Negotiable Instrument Types

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APresentation

OnNegotiable Instruments

Presented By:Krupa Mehta


Negotiable InstrumentsNegotiable Instruments

To qualify as a negotiable instrument To qualify as a negotiable instrument

(commercial paper), the document must (commercial paper), the document must

meet certain requirements established by meet certain requirements established by

Revised Article 3 (Negotiable Instruments) of Revised Article 3 (Negotiable Instruments) of

the Uniform Commercial Code (UCC)the Uniform Commercial Code (UCC)..


Negotiable Instruments Negotiable Instruments (continued)(continued)

If the requirements of Article 3 are met, a If the requirements of Article 3 are met, a transferee who qualifies as a transferee who qualifies as a holder in due holder in due coursecourse takes the instrument free of many takes the instrument free of many defenses that can be asserted against the defenses that can be asserted against the original payee.original payee.

In addition, the document is considered an In addition, the document is considered an ordinary contract that is subject to contract ordinary contract that is subject to contract law.law.


Functions of Negotiable InstrumentsFunctions of Negotiable Instruments

Negotiable instruments serve the following Negotiable instruments serve the following functions:functions: Substitute for moneySubstitute for money Credit deviceCredit device Record-keeping deviceRecord-keeping device

Most purchases by businesses and many Most purchases by businesses and many individuals are made by negotiable individuals are made by negotiable instruments instead of cash.instruments instead of cash.


Types of Negotiable InstrumentsTypes of Negotiable Instruments

DraftsDrafts ChecksChecks

Promissory Promissory NotesNotes

Certificates Certificates of Depositof Deposit


DraftsDrafts

A draft is a three-party instrument that is an A draft is a three-party instrument that is an unconditional written order by one party that unconditional written order by one party that orders the second party to pay money to a orders the second party to pay money to a third party.third party. Drawer of a draftDrawer of a draft Drawee of a draftDrawee of a draft Payee of a draftPayee of a draft


Drafts Drafts (continued)(continued)

Time DraftTime Draft A draft payable at a A draft payable at a

designated future date.designated future date.

Time DraftTime Draft A draft payable at a A draft payable at a

designated future date.designated future date.

Sight DraftSight Draft A draft payable on A draft payable on

sight.sight. Also called a Also called a demanddemand

draft.draft. Trade Acceptance –Trade Acceptance – a a

sight draft that arises sight draft that arises when credit is when credit is extended with the sale extended with the sale of goods.of goods.

Sight DraftSight Draft A draft payable on A draft payable on

sight.sight. Also called a Also called a demanddemand

draft.draft. Trade Acceptance –Trade Acceptance – a a

sight draft that arises sight draft that arises when credit is when credit is extended with the sale extended with the sale of goods.of goods.


ChecksChecks

A distinct form of draft drawn on a financial A distinct form of draft drawn on a financial institution and payable on demand.institution and payable on demand. Drawer of a checkDrawer of a check

Drawee of a checkDrawee of a check

Payee of a checkPayee of a check


Promissory NotesPromissory Notes

A two-party negotiable instrument that is an A two-party negotiable instrument that is an unconditional written promise by one party to unconditional written promise by one party to pay money to another party.pay money to another party. Maker of a noteMaker of a note Payee of a notePayee of a note

Types of notes:Types of notes: Time noteTime note Demand noteDemand note


Certificates of Deposit (CD)Certificates of Deposit (CD)

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


According to UCC 3-104(a), a negotiable According to UCC 3-104(a), a negotiable instrument must:instrument must:

Be in writingBe in writing Be signed by the maker or drawerBe signed by the maker or drawer Be an unconditional promise or order to payBe an unconditional promise or order to pay State a fixed amount of moneyState a fixed amount of money Not require any undertaking in addition to the payment Not require any undertaking in addition to the payment

of moneyof money Be payable on demand or at a definite timeBe payable on demand or at a definite time Be payable to order or to bearerBe payable to order or to bearer


Summary: Formal Requirements for a Summary: Formal Requirements for a Negotiable Instrument Negotiable Instrument (1 of 4)(1 of 4)

RequirementRequirement DescriptionDescription

WritingWriting Writing must be permanent and portable. Oral or implied Writing must be permanent and portable. Oral or implied instruments are nonnegotiable [UCC 3-104(d)].instruments are nonnegotiable [UCC 3-104(d)].

