Business Law 4510 Chapter 18 Notes Negotiability Transferability and Liability 1 I Types of Instruments a Negotiable instrument commercial paper check a signed writing record that contains an unconditional promise or order to pay an exact sum on demand or at a specified future time to a specific person or order or to bearer i In order to operate practically as a substitute for cash or credit the instrument must be easily transferable without danger of being uncollectible b Four types of instruments drafts checks promissory notes certificates of deposit that can be classified in 1 of 2 ways orders to pay and promises to pay or demand instruments payable on demand and time instruments payable at a future date c Orders to Pay Drafts and Checks i Time Drafts and Sight Drafts 1 Draft an unconditional written order to pay rather than a promise to pay a Drawer the person who signs or makes the order to pay creating the draft b Drawee the person to whom the order to pay is made i Must be obligated to the drawer by agreement or debtor creditor relationship c Payee the person to whom payment is ordered 2 3 Time draft payable at a definite future date Sight draft demand draft that is payable on sight when presented to the drawee for payment a Draft can be both time and sight draft if it is payable at a stated time after sight 4 Acceptance drawee s written promise to pay the draft when it comes due ii Trade Acceptances 1 A draft that is commonly used in the sale of goods Seller is both the drawer and the payee a b Buyer is the drawee iii Checks 1 Demand instruments since they are payable on demand i If draft orders the buyer s bank to pay called banker s acceptance a Writer of check is the drawer b c d Cashier s checks functions like cash since the customer pays the bank the amount of The bank on which the check is drawn is the drawee The person to whom the check is payable is the payee the check and indicates to whom the check should be made payable i Bank is drawer and drawee d Promises to Pay Promissory Notes and Certificates of Deposit i Promissory note a written promise made by one person maker to another payee which can be made payable at a definite time or on demand ii Types of Promissory Notes 1 Collateral note a note that is secured by personal property 2 Mortgage note a note secured by real estate 3 Installment note a note payable in installments iii Certificate of Deposit CD 1 Issued when a party deposits funds with a bank that the bank promises to repay with interest on a certain date Time deposit so cannot withdraw funds prior to date of maturity a Bank maker of note b Depositor payee II Requirements for Negotiability a Be in Writing i Must be on a material that is permanent ii Must be portable freely transferable b Be Signed by the Maker or Drawer i Maker if it is a note or certificate of deposit ii Drawer if it is a draft or check iii Signature a symbol executed adopted with a present intention to authenticate a writing and made 1 Manually or with a device machine statement like I Toby Friedman promise is sufficient 2 2 By the use of any name including a trade or assumed name or with a word mark or symbol executed or adopted by a person with present intention to authenticate a writing a Parole evidence can be used to identify signer once identified signature is effective 3 Location of signature on document is unimportant c Be an Unconditional Promise or Order to Pay i Must contain an express order or promise to pay negotiable and unconditional 1 An order that directs a third party to pay a command is mandatory ii Promise or order is conditional NOT negotiable when 1 2 3 It states an express condition to payment It states that the promise or order is subject to or governed by another writing It states that the rights or obligations of the promise or order are stated in another writing d State a Fixed Amount of Money the government as part of the currency e Be Payable on Demand or at a Definite Time i Must be a fixed amount and must be payable in money a medium of exchange authorized or adopted by i To be payable on demand the instrument must have no time for payment specified the person responsible for payment must pay on the items presentment or it must including wording such as payable at sight or payable upon presentment 1 Presentment a demand made by or on behalf of a person entitled to enforce an instrument to either pay or accept the instrument ii To be payable at a definite time the instrument must states that it is payable 1 On a specified date 2 Within a definite period of time after being presented for payment 3 On a date or time readily ascertainable at the time the promise or order is issued iii Acceleration Clause 1 Allows a payee or other holder of a time instrument to demand payment of the entire amount due with interest if a certain event occurs such as a default in payment of an installment 2 Considered negotiable because The exact value of the instrument can be ascertained The instrument will be payable on a specified date if the event allowing acceleration does not occur 3 Foundation Property Investments LLC v CTP LLC Issue does a party that repeatedly accepts late payments on a promissory note waive the right to enforce the note s acceleration clause for failure to make timely payments Yes course of dealing is a sequence of previous conduct between parties which is fairly to be regarded as a establishing a common basis of understanding for interpreting their expressions and other conduct iv Extension Clause 1 Allows the date of maturity to be extended into the future The interval of the extension MUST be specified if the right to extend the time of payment is given to the maker or drawer in order to keep the instrument negotiable If the holder can extend the time of payment the extended date does not need to be specified a b a b a b f Be Payable to Order or to Bearer unless it is a check i Order instrument an instrument that is payable to the order of an identified person the person to whom the instrument is initially payable or to an identified person or order a person designated by the identified person ii Bearer instrument an instrument that does not designate a specific payee 1 Bearer a person in possession of an instrument that is payable to bearer or indorsed in blank a payable to toby or bearer or pay to the order of cash or it can indicate that it is not payable to an identified person III Factors that do not Affect Negotiability a Unless the date