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CHAPTER 21 NEGOTIABILITY. DAVIDSON, KNOWLES & FORSYTHE Business Law: Cases and Principles in the Legal Environment (8 th Ed.). FORMAL REQUIREMENTS FOR NEGOTIABILITY: ARTICLE 3. Negotiable instrument is a formal contract and carries rights under contract law.

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chapter 21 negotiability

CHAPTER 21NEGOTIABILITY

DAVIDSON, KNOWLES & FORSYTHE Business Law: Cases and Principles in the Legal Environment (8th Ed.)

formal requirements for negotiability article 3
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.
formal requirements for negotiability article 33
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.
formal requirements for negotiability article 34
FORMAL REQUIREMENTS FOR NEGOTIABILITY: ARTICLE 3
  • To qualify as negotiable instrument:
    • Be inwriting.
    • 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.
formal requirements for negotiability article 35
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.
formal requirements for negotiability article 36
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.
formal requirements for negotiability article 37
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.
formal requirements for negotiability article 38
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.
formal requirements for negotiability article 39
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.
formal requirements for negotiability article 310
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.
formal requirements for negotiability article 311
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.
formal requirements for negotiability article 312
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.
formal requirements for negotiability article 313
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.
construction and interpretation article 3
CONSTRUCTION AND INTERPRETATION: ARTICLE 3
  • Instrument contains contradictory terms:
    • Typewritten terms prevail over printed terms.
    • Handwritten terms prevail over both.
    • Words prevail over numbers.
requirements for negotiability article 7
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.
requirements for negotiability article 716
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.