Negotiable Instruments - General Principles

PURPOSE OF CODIFICATION

      Chief  purpose  was  to  produce  uniformity  in  the  laws  of  the  different states  upon  this  important  subject,  so  that  the  citizens  of  each  state might  know  the  rules  which  would  be  applied  to  their  notes,  checks, and other negotiable paper in every other state in which the law was
enacted,  since  it  is  an  absolute  impossibility  for  the  commercial purchaser
      Second  purpose  was  to  preserve  the  law  as  nearly  as  possible  as  it then existed
 

COMMON FORMS OF NEGOTIABLE INSTRUMENTS

1.    Promissory notes
2.    Bills of exchange
3.    Checks, which are also bills of exchange, but of a special kind
 

PROMISSORY NOTE, SECTION 184

      “A  negotiable  promissory  note,  within  the  meaning  of  this  act,  is  an unconditional promise in writing by one person to another, signed by the  maker 

(1),  engaging  to  pay  on  demand  or  at  a  fixed  or determinable future time

(2), a sum certain in money

(3) to order or to bearer

(4).  Where a note is drawn to the maker’s own order, it is not complete until indorsed by them.”

      Essentially a promise in writing to pay a sum certain in money
      The promise is to pay on demand or on a fixed or determinable future time
      General  characteristics:  amount;  place  where  contract  to  pay  is executed;  due  date;  absolute  promise  to  pay  something;  payable  to order/bearer; payee; maker of the note
 

BILL OF EXCHANGE, SECTION 126

•      “A  bill  of  exchange  is  an  unconditional  order  in  writing  addressed  by one person to another signed by the person giving it

(1), requiring the person  to  whom  it  is  addressed  to  pay  on  demand  or  at  a  fixed  or determinable future time

(2) a sum certain in money

(3) to order or to bearer”

•      General characteristics:  the order or command to pay; drawer/maker; drawee
 

CHECK

      A bill of exchange drawn on a bank payable on demand

TO WHOM INSTRUMENTS MAY BE PAYABLE

1.    Bearer
2.    Order
3.    To a specified person
 

WHEN IS IT PAYABLE TO BEARER?

1.    When it is expressed to be so payable
2.    When it is payable to a person named therein or bearer

WHEN IS IT PAYABLE TO ORDER?

1.    When it is expressed to be payable to the order of a specified person
2.    To a specified person or his order
 

WHEN IS IT PAYABLE TO A SPECIFIED PERSON?

      When  the  instrument  is  payable  to  a  specified  person  named  in  the
instrument and no other
 

PARTIES TO A PROMISSORY NOTE

1.    Maker—the person who executes the written promise to pay
2.    Payee,  if  the  instrument  is  payable  to  order—the  person  in  whose favor the promissory note is made payable
3.    Bearer, if the instrument is payable to bearer
 

PARTIES TO A BILL OF EXCHANGE 

1.    Drawer—the person who executes the written order to pay
2.    Payee,  if  the  instrument  is  payable  to  order—the  person  in  whose favor a bill of exchange is drawn payable 
3.    Bearer, if the instrument is payable to bearer
4.    Acceptor—the  drawee  who  signifies  his  assent  to  the  order  of  the drawer.  It is  only when he accepts the bill  that he becomes a party thereto and liable thereon.
 

OTHER PARTIES TO NEGOTIATED INSTRUMENTS

1.    Indorser and 
2.    Indorsee, in the case of instruments payable to order
3.    Persons negotiating by mere delivery
4.    Persons to whom the instrument is negotiated by delivery
 

INDORSER AND INDORSEE

      When  the  negotiation  is  by  indorsement  completed  by  delivery,  the parties added are the indorser and indorsee
      Indorser—the one who negotiates the instrument
      Indorsee—the   one   to   whom   the   instrument   is   negotiated   by indorsement
 

WHERE INSTRUMENT IS PAYABLE TO BEARER

•      Where  the  instrument  is  payable  to  bearer,  it  can  be  negotiated  by mere delivery without necessity of indorsement 

HOLDER

      The payee or indorsee of a bill or note, who is in possession of it, or the bearer thereof
      If the instrument is payable to order, he who is the payee or indorsee and who is in possession thereof
      If the instrument is payable to bearer, he who is in possession thereof
 

ISSUE

      First  delivery  of  the  instrument,  complete  in  form  to  a  person  who takes it as a holder
 

DELIVERY

      Consists  principally  of  placing  the  transferee  in  possession  of  the instrument, but it must be accompanied by the intent to transfer title
      “every   contract   on   a   negotiable   instrument   is   incomplete   and revocable  until  delivery  of  the  instrument  for  the  purpose  of  giving effect thereto”
 

NEGOTIATION

•      Transfer of an instrument from one person to another as to constitute the transferee the holder of the instrument
•      Mode of transferring an instrument
•      Effect is to make the transferee the holder of the instrument
 

HOW INSTRUMENT PAYABLE TO BEARER IS NEGOTIATED

      May be negotiated by mere delivery
 

HOW INSTRUMENT PAYABLE TO ORDER IS NEGOTIATED

      Must be negotiated by indorsement completed by delivery
      Indorsement  is  necessary  to  make  the  transferee  the  indorsee  and delivery  is  necessary  to  place  the  transferee  in  possession  of  the instrument
 

