For A-Plus Writer Only

patisa

powerpoint_chapter_19.pptx

Home >Law homework help >For A-Plus Writer Only

Business Law

Principles

and Practices 8e

Arnold J. Goldman  William D. Sigismond

Chapter 19: Nature and Types of

Negotiable Instruments

Part IV Objectives

Relate the various types of negotiable instruments and distinguish among the various parties involved.

© 2011 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use.

Part IV Objectives

Distinguish between the two basic classes of negotiable instruments: promises to pay money and orders to pay money.

Describe the two major functions of negotiable instruments.

Part IV Objectives

Describe the requirements necessary to make negotiable instruments negotiable.

Explain the process of negotiation—that is, how negotiable instruments are transferred from one party to another.

Part IV Objectives

Explain the meaning of the term endorsement and name five types of endorsements.

Restate the holder in due course (HIDC) concept and explain the significance of one’s having the status of an HIDC.

Part IV Objectives

Explain the liabilities of the primary and secondary parties for payment of negotiable instruments.

Describe the legal effect of personal and real defenses on a holder in due course.

Part IV Objectives

Summarize the rights and responsibilities that banks and their customers have to each other.

Trace the path of a check through the check-collection and payment channels.

Part IV Objectives

Describe the impact of electronic banking on bank–customer relations.

Chart a new plan for conducting your business transactions in the twenty-first century.

Negotiable Instruments— An Introduction

Negotiable Instruments can be used as a substitute for money when conducting everyday business transactions.

Modern business cannot be carried on without the use of negotiable instruments.

Article 3 of the Uniform Commercial Code (UCC).

Negotiable Instrument

Negotiable instrument: written document that can be used as a substitute for money or as a credit device.

Uses and Types

Promissory notes.

Certificates of deposit.

Checks.

Drafts.

Promissory Note

Promissory note: instrument by which one person promises to pay a sum of money to another.

A promissory note is used to obtain goods and services on credit or to borrow money.

Promissory Note

Promissory Notes and Certificates of Deposit: Promises to Pay

Maker: one who makes out and signs a promissory note.

Payee: one who receives payment on a check, draft, or promissory note.

Certificate of Deposit

Certificate of deposit: bank’s promise to repay an amount left on deposit for a certain time.

Draft

Draft: instrument in which drawer orders drawee to pay a certain sum to payee.

Drafts, Drawer, and Drawee

Drafts are orders to pay.

Drawer: one who signs a check or draft ordering drawee to pay the payee.

Drawee: party to a check or draft who is ordered to pay the payee.

Trade Acceptances and Checks

Trade acceptance: form of draft used by seller as a credit device.

Check: type of draft in which the drawee is always a bank.

A check can also be drawn by a bank on another bank. This instrument is known as a bank draft.

Other Check Types

A substitute check is a legal copy of your original check.

Came into existence because of the passage of the Check Clearing for the 21st Century Act (also referred to as The Check 21 Act passed in 2004).

Types of Negotiable Instruments

Requirements for Negotiability

To be negotiable and be governed by Revised Article 3 in determining the rights and liabilities of the parties, an instrument must meet each and every requirement of negotiability.

Requirements for Negotiability

In writing

Signed by the maker or drawer

Contain a promise or order that is unconditional

Payable in a fixed amount of money with or without interest

Payable either on demand, or at a definite time

Requirements for Negotiability

Payable to order or bearer

Contain no understanding or instruction beyond the promise or order to pay

Designate a drawee (in case of a draft) with reasonable certainty.

Written Form

To promote certainty and prevent fraud, negotiable instruments must be in writing.

There is no such thing as an oral note or check.

The instrument must also meet the requirement that the instrument is freely transferable.

Signature

The signature on the instrument must be signed by the maker (for a promissory note or a certificate of deposit) or drawer (for a draft or a check) or their authorized agents.

Parol (oral) evidence is admissible to identify the signer.

Unconditional Promise or Order to Pay

A promissory note or certificate of deposit must contain words on the face of the instrument indicating a promise to pay.

A phrase such as IOU, Joan Hartman, $50.00 merely acknowledges that a debt exists; it does not contain a promise to pay and therefore is not negotiable.

Unconditional Promise or Order to Pay

To be negotiable, a draft or check must order the drawee to pay.

The promise or order to pay must be payable without any conditions attached (it must be unconditional).

Revised Article 3 eliminates as conditional a statement on an instrument that says “payment is to be made only out of a particular fund.”

Fixed Amount of Money

A note or check payable in merchandise or anything other than money, such as services, is not negotiable.

Furthermore, “money” does not require payment in U.S. currency.

Fixed Amount of Money

Article 3 applies the fixed-amount requirement only to the principal. Thus, a $500 note payable with 8 percent interest is still negotiable.

Under the UCC, if there is a discrepancy between the amount written in words and the amount indicated in figures on an instrument, the amount written in words would be paid.

Payable on Demand

“Payable on demand” means payable at the time when the payee presents the instrument for payment to the person obligated to pay it (upon request).

Payable at a Definite Time

An instrument is payable at a definite time if it states that it is payable

On a specified date.

Within a definite period of time.

On a date or time readily ascertainable at the time the promise or order is issued.

Acceleration Clause

A time instrument may contain an acceleration clause, which requires the debtor to pay off the amount owed on a loan sooner than the stated due date.

Other Requirements

Clauses for extension.

Holder of the instrument must know when the note must be presented for collection and whether it is current or overdue.

Payable to Order or Bearer

To be negotiable, an instrument must contain words of negotiability. The words order and bearer are words of negotiability.

Payable to Order

Payable to order: words directing an instrument to be paid to named payee or to whomever payee orders the paper to be paid.

Payable to Bearer

Payable to bearer: words directing an instrument to be paid to person holding it.

Other Requirements for Negotiable Instruments

A negotiable instrument must be straightforward and very specific.

If the instrument contains an order or promise to do anything else in addition to or in lieu of the payment of money, it will be nonnegotiable.

In the case of a draft or a check, the drawee must be named in the instrument with reasonable certainty.

Added Language and Omissions Not Affecting Negotiability

The date of issue on a note or check may be important, but it does not affect negotiability if it is omitted.

Inserted information.

Handwritten information.