inc, three
thousand six hundred dollars with interest at the rate of
10.9%. This note is secured by the video arcade games
purchased with its funds.
In the event of default, all sums due hereunder may be
collected. Debtor agrees to pay all costs of collection
including, but not limited to, attorney fees, costs of
repossession, and costs of litigation.
John R. Haldehand
Video Arcade Inc.
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Draft
March 18, 1998
TO:
Oriental Traders
1100 W. Clarendon
Phoenix, AZ
Pay to the order of Silly Putty, Inc.
the sum of One thousand
and no/100 dollars
Accepted by:
_______________
_______________
DATE:
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Joe Guilden
Silly Putty, Inc.
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Parties to Instruments
• Maker: original party on a note;
promises to pay amount specified.
• Drawer: party who creates a draft.
• Drawee: party to whom a draft is
addressed (i.e. bank or credit union).
• Payee: party named on the face of the
instrument to receive payment.
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Parties to Instruments
• Drawee becomes the acceptor when it
accepts responsibility to pay.
• Accommodation party: one whose
name is added to an instrument to
strengthen its collectability.
• Guarantor: promises to pay instrument
under certain circumstances.
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Types of Instruments
and Parties
Notes
Maker (Borrower)
Payee
Certificates
of
Deposit
Maker (Bank)
Payee
Drawer (Seller)
Draft
Drawee (Buyer)
Payee (Seller or Seller’s Bank)
Drawer (Account Holder)
Check
Drawee (Bank)
Payee
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Requirements of Negotiability
• The instrument must have:
– A record (writing),
– Authenticated (signed) by the maker or
the drawer,
• Agent,
• Absence of Representative Capacity or
Identification of Principal.
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Requirements of Negotiability
• Instrument must (continued):
– contain a promise or order:
• of an unconditional nature,
• to pay in money,
• a sum certain,
• on demand or at a definite time,
• to order or bearer.
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Requirements of Negotiability
• A check may be negotiable without
being payable to order or bearer.
• If an instrument is not negotiable, it is
governed by contract law.
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Bearer vs. Order Paper
“Pay to the bearer”
“Pay to the order of John Jones or bearer”
“Pay to John Jones or bearer”
BEARER
“Pay to cash”
“Pay to the order of cash”
“Pay to the order of Thomasina Jones”
“Pay to John Jones, bearer”
ORDER
“Pay to Thomasina Jones” (check)
“Pay to Thomasina Jones” (note)
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NOT
NEGOTIABLE
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Factors not
Affecting Negotiability
• Ambiguous Language:
–Words outrank figures.
–Handwriting supercedes typed or
printed terms.
–Typewritten supercedes preprinted terms.
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Factors not
Affecting Negotiability
• Statute of Limitations
– The UCC sets a three-year statute of
limitations on most actions involving
negotiable instruments.
– The statute is six years for suits on
certificates of deposit and accepted
drafts.
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