Chapter 019 - Formation of Sales & Lease ContractsNegotiable
Instruments
To qualify as a negotiable instrument (commercial paper), the
document must meet certain requirements established by Revised
Article 3 (Negotiable Instruments) of the Uniform Commercial Code
(UCC).
19 - *
Negotiable Instruments (continued)
If the requirements of Article 3 are met, a transferee who
qualifies as a holder in due course 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.
19 - *
Substitute for money
Credit device
Record-keeping device
Most purchases by businesses and many individuals are made by
negotiable instruments instead of cash.
19 - *
19 - *
Drafts
A draft is a three-party instrument that is an unconditional
written order by one party that orders the second party to pay
money to a third party.
Drawer of a draft
Drawee of a draft
Payee of a draft
A draft payable on sight.
Also called a demand draft.
Trade Acceptance – a sight draft that arises when credit is
extended with the sale of goods.
Time Draft
19 - *
Checks
A distinct form of draft drawn on a financial institution and
payable on demand.
Drawer of a check
Drawee of a check
Payee of a check
Promissory Notes
A two-party negotiable instrument that is an unconditional written
promise by one party to pay money to another party.
Maker of a note
Payee of a note
May be automobiles, homes, buildings, securities, or other
property
If maker fails to repay note as due, lender can foreclose and take
collateral as payment
19 - *
Certificates of Deposit (CD)
A two-party negotiable instrument
Special form of note created when a depositor deposits money at a
financial institution
Institution promises to pay back the amount of the deposit plus an
agreed-upon rate of interest at set time.
19 - *
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
19 - *
Permanent
Maker or drawer not liable unless signature appears on
instrument
Agent may sign
Any symbol or device may be used if intention was to authenticate
document
19 - *
Additional Requirements
Must contain unconditional order to pay or unconditional promise to
pay
Check or draft
CD do not require express promise to pay
If conditional, it is not negotiable because of risk of promise or
event not occurring
19 - *
Requirement
Description
Writing
Writing must be permanent and portable. Oral or implied instruments
are nonnegotiable [UCC 3-104(d)].
Signed by maker or drawer
Signature must appear on the face of the instrument. It may be any
mark intended by the signer to be his or her signature. Signature
may be by an authorized representative [UCC 3-104(a)].
Unconditional promise or order to pay
Instrument must be an unconditional promise or order to pay [UCC
3-104(a)]. Permissible notations listed in UCC 3-106(a) do not
affect instrument’s negotiability. If payment is conditional on the
performance of another agreement, the instrument is
nonnegotiable.
19 - *
No interest requirement, but may have fixed or variable
amount
Must be payable in money
19 - *
Requirement
Description
Fixed amount of money
Fixed amount: Amount required to discharge the instrument must be
on the face of the instrument [UCC 3-104(a)]. Amount may include
payment of interest, discount, and costs of collection. Revised
Article 3 provides that variable interest rate notes are negotiable
instruments. In money: Amount must be payable in U.S. or foreign
country’s currency. If payment is to made in goods, services, or
non-monetary items, the instrument is nonnegotiable [UCC
3-104(a)].
19 - *
Requirement
Description
Cannot require any undertaking in addition to the payment of
money
A promise or order to pay cannot state any other undertaking to do
an act in addition to the payment of money [UCC 3-104(a)(3)]. A
promise or order to may include authorization or power to protect
collateral, dispose of collateral, waive any law intended to
protect the obligee, and the like.
19 - *
Demand Instruments
Checks
Time Instruments
19 - *
Requirement
Description
Payable on demand or at a definite time
Payable on demand: Payable at sight, upon presentation, or when no
time for payment is stated [UCC 3-108(a)]. Payable at a definite
time: Payable at a definite date, or before a stated date, a fixed
period after a stated date, or at a fixed period after sight [UCC
3-108(b)(c)]. Instrument payable only upon the occurrence of an
uncertain act or event is nonnegotiable.
19 - *
Acceleration clause
Extension clause
19 - *
Nonnegotiable Contract
A promise or order to pay that does not meet the requirements of a
negotiable instrument.
It is not subject to the provisions of UCC Article 3.