Negotiable Instruments
A promise or an order is conditional and, therefore, not negotiable if it states
(1) an express condition to payment, (2) that the promise or order is subject to or governed by another writing, or (3) the rights or obligations with respect to the promise or order are stated in another writing. The mere reference to a different writing does not make a promise or an order conditional [UCC 3-106(a)].
The UCC recognizes four kinds of negotiable instruments:
(1) drafts, (2) checks, (3) promissory notes, and (4) certificates of deposit. Each of these is discussed in the following paragraphs.
Negotiable instruments
(or commercial paper) are important for the conduct of business and individual affairs. In this country, modern commerce could not continue without them. The term instrument means negotiable instrument [UCC 3-104(b)]. These terms are often used interchangeably. The types of negotiable instruments and their creation are discussed in this chapter
What are the three functions of Negotiable Instruments:
1. Substitute for money 2. Act as a credit device 3. Act as a record keeping device
A Draft
A check is a distinct form of a BLANK
the drawer of a check
A customer who has a checking account and writes (draws) a check is BLANK.
Representative's Signature
A maker or drawer can appoint an agent to sign a negotiable instrument on his or her behalf. In such circumstances, the representative's signature binds the maker or drawer.
Representative's Signature
A maker or drawer is liable on a negotiable instrument signed by an authorized agent. The agent is not personally liable on the negotiable instrument if his or her signature properly unambiguously discloses (1) his or her agency status and (2) the identity of the maker or drawer [UCC 3-402(b)]. In the case of an organization, the agent's signature is proper if the organization's name is preceded or followed by the name of the authorized agent.
Requirement for a negotiable instrument
A negotiable instrument must be (1) in writing and (2) permanent and portable. The writing requirement is met if the writing is on a preprinted form, but typewritten, handwritten, or other tangible agreements are also acceptable [UCC 1-201(46)]. The instrument can be a combination of different kinds of writing.
the maker of a note
A party who makes a promise to pay is BLANK (i.e., the borrower).
Not Require Any Undertaking in Addition to the Payment of Money
A promise or an order may include authorization or power to protect collateral, dispose of collateral, and waive any law intended to protect the obligee.
Unconditional To be negotiable, a promise or an order must be unconditional [UCC 3-104(a)].
A promise or an order that is conditional on another promise or event is not negotiable because the risk of the other promise or event not occurring would fall on the person who held the instrument. A conditional promise is not a negotiable instrument and is therefore subject to normal contract law.
For a draft
Acceptance is usually shown by the written word accepted on the face of the draft, along with the drawee's signature and the date. The drawee is called the acceptor of a draft because his or her obligation changes from having to pay the drawer to having to pay the payee. After the drawee accepts the draft, it is returned to the drawer or the payee. The drawer or the payee, in turn, can freely transfer it as a negotiable instrument to another party.
An instrument can be
An instrument can be payable to the order of the maker, the drawer, the drawee, the payee, or two or more payees together or, alternatively, to an office, an officer by his or her title, a corporation, a partnership, an unincorporated association, a trust, an estate, or another legal entity. A party to which an instrument is payable may be identified in any way, including by name, identifying number, office, or account number. An instrument is payable to the party intended by the signer of the instrument even if that party is identified in the instrument by a name or another identification that is not that of the intended party [UCC 3-110].
Payable to Order
An instrument is an order instrument or order paper if it is payable (1) to the order of an identified person or (2) to an identified person or order [UCC 3-109(b)].
Order to pay
An order can be directed to one or more parties jointly, such as "to A and B," or, in the alternative, such as "to A or B."
payee of a check
And the party to whom the check is written is the NLANK.
A signature
Any other symbol or device (e.g., an X, a thumbprint) adopted by the signer as his or her signature also qualifies. The signer's intention to use the symbol as his or her signature is controlling. Typed, printed, lithographed, rubber-stamped, and other mechanical means of signing instruments are recognized as valid by the UCC.
What are the requirements of a instruments?
Be in writing. Be signed by the maker or drawer. Be an unconditional promise or order to pay. State a fixed amount of money. Not require any undertaking in addition to the payment of money. Be payable on demand or at a definite time. Be payable to order or to bearer.
Requirement for a negotiable instrument
Example A check is often a preprinted form on which the drawer handwrites the amount of the check, the name of the payee, and the date of the check.
Unconditional To be negotiable, a promise or an order must be unconditional [UCC 3-104(a)].
Example American Airlines buys a $50 million airplane from Boeing. American signs a promissory note that promises to pay Boeing if it is "satisfied" with the airplane. This promise is a conditional promise. The condition—that American is satisfied with the airplane—destroys the negotiability of the note.
