A negotiable instrument is a specialized type of "contract In law, a contract is an agreement between two or more parties which, if it contains the elements of a valid legal agreement, is enforceable by law or by binding arbitration. That is to say, a contract is an exchange of promises with specific legal remedies for breach. These can include Compensatory remedy, whereby the defaulting party is required" for the payment of money that is unconditional and capable of transfer by negotiation. As payment of money is promised later, the instrument itself can be used by the holder in due course frequently as money Money is any object that is generally accepted as payment for goods and services and repayment of debts in a given country or socio-economic context. The main functions of money are distinguished as: a medium of exchange; a unit of account; a store of value; and, occasionally, a standard of deferred payment. Common examples include cheques A cheque or check is a piece of paper (usually) that orders a payment of money. The person writing the cheque, the drawer, usually has a chequing account where their money is deposited. The drawer writes the various details including the money amount, date, and a payee on the cheque, and signs it, ordering their bank, know as the drawee, to pay, banknotes A banknote is a kind of negotiable instrument, a promissory note made by a bank payable to the bearer on demand, used as money, and in many jurisdictions is legal tender. Along with coins, banknotes make up the cash or bearer forms of all modern fiat money. With the exception of non-circulating high-value or precious metal commemorative issues, (paper money A banknote is a kind of negotiable instrument, a promissory note made by a bank payable to the bearer on demand, used as money, and in many jurisdictions is legal tender. Along with coins, banknotes make up the cash or bearer forms of all modern money. With the exception of non-circulating high-value or precious metal commemorative issues, coins), and commercial paper In the global money market, commercial paper is an unsecured promissory note with a fixed maturity of 1 to 270 days. Commercial Paper is a money-market security issued by large banks and corporations to get money to meet short term debt obligations (for example, payroll), and is only backed by an issuing bank or corporation's promise to pay the. In the United States, the Article 3 of the Uniform Commercial Code The Uniform Commercial Code , first published in 1952, is one of a number of uniform acts that have been promulgated in conjunction with efforts to harmonize the law of sales and other commercial transactions in all 50 states within the United States of America covers the use of negotiable instruments except banknotes A banknote is a kind of negotiable instrument, a promissory note made by a bank payable to the bearer on demand, used as money, and in many jurisdictions is legal tender. Along with coins, banknotes make up the cash or bearer forms of all modern fiat money. With the exception of non-circulating high-value or precious metal commemorative issues, (money).
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Differences from a contract
A negotiable instrument is a contract In law, a contract is an agreement between two or more parties which, if it contains the elements of a valid legal agreement, is enforceable by law or by binding arbitration. That is to say, a contract is an exchange of promises with specific legal remedies for breach. These can include Compensatory remedy, whereby the defaulting party is required, albeit not obvious in formation of the required offer, and consideration. Unlike ordinary contract documents, the right to the performance of a negotiable instrument is linked to the possession of the document itself (with certain exceptions such as loss or theft). The consideration for a negotiable instrument is the value given up to acquire it and the consequent loss of value in the prior holder. The instrument itself is understood as a right for payment and an obligation for payment evidenced by the instrument itself with possession the touchstone for the right of payment. The rights of a holder in due course of a negotiable instrument are better than those provided by ordinary contracts as follows:
- The rights to payment are not subject to set-off In law, a set-off is a statutory defense to the whole or to a portion of a plaintiff's claim. It had no existence under the English common law, being created by 2 Geo. II c. 22 for the relief of insolvent debtors, although set-off was recognized in equity. Such a defense could be pleaded only in respect of mutual debts of a definite character, and, and do not rely on the validity of the underlying contract giving rise to the debt (for example if a cheque was drawn for payment for goods delivered but defective, the drawer is still liable on the cheque)
- No notice needs to be given to any prior party liable on the instrument for transfer of the rights under the instrument by negotiation
- Transfer free of equities—the holder in due course can hold better title than the party he obtains it from
Negotiation enables the transferee to become the party to the contract, and to enforce the contract in his own name. Negotiation can be effected by endorsement and delivery (order instruments), or by delivery alone (bearer instruments A bearer instrument is a document that indicates that the bearer of the document has title to property, such as shares or bonds. Bearer instruments differ from normal registered instruments, in that no records are kept of who owns the underlying property, or of the transactions involving transfer of ownership. Whoever physically holds the bearer). In addition, it includes the rule of a derivative title which does not allow a property owner to transfer rights in a piece of property greater than his own.
Classes
Promissory notes and bills of exchange are two primary types of negotiable instruments.
