Business Law II – Week 6 Lecture 1

Negotiability

This week's lectures will cover negotiable instruments.

A negotiable instrument is any written promise or order to pay a sum of money. These promises come in several types. First, there are drafts (also known as a check). A draft (or bill of exchange) is an unconditional written order to a third party (normally a bank) to pay. Next, there are promises to pay. These include promissory notes and certificates of deposit. Essentially, these are a written promise by one party to pay money to another party or to the bearer of the note.

Negotiable instruments are very similar to contracts. However as these are meant to facilitate commerce, negotiable instruments make it easier to receive payment than a traditional contract. To become negotiable, the instrument must:

· Be in writing: In order to satisfy this element, the writing must be on a material that lends itself to permanence; and the writing must have portability.

· Be signed by the maker or the drawer: Anything meant to be a signature anywhere on the instrument will qualify.

· Be an unconditional promise or order to pay: This means the terms of the promise or order must be included in the writing on the fact of the instrument. These terms may not be conditioned on the occurrence or nonoccurrence of some other event. Mere acknowledgement of a debt is not enough unless there is an explicit promise to pay it back.

· State a fixed amount of money: This must appear on the face of the instrument. Interest rates do not make it nonnegotiable as long as the rate may be ascertainable from a formula or source described in the instrument.

· Be payable on demand or at a definite time: Demand instruments will include words, such as “payable at sight” or “payable upon presentment” that do not include a time when payment is due. Otherwise, the instrument will be payable at a definite time. These may be on a specified date, within a definite period of time after sight or acceptance, or on a date or time readily ascertainable at the time the promise or order is issued.

· Be payable to order or to bearer, unless it is a check: A order instrument is payable either to “the order of an identified person” or “to an identified person or order.” Bearer instruments do not designate a specific payee. A bearer is a person in possession of an instrument that is payable to bearer or indorsed in blank.

These notes may be transferred in several ways. The note may be transferred by assignment. In this case, the assignee will only have the rights the assignor had. Additionally, the note may be transferred by negotiation. Negotiation is a transfer of an instrument so that the transferee becomes a holder. The holder will (at a bare minimum) receive the rights of the previous possessor. However, the holder may qualify for holder in due course status. This status will actually give the holder and due course more protection than another holder of the note would possess.