At a fixed date.
Example An instrument is payable at a definite time if it says "Payable on January 1, 2020."
On or before a stated date.
Example An instrument is payable at a definite time if it says "Payable on or before January 1, 2020." In this case, the maker or drawee has the option of paying the note before—but not after—the stated maturity date.
Payable to Order
Example An instrument that states "payable to the order of IBM" or "payable to IBM or order" is a negotiable order instrument. It would not be negotiable if it stated either "payable to IBM" or "pay to IBM" because it is not payable to order.
Example An unconditional promise or order might state,
Example An unconditional promise or order might state, "See collateral agreement dated January 15, 2018."
WHat is an example of a promissionary note?
Example Andrew borrows $10,000 from Wei and signs a promissory note agreeing to pay Wei the principal and 10 percent annual interest over three years in equal monthly installments. Here, Andrew is the maker of the note, and Wei is the payee.
Representative's Signature
Example Corporations and other organizations use agents, usually corporate officers or employees, to sign the corporation's checks and other negotiable instruments. Individuals can also appoint agents to sign their negotiable instruments.
Not Require Any Undertaking in Addition to the Payment of Money
Example If a note required the maker to pay a stated amount of money and perform some type of service, it would not be negotiable.
Example of components of a draft ie a check
Example Justin has a checking account at Country Bank. When Justin purchases a car from Mary's Motors, a car dealership, Justin pays for the car by writing a check on the bank made payable to Mary's Motors. Here, Justin is the drawer, Country Bank is the drawee, and Mary's Motors is the payee.
Example of a draft
Example Mary owes Hector $1,000. Hector wants Mary to pay the money to Cindy instead of to him. Hector writes out a draft that orders Mary to pay the $1,000 to Cindy. Mary agrees to this change of obligation and writes the word "accepted" on the draft and signs the draft. Hector is the drawer, Mary is the drawee and acceptor of the draft, and Cindy is the payee. Mary is now obligated to pay Cindy $1,000.
A certificate of deposit (CD)
Example Millicent has $50,000 that she would like to invest and earn income on. Millicent goes into City Bank and deposits her money with the bank in exchange for a certificate of deposit (CD) that bears an annual interest rate of 7 percent. Here, City Bank is the maker of the CD (borrower), and Millicent is the payee (lender).
Instruments that are payable on an uncertain act or event are not negotiable.
Example Sarah's father executes a promissory note that states, "I promise to pay to the order of my daughter, Sarah, $100,000 on the date she marries Bobby Boggs." This note is nonnegotiable because the act and date of marriage are uncertain.
Payable in Money UCC 3-104(a)
Examples An instrument that is "payable in $10,000 U.S. currency" is a negotiable instrument.
Instruments that are fully or partially payable in a medium of exchange other than money are not negotiable.
Examples An instrument that is "payable in $10,000 U.S. gold" is not negotiable. Although the stated amount is a fixed amount, it is not payable in a medium of exchange of the U.S. government.
Promise to Pay To be negotiable, a promissory note must contain the maker's unconditional and affirmative promise to pay.
Examples The statement "I owe you $100" is merely an I.O.U. It acknowledges a debt, but it does not contain an express promise to repay the money. If the I.O.U. used language such as "I promise to pay" or "the undersigned agrees to pay," however, a negotiable instrument would be created because the note would contain an affirmative obligation to pay.
Order or pay
Examples The words Pay to the order of are usually used on a check or draft. The printed word pay on a check is a proper order that is sufficient to make a check negotiable.
Article 3
In 1990, the American Law Institute and the National Conference of Commissioners on Uniform State Laws promulgated Revised Article 3 (Negotiable Instruments) of the UCC.
A Check
In other words, a check is an order to pay (see Exhibit 22.2).
A promissory note (or note)
It is a two-party instrument (see Exhibit 22.3), not an order to pay.
A Check
It is unique in that it is drawn on a financial institution (the drawee) and is payable on demand [UCC 3-104(f)]. Most businesses and many individuals have checking accounts at financial institutions. Like other drafts, a check is a three-party instrument. A customer who has a checking account and writes (draws) a check is the drawer of a check. The financial institution on which the check is written is the drawee of a check. And the party to whom the check is written is the payee of a check.
collateral
Lenders sometimes require the maker of a note to post security for the repayment of the note. If a maker fails to repay a note when it is due, the lender can foreclose and take the collateral as payment for the note. Notes are often named after the security that underlies the note. For example, notes that are secured by real estate are called mortgage notes, and notes that are secured by personal property are called collateral notes.