INDORSEMENT

      Legal  transaction,  effected  by  the  writing  of  one’s  own  name  on  the back  of  the  instrument  or  upon  a  paper  attached  thereto,  with  or without  additional  words  specifying  the  person  to  whom  or  to  whose order the instrument is to be payable whereby one not only transfers
one’s full legal title to the paper transferred but likewise enters into an implied guaranty that the instrument will be duly paid
 

SPECIAL INDORSEMENT

      Specifies the person to whom  or to whose order the instrument is to be payable
 

BLANK INDORSEMENT

      One  that  doesn’t  specify  the  person  to  whom  or  to  whose  order  the instrument is to be payable
 

NEGOTIATION, INDORSEMENT, DELIVERY, COMPARED.

1. Indorsement is merely the first step in the process of negotiating an instrument which is payable to order 

2. Where  the  instrument  is  payable  to  order,  neither  is  delivery equivalent to negotiation
3. But  where  the  instrument  is  payable  to  bearer,  delivery  is equivalent to negotiation
 

PRESENTMENT FOR ACCEPTANCE

      Exhibiting the bill to the drawee and demanding that he accept it, that is, signify his assent to the order or command of the drawer
 

ACCEPTANCE

      Signification of the drawee of his assent to the order of the drawer
 

DISHONOR BY ACCEPTANCE

      Where the bill is presented for acceptance, and acceptance is refused by  the  drawee,  or  cannot  be  obtained,  or  where  presentment  for acceptance is excused, and the bill is not accepted
 

PRESENTMENT FOR PAYMENT

      Consists  of  exhibiting  the  instrument  to  the  person  primarily  liable thereon and demanding payment form him on the date of maturity
 

DISHONOR BY NON-PAYMENT

      Where  the  instrument  is  presented  for  payment  and  payment  is refused or cannot be obtained,  or where presentment for  payment is excused and the instrument is overdue and unpaid
 

NOTICE OF DISHONOR

      When  an  instrument  has  been  dishonored  by  non-payment  or  non-acceptance
 

DISCHARGE

•      An instrument is discharged by payment in due course by or on behalf of the principal debtor
 

PARTIES PRIMARILY AND SECONDARILY LIABLE

•      Under  the  Negotiable Instruments Law,  the  person  primarily  liable  on  an  instrument  is  the person  who  by  the  terms  of  the  instrument  is  absolutely  required  to pay the same
•      All other parties are secondarily liable
 

IN BILLS OF EXCHANGE

•      The acceptor is the one primarily liable
•      He is absolutely required to pay the instrument as he engages that he will pay it according to the tenor of his acceptance
 

SECONDARY LIABILITY OF DRAWER

•      By  the  mere  drawing  of  the  instrument,  the  drawer  assumes  the liability stated in Section 61
•      The general tenor of the liability of the drawer is that he will pay the bill if the drawee doesn’t accept or pay the bill.  
•      In  other  words,  he  is  not  absolutely  required  to  pay  the  bill—if  the drawee  pays,  then  he  is  not  required  to  pay.    It  is  only  when  the drawee doesn’t pay that he will be required to pay.
 

SECONDARY LIABILITY OF INDORSER

      He will pay the instrument if the person primarily liable will not pay.
 

SECONDARY LIABILITY OF ONE NEGOTIATING BY DELIVERY

      By merely delivering an instrument payable to bearer, without saying anything more, the person negotiating by mere delivery assumes the liability mentioned in Section 65.  
      Under said section, the general tenor of liability is similar to that of an indorser
 

IN PROMISSORY NOTES

      The maker is primarily liable
      Agreement of the maker is that he will pay the instrument according to the tenor
 

FUNCTION OF NEGOTIABLE INSTRUMENTS

1.    Substitute for money 
2.    Increase the purchasing medium in circulation
 

PAYMENT BY NEGOTIABLE INSTRUMENTS

      W/N the giving and taking of a promissory note or bill of exchange is prima  facie  absolute  payment  as  in  the  case  of  money  or  merely  a prima facie conditional payment?
      The  delivery  of  the  promissory  notes  payable  to  order,  or  bills  of exchange  or  other  mercantile  documents  shall  produce  the  effect  of payment only when they have been cashed, or when, through the fault of the creditor, they have been impaired
 

PRINCIPAL FEATURES OF NEGOTIABLE INSTRUMENTS

1.    Negotiability
2.    Accumulation of secondary contracts as they are transferred from one person to another
 

NEGOTIABILITY 

      Attribute or property whereby a bill, note or check passes or may pass from hand to hand similar to money, so as to give the holder in due course the right  to hold the instrument and  collect the sums payable for himself free from defense.
 

PRIMARY PURPOSE OF NEGOTIABILITY

      To  allow  bills  and  notes  the  effect  which  money,  in  the  form  of government bills or notes, supplies in the commercial world

ACCUMULATION OF SECONDARY CONTRACTS

      Most   important   characteristic   of   negotiable   instruments   is   the accumulation of secondary contracts which they pick up and carry with them as they are negotiated from one person to another
      Advantage:  they  improve  as  they  pass  from  hand  to  hand,  as  more debtors are added