Promissory note
A promissory note A promissory note, referred to as a note payable in accounting, or commonly as just a "note", is a contract where one party makes an unconditional promise in writing to pay a sum of money to the other (the payee), either at a fixed or determinable future time or on demand of the payee, under specific terms. They differ from IOUs in that is a written promise by the maker to pay money to the payee. Bank note A banknote is a kind of negotiable instrument, a promissory note made by a bank payable to the bearer on demand, used as money, and in many jurisdictions is legal tender. Along with coins, banknotes make up the cash or bearer forms of all modern fiat money. With the exception of non-circulating high-value or precious metal commemorative issues, is frequently transferred as a promissory note, a promissory note made by a bank and payable to bearer on demand. A maker of a promissory note promises to unconditionally pay the payee (beneficiary) a specific amount on a specified date.
A promissory note is an unconditional promise to pay a specific amount to bearer or to the order of a named person, on demand or on a specified date.
A negotiable promissory note is unconditional promise in writing made by one person to another, signed by the maker, engaging to pay on demand, or at fixed or determinable future time, sum certain in money, to order or to bearer. (see Sec.194)
A promissory note, briefly stated, is a promise to pay a sum of money.
Original parties to a promissory note.
There are originally two parties in a promissory note. The one who makes the promise and signs the instrument is called the "maker" and the party to whom the promise is made or the instrument is payable is called the "payee"
Bill of exchange
A bill of exchange or "draft" is a written order by the drawer to the drawee to pay money to the payee. A common type of bill of exchange is the cheque A cheque or check is a piece of paper (usually) that orders a payment of money. The person writing the cheque, the drawer or maker, usually has a chequing account where their money is deposited. The maker writes the various details including the money amount, date, and a payee on the cheque, and signs it, ordering their bank, know as the drawee, (check in American English American English is a set of dialects of the English language used mostly in the United States. Approximately two thirds of native speakers of English live in the United States), defined as a bill of exchange drawn on a banker and payable on demand. Bills of exchange are used primarily in international trade, and are written orders by one person to his bank to pay the bearer a specific sum on a specific date. Prior to the advent of paper currency, bills of exchange were a common means of exchange. They are not used as often today.
A bill of exchange is an unconditional order in writing addressed by one person to another, signed by the person giving it, requiring the person to whom it is addressed to pay on demand or at fixed or determinable future time a sum certain in money to order or to bearer. (Sec.126)
It is essentially an order made by one person to another to pay money to a third person.
A bill of exchange requires in its inception three parties--the drawer, the drawee, and the payee.
The person who draws the bill is called the drawer. He gives the order to pay money to third party. The party upon whom the bill is drawn is called the drawee. He is the person to whom the bill is addressed and who is ordered to pay. he becomes an acceptor when he indicates his willingness to pay the bill. (Sec.62) The party in whose favor the bill is drawn or is payable is called the payee.
The parties need not all be distinct persons. Thus, the drawer may draw on himself payable to his own order. (see Sec. 8)
A bill of exchange may be endorsed by the payee in favour of a third party, who may in turn endorse it to a fourth, and so on indefinitely. The "holder in due course" may claim the amount of the bill against the drawee and all previous endorsers, regardless of any counterclaims that may have disabled the previous payee or endorser from doing so. This is what is meant by saying that a bill is negotiable.
In some cases a bill is marked "not negotiable". In that case it can still be transferred to a third party, but the third party can have no better right than the transferor. it a one kind of draft.
In the Commonwealth
In the commonwealth almost all jurisdictions have codified the law relating to negotiable instruments in a Bills of Exchange Act, e.g. Bills of Exchange Act 1882 in the UK, Bills of Exchange Act 1908 in New Zealand, The Negotiable Instrument Act 1881 in India and The Bills of Exchange Act 1914 in Mauritius. The Bills of Exchange Act:
- defines a bill of exchange as: 'an unconditional order in writing, addressed by one person to another, signed by the person giving it, requiring the person to whom it is addressed to pay on demand, or at a fixed or determinable future time, a sum certain in money to or to the order of a specified person, or to bearer.
- defines a cheque as: 'a bill of exchange drawn on a banker payable on demand'
- defines a promissory note as: 'an unconditional promise in writing made by one person to another, signed by the maker, engaging to pay on demand, or at a fixed or determinable future time, a sum certain in money to or to the order of a specified person or to bearer.'
Additionally most commonwealth jurisdictions have separate Cheques Acts providing for additional protections for bankers collecting unindorsed or irregularly indorsed cheques, providing that cheques that are crossed and marked 'not negotiable' or similar are not transferrable, and providing for electronic presentation of cheques in inter-bank cheque clearing systems.
The 1911 Encyclopædia Britannica Eleventh Edition The Encyclopædia Britannica Eleventh Edition is a 29-volume reference work that marked the beginning of the Encyclopædia Britannica's transition from a British to an American publication. Some of its articles were written by the best-known scholars of the day. This edition of the encyclopedia is now in the public domain, but the outdated nature has a comprehensive article on the Bill of Exchange, detailing its history and operation, as understood at the time of its publication.