Functions of Negotiable Instruments : Substitute for money.
Merchants and consumers often do not carry cash for fear of loss or theft. Further, it would be almost impossible to carry enough cash for large purchases (e.g., a car, a house). Thus, certain forms of negotiable instruments—such as checks—serve as substitutes for money.
permanency requirement
Most writings on paper meet
permanency requirement
Most writings on paper meet the BLANK. However, a writing that is on tissue paper would not meet this requirement because of its impermanence. Oral promises do not qualify as negotiable instruments because they are not clearly transferable in a manner that will prevent fraud. Tape recordings and videotapes are not negotiable instruments because they are not considered writings.
Functions of negotiable instruments: Act as record-keeping devices.
Negotiable instruments often serve as record-keeping devices. Banks either return checks to checking-account customers each month or allow customers to view them online. These act as a record-keeping device for the preparation of financial statements, tax returns, and the like.
For notes:
Notes can be made payable to a named payee or to "bearer." They can be payable in a single payment or in installments. The latter are called installment notes. Most notes require the borrower to pay interest on the principal.
time instruments
Payable at a Definite Time Instruments that are payable at a definite time are called BLANKs. UCC 3-108(b) and 3-108(c) state that an instrument is payable at a definite time if it is payable as follows: 1. At a fixed date. 2.On or before a stated date.
Demand instruments
Payable on Demand Instruments that are payable on demand are called demand instruments.
Functions of negotiable instruments: Act as credit devices.
Some forms of negotiable instruments extend credit from one party to another. A seller may sell goods to a customer on a customer's promise to pay for the goods at a future time, or a bank may lend money to a buyer who signs a note promising to repay the money. Both of these examples represent extensions of credit. Without negotiable instruments, the "credit economy" of the United States and other modern industrial countries would not be possible.
Fixed Amount
The BLANK of money requirement ensures that the value of the instrument can be determined with certainty. The principal amount of the instrument must appear on the face of the instrument.
A signature
The UCC broadly defines BLANK as any symbol executed or adopted by a party with a present intent to authenticate the writing [UCC 1-201(39)]. A BLANK is made by the use of any name, including a trade or an assumed name, or by any word or mark used in lieu of a written signature [UCC 3-401(b)].
Drafts, Checks, Promissionaty Notes, and Certificares of deposit
The UCC recognizes four kinds of negotiable instruments:
payable to order or payable to bearer
The UCC requires that negotiable instruments be either BLANKKKKK [UCC 3-104(a)(1)]. Promises or orders to pay that do not meet this requirement are not negotiable.
A certificate of deposit (CD)
The financial institution is the borrower (the maker of a certificate of deposit), and the depositor is the lender (the payee of a certificate of deposit). A CD is a two-party instrument (see Exhibit 22.4). Note that a CD is a promise to pay, not an order to pay. Unlike a regular passbook savings account, a CD is a negotiable instrument. CDs under $100,000 are commonly referred to as small CDs. CDs of $100,000 or more are usually called jumbo CDs.
drawee of a check
The financial institution on which the check is written is the BLANK.
Promise to Pay To be negotiable, a promissory note must contain the maker's unconditional and affirmative promise to pay.
The mere acknowledgment of a debt is not sufficient to constitute a negotiable instrument. Certificates of deposit (CDs) are an exception to this rule. CDs do not require an express promise to pay because the bank's acknowledgment of the payee's bank deposit and other terms of the CD clearly indicate the bank's promise to repay the certificate holder. Nevertheless, most CDs contain an express promise to pay.
Atricle 3
The new article, which is called "Negotiable Instruments" instead of "Commercial Paper," is a comprehensive revision of BLANK. Revised BLANKKK is used as the basis for this and the following chapters on negotiable instruments.
A promissory note (or note)
The note is evidence of (1) the extension of credit and (2) the borrower's promise to repay the debt. A party who makes a promise to pay is the maker of a note (i.e., the borrower). The party to whom the promise to pay is made is the payee of a note (i.e., the lender). A promissory note is a negotiable instrument that the payee can freely transfer to other parties.
Promissioary Note
The parties are free to design the terms of a note to fit their needs.
payee of a note
The party to whom the promise to pay is made is the BLANK (i.e., the lender)
Negotiable Instruments
These requirements must appear on the face of the instrument. If they do not, the instrument does not qualify as negotiable. Each of these seven requirements is discussed in the paragraphs and sections that follow.
collateral
This security, which is called BLANK, may be in the form of automobiles, houses, securities, or other property.
Not Require Any Undertaking in Addition to the Payment of Money
To qualify as a negotiable instrument, a promise or an order to pay cannot state any other undertaking by the person promising or ordering payment to do any act in addition to the payment of money [UCC 3-104(a)(3)].