Signed by maker or drawerSigned by maker or drawer Signature must appear on the face of the instrument. It Signature must appear on the face of the instrument. It may be any mark intended by the signer to be his or her may be any mark intended by the signer to be his or her signature. Signature may be by an authorized signature. Signature may be by an authorized representative [UCC 3-104(a)].representative [UCC 3-104(a)].

Unconditional promise or Unconditional promise or order to payorder to pay

Instrument must be an unconditional promise or order to Instrument must be an unconditional promise or order to pay [UCC 3-104(a)]. Permissible notations listed in UCC pay [UCC 3-104(a)]. Permissible notations listed in UCC 3-106(a) do not affect instrument’s negotiability. If 3-106(a) do not affect instrument’s negotiability. If payment is conditional on the performance of another payment is conditional on the performance of another agreement, the instrument is nonnegotiable.agreement, the instrument is nonnegotiable.




Fixed amount of moneyFixed amount of money Fixed amount:Fixed amount: Amount required to discharge the Amount required to discharge the instrument must be on the face of the instrument [UCC 3-instrument must be on the face of the instrument [UCC 3-104(a)]. Amount may include payment of interest, 104(a)]. Amount may include payment of interest, discount, and costs of collection.discount, and costs of collection.Revised Article 3 provides that variable interest rate notes Revised Article 3 provides that variable interest rate notes are negotiable instruments.are negotiable instruments.In money:In money: Amount must be payable in U.S. or foreign Amount must be payable in U.S. or foreign country’s currency. If payment is to made in goods, country’s currency. If payment is to made in goods, services, or non-monetary items, the instrument is services, or non-monetary items, the instrument is nonnegotiable [UCC 3-104(a)].nonnegotiable [UCC 3-104(a)].




Cannot require any Cannot require any undertaking in addition to undertaking in addition to the payment of moneythe payment of money

A promise or order to pay cannot state any other A promise or order to pay cannot state any other undertaking to do an act in addition to the payment of undertaking to do an act in addition to the payment of money [UCC 3-104(a)(3)]. A promise or order to may money [UCC 3-104(a)(3)]. A promise or order to may include authorization or power to protect collateral, include authorization or power to protect collateral, dispose of collateral, waive any law intended to protect dispose of collateral, waive any law intended to protect the obligee, and the like.the obligee, and the like.




Payable on demand or at a Payable on demand or at a definite timedefinite time

Payable on demand:Payable on demand: Payable at sight, upon presentation, Payable at sight, upon presentation, or when no time for payment is stated [UCC 3-108(a)].or when no time for payment is stated [UCC 3-108(a)].Payable at a definite time:Payable at a definite time: Payable at a definite date, or Payable at a definite date, or before a stated date, a fixed period after a stated 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)].at a fixed period after sight [UCC 3-108(b)(c)].Instrument payable only upon the occurrence of an Instrument payable only upon the occurrence of an uncertain act or event is nonnegotiable.uncertain act or event is nonnegotiable.


Nonnegotiable ContractNonnegotiable Contract

A promise or order to pay that does not meet A promise or order to pay that does not meet the requirements of a negotiable instrument.the requirements of a negotiable instrument.

It is not subject to the provisions of UCC It is not subject to the provisions of UCC Article 3.Article 3.

A nonnegotiable contract can be enforced A nonnegotiable contract can be enforced under normal contract law.under normal contract law.


Transfer by Assignment or NegotiationTransfer by Assignment or Negotiation

Transfer by AssignmentTransfer by Assignment The transfer of rights under The transfer of rights under

a contract.a contract. It transfers the rights of the It transfers the rights of the

transferor (transferor (assignorassignor) to the ) to the transferee (transferee (assigneeassignee).).

