Chapter 24–Form & Content -Negotiable instruments (instruments): drafts, checks, promissory notes, and certificates of deposit. -Utilized in the sale of goods and services as well as financing businesses. The use of negotiable instruments has increased to such an extent that payments made with these instruments, checks in particular, are now many times greater than payments made with cash, which now is used primarily for smaller transactions.
The utilization of checks has decreased due to the emergence of electronic transfers, hile promissory notes have been utilized to pay for a company’s operating expenses and current assets. Modern business could not be conducted without the use of negotiable instruments. Negotiability: a legal concept that makes instruments freely transferrable, a readily accepted form of payment in substitution for money. Invests negotiable instruments with a high degree of marketability and commercial utility. It allows negotiable instruments to be freely transferrable and enforceable by a person with the rights of a holder in due course against any person obligated on he instrument, subject only to a limited number of defenses. -Must satisfy 2 conditions: (1) meet the requirements of negotiability & (2) must be acquired by a holder in due course. The flourishing of trade and commerce brought about the necessity to develop an effective way of exchanging contractual rights for money. A merchant who sold goods for cash might use the cash to buy more goods for resale.
If he were to make a sale on credit in exchange for a promise to pay money, why should he not be permitted to sell that promise to someone else for cash with which to carry on his business? One difficulty was that the buyer of the goods gave the seller only a promise to pay money to him. The seller was the only person to whom performance or payment was promised. If, however, the seller obtained from the buyer a promise in writing to pay money to anyone in possession of the writing or to anyone the seller designated, then the duty of performance would run directly to the holder. Bearer: the person in possession of the writing -Writing: the paper or instrument -Holder: the bearer of the paper; the person to whom the payee ordered the payment to be made -Drafts An order or direction to pay money -May be time (payable at a specified tuture date) or sight (payable on demand; immediately upon presentation to the drawee) -It involves 3 parties: drawer, drawee, and payee (the same party may appear in more than one capacity) -Drawer: orders the drawee to pay a fixed amount of money to the payee -Drawee: pays a fixed amount of money to the payee; in possession of money belonging to the drawer or owes the drawer money -Payee: receives a fixed amount of money from the drawee; may be the drawer – The drawer “draws” the draft on the drawee Checks -An order or direction to pay money; the most widely used form of negotiable instruments -A specialized form of draft drawn on a bank (payee) and payable on demand (payee requests the payment) -It involves 3 parties: drawer, drawee, and payee -21st Century Act (Check 21 or the Check Truncation Act) -Created a new negotiable instrument: a substitute check or image replacement document -Allows banks, but doesn’t require them, to truncate original checks, to process check information electronically, and to deliver substitute checks to banks hat want to continue receiving paper checks. -Substitute check = legal equivalent of an original check; contains all the information found on an original check -Promissory Note -A promise to pay money (forms: “l promise to pay $X to the order of Y,” installment notes, collateral notes, mortgage notes, and Judgment notes) -It involves 2 parties: maker and payee -Maker: promises to pay the payee a stated sum of money on demand or at a stated future date -Payee: presents instrument to maker for payment -Two types: time or demand note (note payable upon demand or request of payee/ holder)