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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

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negotiable instruments2
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
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
  • 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
Signed Writing
  • 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

An Agent may sign.

Signature can appear anywhere.

  • 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
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
Sum Certain in Money
  • 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

Exact amount

Currency only

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

To Order or Bearer
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



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.

Payable at a Definite Time or Upon Demand