To qualify as a negotiable instrument,
a document must meet certain requirements established by Article 3 of the Uniform Commercial Code (UCC).
In order for a negotiable instrument; Order to Pay To be negotiable
a draft or check must contain the drawer's unconditional order to pay a payee. The language of the order must be precise and contain the word pay.
If these requirements are met,
a transferee who qualifies as a holder in due course (HDC) takes the instrument free of many defenses that can be asserted against the original payee. In addition, the document is considered an ordinary contract that is subject to contract law.
To be a negotiable instrument under the requirements of UCC 3-104,
a writing must contain either an unconditional order to pay (draft or check) or an unconditional promise to pay (note or CD) a fixed amount of money on demand or at a definite time. The term unconditional, which is discussed in the following paragraphs, is one of the keys.
A promise or an order may
also stipulate that payment is limited to a particular fund or source and still remain unconditional [UCC 3-106(b)].
Demand instruments
are created by language such as "payable on demand," "payable at sight," or "payable on presentment" [UCC 3-108(a)]. By definition, checks are payable on demand [UCC 3-104(f)]. Other instruments, such as notes, CDs, and drafts, can be but are not always payable on demand.
A draft
can be either a time draft or a sight draft.
Promissioary Note
can be payable at a specific time (time notes) or on demand (demand notes).
A promise or an order remains unconditional
even if it refers to a different writing for a description of rights to collateral, prepayment, or acceleration.
Examples of negotiable instruments
include checks (e.g., a check used by a business to purchase equipment) and promissory notes (e.g., a note executed by a borrower of money to pay for tuition).
The UCC signature requirement
indicates that a negotiable instrument must be signed by the maker if it is a note or CD and by the drawer if it is a check or draft. The maker or drawer is not liable on the instrument unless his or her signature appears on it. The signature can be placed on the instrument by the maker or drawer or by an authorized agent [UCC 3-401(a)]. Although the signature of the maker, drawer, or agent can be located anywhere on the face of the negotiable instrument, it is usually placed in the lower-right corner.
A promissory note
is a negotiable instrument that the payee can freely transfer to other parties.
A certificate of deposit (CD)
is a special form of note that is created when a depositor deposits money at a financial institution in exchange for the institution's promise to pay back the amount of the deposit plus an agreed-on rate of interest on the expiration of a set time period agreed on by the parties [UCC 3-104(j)].
A sight draft
is also called a demand draft. Language such as "on demand pay" or "at sight pay" creates a sight draft. A draft can be both a time draft and a sight draft. Such a draft would provide that it is payable at a stated time after sight. This type of draft is created by language such as "payable 90 days after sight."
A promissory note (or note)
is an unconditional written promise by one party to pay money to another party [UCC 3-104(e)].Promissory notes usually arise when one party borrows money from another.
The concept of negotiation
is important to the law of negotiable instruments. As such, it must be freely transferable to subsequent parties. Technically, a negotiable instrument is negotiated when it is originally issued. The term negotiation, however, is usually used to describe the transfer of negotiable instruments to subsequent transferees.
The portability requirement
is intended to ensure free transfer of an instrument. Example A promise to pay chiseled in a tree would not qualify as a negotiable instrument because the tree is not freely transferable in commerce.
A time draft
is payable at a designated future date. Language such as "pay on January 1, 2016" or "pay 120 days after date" creates a time draft (see Exhibit 22.1).
A sight draft
is payable on sight.
The primary benefit of a negotiable instrument
is that it can be used as a substitute for money.
Although the signature of the maker, drawer, or agent can be located anywhere on the face of the negotiable instrument,
it is usually placed in the lower-right corner.
Payable in Money UCC 3-104(a)
provides that the fixed amount of a negotiable instrument must be payable in money. The UCC defines money as a "medium of exchange authorized or adopted by a domestic or foreign government as part of its currency" [UCC 1-201(24)].
For the drawee to be liable on a draft,
the drawee must accept the drawer's written order to pay it.
A draft
which is a three-party instrument, is an unconditional written order by one party (the drawer of a draft) that orders a second party (the drawee of a draft) to pay money to a third party (the payee of a draft) [UCC 3-104(e)]. The drawee is obligated to pay the drawer money before the drawer can order the drawee to pay this money to a third party (the payee).
Article 3 (Commercial Paper) of the UCC,
which was promulgated in 1952, established rules for the creation of, transfer of, enforcement of, and liability on negotiable instruments. Most states and the District of Columbia have adopted BLANK of the UCC.