PowerPoint Slides to Accompany

BUSINESS LAW
E-Commerce and Digital Law
International Law and Ethics
5th Edition
by Henry R. Cheeseman

Chapter 23
Creation and Transfer of
Negotiable Instruments

Slides developed by
Les Wiletzky
Wiletzky and Associates, Puyallup, WA

Copyright © 2004 by Prentice-Hall. All rights reserved.

Negotiable 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).

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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.

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Functions of Negotiable Instruments
 Negotiable instruments serve the following
functions:
 Substitute for money
 Credit device

 Record-keeping device

 Most purchases by businesses and many

individuals are made by negotiable
instruments instead of cash.

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Types of Negotiable Instruments

Drafts Checks

Certificates of Promissory
Deposit Notes

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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

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Drafts (continued)
Time Draft
Time Draft Sight
Sight Draft
Draft
 A draft payable at a A
 A draft payable at a 
A draft
draft payable
payable on on
designated future
designated future date.
date. sight.
sight.
 Also

Also called
called aa demand
demand
draft.
draft.
 Trade

Trade Acceptance
Acceptance –– aa
sight
sight draft
draft that
that arises
arises
when
when credit
credit is
is
extended
extended with
with the
the sale
sale
of
of goods.
goods.
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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

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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

 Types of notes:
 Time note
 Demand note

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Certificates of Deposit (CD)
 A two-party negotiable instrument that is a
special form of note created when a
depositor deposits money at a financial
institution in exchange for the institution’s
promise to pay back the amount of the
deposit plus an agreed-upon rate of interest
upon the expiration of a set time period
agreed upon by the parties.

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According to UCC 3-104(a), a negotiable
instrument must:
 Be in writing
 Be signed by the maker or drawer

 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

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Summary: Formal Requirements for a
Negotiable Instrument (1 of 4)
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 Instrument must be an unconditional promise or order to
order to pay 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.

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Summary: Formal Requirements for a
Negotiable Instrument (2 of 4)
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)].

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Summary: Formal Requirements for a
Negotiable Instrument (3 of 4)
Requirement Description
Cannot require any A promise or order to pay cannot state any other
undertaking in addition to undertaking to do an act in addition to the payment of
the payment of money 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.

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Summary: Formal Requirements for a
Negotiable Instrument (4 of 4)
Requirement Description
Payable on demand or at a Payable on demand: Payable at sight, upon presentation,
definite time 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.

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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.
 A nonnegotiable contract can be enforced

under normal contract law.

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Transfer by Assignment or Negotiation
Transfer by
Transfer by Assignment
Assignment Transfer
Transfer by by Negotiation
Negotiation
 The transfer of rights under  The
 The transfer of rights under 
Thetransfer
transferofofaanegotiable
negotiable
aacontract.
contract. instrument
instrumentby byaaperson
personother
other
 It transfers the rights of the
 It transfers the rights of the than
thanthe
theissuer.
issuer.
transferor((assignor
transferor assignor))totothe
the  The

Theperson
persontotowhom
whomthe the
transferee((assignee
transferee assignee).). instrument
instrumentisistransferred
transferred
becomes
becomesthe theholder
holder..

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Indorsement
 The signature (and other directions) written
by or on behalf of the holder somewhere on
the instrument.
 The signature may:

 Appear alone
 Name an individual to whom the instrument is

to be paid, or
 Be accompanied by other words

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Types of Indorsements (1 of 2)
Type of Indorsement Description
Blank Does not specify a particular indorsee.
This indorsement creates bearer paper.
Special Specifies the person to whom the indorser intends the
instrument to be payable.
This indorsement creates order paper.
Unqualified Does not disclaim or limit liability.
The indorsee is liable on the instrument if it is not paid by the
maker, acceptor, or drawer.

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Types of Indorsements (2 of 2)
Type of Indorsement Description
Qualified Disclaims or limits the liability of the indorsee. There are two
types:
1. Special qualified indorsement
2. Blank qualified indorsement
Nonrestrictive No instructions or conditions attached to the payment of funds
Restrictive Conditions or instructions restrict the indorsee’s rights. There
are four types:
1. Conditional indorsement
2. Indorsement prohibiting further indorsement
3. Indorsement for deposit or collection
4. Indorsement in trust

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Forged Indorsement
The Imposter
The Imposter Rule Rule The
The Fictitious
Fictitious Payee
Payee
 A rule that says if an
 A rule that says if an Rule
Rule
imposter forges
imposter forges the the A

A rule
rule that
that says
says that
that aa
indorsement of
indorsement of the
the drawer
drawer or or maker
maker is is
named payee,
named payee, the the liable
liable on
on aa forged
forged oror
drawer or
drawer or maker
maker is is unauthorized
unauthorized
liable on
liable on the
the instrument
instrument indorsement
indorsement of of aa
and bears
and bears thethe loss.
loss. fictitious
fictitious payee.
payee.

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