CHAPTER 21
NEGOTIABILITY
DAVIDSON, KNOWLES & FORSYTHE
Business Law: Cases and Principles
in the Legal Environment (8th Ed.)
BUSINESS LAW: Cases & Principles
Davidson • Knowles • Forsythe 8th Ed.
FORMAL REQUIREMENTS FOR
NEGOTIABILITY: ARTICLE 3

Negotiable instrument is a formal contract
and carries rights under contract law.
 Instrument must meet each and every
requirement in order to fall within coverage
of Article 3.
 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 8th Ed.
FORMAL REQUIREMENTS FOR
NEGOTIABILITY: ARTICLE 3

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 8th Ed.
FORMAL REQUIREMENTS FOR
NEGOTIABILITY: ARTICLE 3

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 8th Ed.
FORMAL REQUIREMENTS FOR
NEGOTIABILITY: ARTICLE 3

Writing Requirement.
– Right must be tangible.
– Simplest way to prove that the right exists.
– Negotiable instruments:
 Checks;
 Drafts;
 Certificates of Deposit; or
 Notes.
– 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 8th Ed.
FORMAL REQUIREMENTS FOR
NEGOTIABILITY: ARTICLE 3

Writing Requirement.
– Commercial paper is equally valid:
 When prepared on a scratch paper.
 Blank sheet of paper.
 Or any other relatively permanent thing.
© 2004 West Legal Studies in Business
A Division of Thomson Learning
6
BUSINESS LAW: Cases & Principles
Davidson • Knowles • Forsythe 8th Ed.
FORMAL REQUIREMENTS FOR
NEGOTIABILITY: ARTICLE 3

Signature Requirement.
– Protection from fraud or trickery.
– Types of signatures:
 Manual subscription.
 Any symbol executed or adopted by a party with
present intention to authenticate a writing.
– 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 8th Ed.
FORMAL REQUIREMENTS FOR
NEGOTIABILITY: ARTICLE 3

Unconditional Promise or Order
Requirement.
– Promise or order unconditional unless it states:
 An express condition to payment.
 The promise or order is subject to or governed by
another writing.
 Rights or obligations with respect to promise or
order are stated in another writing.
© 2004 West Legal Studies in Business
A Division of Thomson Learning
8
BUSINESS LAW: Cases & Principles
Davidson • Knowles • Forsythe 8th Ed.
FORMAL REQUIREMENTS FOR
NEGOTIABILITY: ARTICLE 3

Unconditional Promise or Order
Requirement.
– Promise or order is not made conditional:
 By reference to another writing for a statement of
rights.
 Because payment is limited to resort to a particular
source of funds.
© 2004 West Legal Studies in Business
A Division of Thomson Learning
9
BUSINESS LAW: Cases & Principles
Davidson • Knowles • Forsythe 8th Ed.
FORMAL REQUIREMENTS FOR
NEGOTIABILITY: ARTICLE 3

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 8th Ed.
FORMAL REQUIREMENTS FOR
NEGOTIABILITY: ARTICLE 3

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 8th Ed.
FORMAL REQUIREMENTS FOR
NEGOTIABILITY: ARTICLE 3

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 8th Ed.
FORMAL REQUIREMENTS FOR
NEGOTIABILITY: ARTICLE 3

Words of Negotiability Requirement.
– Instrument must contain words of negotiability.
 “Pay to the order of”; or
 “Pay to bearer”.
– 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 8th Ed.
CONSTRUCTION AND INTERPRETATION:
ARTICLE 3

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 8th Ed.
REQUIREMENTS FOR NEGOTIABILITY: ARTICLE
7

More relaxed in determining whether a
document of title is negotiable.
 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 8th Ed.
REQUIREMENTS FOR NEGOTIABILITY: ARTICLE
7

Every other document title is deemed
nonnegotiable.
 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