orders or promises to pay money that may be transferred from one person
to another by delivery, or by endorsement and delivery, the full legal
title thereby becoming vested in the transferee.
The negotiation of such an instrument to a holder in due course
gives such holder the same rights as held by the original payee (promisee),
free from defenses (except real defenses) that might defeat them.
Article 3 of the Uniform Commercial Code, entitled "Commercial
Paper", is concerned with notes, drafts, checks, and certificates of deposit.
Most such instruments are negotiable in form.
Other types of negotiable property interests that are not commercial
paper (e.g., stock and bond certificates, order or bearer bills or lading
and warehouse receipts) are covered in other sections of the code, primarily
relating to commercial paper developed among traders and merchants in
negotiable instrument is commercial paper (promissory notes, checks, drafts
or bills of exchange, and certificates of deposit).
A promissory note is an unconditional promise in writing made by
one person to another, signed by the maker, engaging to pay on demand
or at a fixed or determinable future time a sum certain in money to order
or to bearer. A bill of exchange
is an unconditional order in writing addressed by one person to another,
signed by the person giving it, requiring the person to whom it is addressed
to pay on demand or at a fixed or determinable future time, a sum certain
in money to order or to bearer. A
check is a bill of exchange drawn on a bank payable on demand.
A certificate of deposit is an acknowledgment by a bank of a receipt
of money with an engagement to repay it.
negotiable instrument must meet the following four requirements:
must be in writing and signed by the maker or drawee.
must contain an unconditional promise or order to pay a certain sum in
money and no other promise, order, obligation, or power except such as
is authorized by Article 3 of the Uniform Commercial Code.
must be payable on demand, or at a definite time.
must be payable either to order or to bearer.
is no express requirement concerning the materials with which or on which
a negotiable instrument must be written.
"Signed" includes any symbol executed or adopted by a party with
present intention to authenticate a writing.
A conditional promise or order (unnegotiable) is evident (1) if
it states that it is subject to or governed by any other agreement or
(2) if it states that it is to be paid only out of a particular fund or
source (with some exceptions). For
a sum to be certain, the amount must be capable of being calculated from
data on the face of the note. To
be payable in money requires that it be paid in the medium of exchange
adopted by the government as its currency.
promise is an undertaking to pay and must be more than an acknowledgment
of an obligation. An order
is a direction to pay and must be more than an authorization or request.
Instruments payable on demand include those payable at sight or
on presentation and those in which no time for payment is stated.
Order paper is negotiated by the transferor's endorsing the paper
and delivering it to the new holder.
It is possible to negotiate bearer paper by delivery without an
endorsement; however, a transferee will usually ask for an endorsement
so as to obtain the advantage of the broader contract liability.
holder in due course is one who has taken the instrument under the following
it is complete and regular upon its face.
the individual became the holder of it before it was overdue, and without
notice that it was previously dishonored, if such was the fact.
the holder took it in good faith and for value.
at the time it was negotiated, the holder had no notice of an infirmity
in the instrument or defect in the title of the person negotiating it.
is generally held that a holder in due course holds the instrument free
from any defect of title of prior parties, and free from defenses available
to prior parties among themselves, and may enforce payment of the instrument
for the full amount thereof against all parties liable thereon.
The holder of a note is presumed to be the owner thereof, and may
sue thereon in his or her own name.
forms of ENDORSEMENT include:
Pay to the order of John Doe
Signed: Bill Doe
Signed: Bill Doe
Pay to John Doe only
Pay without recourse to order of John Doe
On the election of the mayor in
To the order of John Doe Signed:
unqualified endorser, who receives consideration, warrants to the transferee
and to any subsequent holder who receives the instrument in good faith:
the endorser has good title to the instrument, or represents a person
with title, and that the transfer is otherwise rightful.
all signatures are genuine or authorized.
the instrument has not been materially altered.
no defense of any prior party is good against him or her.
the endorser has no knowledge of any insolvency proceeding involving the
transferor without endorsement, who receives consideration, warrants to
the transferee only who receives the instrument in good faith the same
the instrument specifies otherwise, two or more persons (multiple signers)
who sign as maker, acceptor, drawer, or endorser and as part of the same
transactions are jointly and severally liable.
An accommodation party is one who signs the instrument in any capacity
for the purpose of lending his or her name to another party to it.
When the instrument has been taken for value before it is due,
the accommodation party is liable in the capacity in which he or she has
unqualified endorser is released from liability on his endorser's promise
if the holder failed to make due presentment to the payor or to give the
endorser prompt notice of the payor's dishonor.
The lability of a person on commercial paper may be discharged
by (1) cancellation or renunciation and (2) discharge of secondary liability
by changing primary contract.
instrument is dishonored when a necessary or optional presentment is duly
made and due acceptance or payment is refused or cannot be obtained within
the prescribed time.
Uniform Negotiable Instrument Act states that "where a signature is forged
or made without authority of the person whose signature it purports to
be, it is totally inoperative, and no right to retain the instrument,
or to give a discharge, or to enforce payment thereof against any party
thereto, give a discharge, or to enforce payment thereof against any party
thereto, can be acquired through or under such signature, unless the party,
against whom it is sought to enforce such right, is precluded from setting
up the forgery or want of authority."
act also states that "an instrument is not invalid for the reason only
that it is antedated or past-dated, provided this is not done for an illegal
or fraudulent purpose. The
person to whom an instrument so dated is delivered, acquired title thereto
as of the date of delivery."
act states that "where a negotiable instrument is materially altered without
the assent of all parties liable thereon, it is voided except as against
a party who has himself made, authorized or assented to the alteration
and subsequent indorser. But
when an instrument has been materially altered and is in the hands of
a holder in due course, not a party to the alteration, he may enforce
payment thereon according to its original tenor."
However, any person who by his negligence substantially contributes
to a material alteration of the instrument or to the making of an authorized
signature is precluded from asserting the alteration or lack of authority
against a holder in due course or against a drawee or other payor who
pays the instrument in good faith and in accordance with the reasonable
commercial standards of the drawee's or payor's business.
have a debtor-creditor relationship with depositors.
Even though a depositor has funds in the bank, a payee cannot force
a drawee bank to make payments. The
drawer could possibly have an action against a bank-drawee for wrongfully
dishonouring a check. Generally,
banks are not obligated to pay on a check presented more than six months
after date but can pay in good faith and charge the customer's account.
Banks are liable to a drawer for payment on bad checks unless the
drawer was negligent. Drawer
is required to promptly examine returned checks for irregularities or
be held liable for bank's losses resulting from insufficient care and
vigilance. A bank is considered
to know the signature of endorsers and can collect from the party that
cashed the check. Generally,
oral stop payment orders are good for 14 days; written stop payment orders
are good for six months and are renewable.
A bank is entitled to a depositor's endorsement on deposited checks.
If the endorsement is missing, the bank can supply it.
sometimes appear in negotiable instruments.
Generally the following rules apply:
words control over figures, hand-written terms control over typewritten
and printed terms; typewritten terms control over printed terms; an instrument
stating "I promise to pay" and signed by two persons which results in
joint liability for both parties.
any university business law textbook.