Transfer by AssignmentTransfer by Assignment The transfer of rights under The transfer of rights under

a contract.a contract. It transfers the rights of the It transfers the rights of the

transferor (transferor (assignorassignor) to the ) to the transferee (transferee (assigneeassignee).).

Transfer by NegotiationTransfer by Negotiation The transfer of a negotiable The transfer of a negotiable

instrument by a person other instrument by a person other than the issuer.than the issuer.

The person to whom the The person to whom the instrument is transferred instrument is transferred becomes the becomes the holderholder..

Transfer by NegotiationTransfer by Negotiation The transfer of a negotiable The transfer of a negotiable

instrument by a person other instrument by a person other than the issuer.than the issuer.

The person to whom the The person to whom the instrument is transferred instrument is transferred becomes the becomes the holderholder..


IndorsementIndorsement

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

The signature may:The signature may: Appear aloneAppear alone Name an individual to whom the instrument is Name an individual to whom the instrument is

to be paid, orto be paid, or Be accompanied by other wordsBe accompanied by other words


Types of Indorsements Types of Indorsements (1 of 2)(1 of 2)

Type of IndorsementType of Indorsement DescriptionDescription

BlankBlank Does not specify a particular indorsee.Does not specify a particular indorsee.This indorsement creates This indorsement creates bearer paperbearer paper..

SpecialSpecial Specifies the person to whom the indorser intends the Specifies the person to whom the indorser intends the instrument to be payable.instrument to be payable.This indorsement creates This indorsement creates order paperorder paper..

UnqualifiedUnqualified Does not disclaim or limit liability.Does not disclaim or limit liability.The indorsee is liable on the instrument if it is not paid by the The indorsee is liable on the instrument if it is not paid by the maker, acceptor, or drawer.maker, acceptor, or drawer.


Types of Indorsements Types of Indorsements (2 of 2)(2 of 2)

Type of IndorsementType of Indorsement DescriptionDescription

QualifiedQualified Disclaims or limits the liability of the indorsee. There are two Disclaims or limits the liability of the indorsee. There are two types:types:1. Special qualified indorsement1. Special qualified indorsement2. Blank qualified indorsement2. Blank qualified indorsement

NonrestrictiveNonrestrictive No instructions or conditions attached to the payment of fundsNo instructions or conditions attached to the payment of funds

RestrictiveRestrictive Conditions or instructions restrict the indorsee’s rights. There Conditions or instructions restrict the indorsee’s rights. There are four types:are four types:1. Conditional indorsement1. Conditional indorsement2. Indorsement prohibiting further indorsement2. Indorsement prohibiting further indorsement3. Indorsement for deposit or collection3. Indorsement for deposit or collection4. Indorsement in trust4. Indorsement in trust


Forged IndorsementForged Indorsement

The Imposter RuleThe Imposter Rule A rule that says if an A rule that says if an

imposter forges the imposter forges the indorsement of the indorsement of the named payee, the named payee, the drawer or maker is drawer or maker is liable on the instrument liable on the instrument and bears the loss.and bears the loss.

The Imposter RuleThe Imposter Rule A rule that says if an A rule that says if an

imposter forges the imposter forges the indorsement of the indorsement of the named payee, the named payee, the drawer or maker is drawer or maker is liable on the instrument liable on the instrument and bears the loss.and bears the loss.

The Fictitious Payee The Fictitious Payee RuleRule

A rule that says that a A rule that says that a drawer or maker is drawer or maker is liable on a forged or liable on a forged or unauthorized unauthorized indorsement of a indorsement of a fictitious payee.fictitious payee.

The Fictitious Payee The Fictitious Payee RuleRule

A rule that says that a A rule that says that a drawer or maker is drawer or maker is liable on a forged or liable on a forged or unauthorized unauthorized indorsement of a indorsement of a fictitious payee.fictitious payee.

Negotiable Instrument Types

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