In the United States
In the United States ^ b. English is the de facto language of American government and the sole language spoken at home by 80% of Americans age five and older. Spanish is the second most commonly spoken language, Article 3 and Article 4 of the Uniform Commercial Code The Uniform Commercial Code , first published in 1952, is one of a number of uniform acts that have been promulgated in conjunction with efforts to harmonize the law of sales and other commercial transactions in all 50 states within the United States of America govern the issuance and transfer of negotiable instruments. For a writing to be a negotiable instrument under Article 3,[1] the following requirements must be met: 1) The promise or order to pay must be unconditional; 2) The payment must be a specific sum of money, although interest Interest is a fee paid on borrowed assets. It is the price paid for the use of borrowed money, or, money earned by deposited funds. Assets that are sometimes lent with interest include money, shares, consumer goods through hire purchase, major assets such as aircraft, and even entire factories in finance lease arrangements. The interest is may be added to the sum; 3) The payment must be made on demand or at a definite time; 4) The instrument must not require the person promising payment to perform any act other than paying the money specified; 5) The instrument must be payable to bearer or to order.
The latter requirement is referred to as the "words of negotiability": a writing which does not contain the words "to the order of" or indicate that it is payable to the person in possession, is not a negotiable instrument and is not governed by Article 3, even if it has all of the other features of negotiability. The only exception is that if an instrument meets the definition of a cheque (a bill of exchange payable on demand and drawn on a bank Banking is generally a highly regulated industry, and government restrictions on financial activities by banks have varied over time and location. The current set of global bank capital standards are called Basel II. In some countries such as Germany, banks have historically owned major stakes in industrial corporations while in other countries) and is not payable to order (i.e. if it just reads "pay John Doe") then it is treated as a negotiable instrument.
Persons other than the original obligor and obligee can become parties to a negotiable instrument. The most common manner in which this is done is by placing one's signature A signature is a handwritten (and sometimes stylized) depiction of someone's name, nickname or even a simple "X" that a person writes on documents as a proof of identity and intent. The writer of a signature is a signatory. Similar to a handwritten signature, a signature work describes the work as readily identifying its creator on the instrument: if the person who signs does so with the intention of obtaining payment of the instrument or acquiring or transferring rights to the instrument, the signature is called an indorsement. An indorsement which transfers the instrument to a specified person is a special indorsement. An indorsement by the payee or holder which does not contain any additional notation (thus making the instrument payable to bearer) is a indorsement in blank. An indorsement which requires that the funds be applied in a certain manner (i.e. "for deposit only", "for collection") is a restrictive indorsement.
If a note or draft is negotiated to a person who acquires the instrument i) in good faith Good faith, or in Latin bona fides , is good, honest intention (even if producing unfortunate results) or belief. In law, it is the mental and moral state of honesty, conviction as to the truth or falsehood of a proposition or body of opinion, or as to the rectitude or depravity of a line of conduct. This concept is important in law, especially ii) for value The economic value of a good or service has puzzled economists since the beginning of the discipline. First, economists tried to estimate the value of a good to an individual alone, and extend that definition to goods which can be exchanged. From this analysis came the concepts value in use and value in exchange iii) without notice of any defenses In civil proceedings and criminal prosecutions under the common law, a defendant may raise a defense in an attempt to avoid criminal or civil liability. Besides contesting the accuracy of any allegation made against him or her in a criminal or civil proceeding, a defendant may also make allegations against the prosecutor or plaintiff or raise a to payment, the transferee is a holder in due course and can enforce the instrument without being subject to defenses which the maker of the instrument would be able to assert against the original payee, except for certain real defenses which are rarely applicable. These real defenses include forgery of the instrument, fraud as to the nature of the instrument being signed, alteration of the instrument, incapacity of the signer to contract, infancy of the signer, duress, discharge in bankruptcy, and the running of a statute of limitations on the instrument.
The rule is what makes the free transfer of negotiable instruments feasible in the modern industrial economy: a person or company who purchases such an instrument in the ordinary course of business can reasonably expect that it will be paid when presented to the maker, without involving itself in a dispute between the maker and the person to whom the instrument was first issued.
The foregoing is the theory and the law. In reality the issuer of an instrument who feels he has been defrauded or otherwise rawly dealt with by the payee may nonetheless refuse to pay the holder in due course, requiring the latter to resort to litigation A lawsuit, or "suit in law", is a civil action brought before a court of law in which a plaintiff, a party who claims to have received damages from a defendant's actions, seeks a legal or equitable remedy. The defendant is required to respond to the plaintiff's complaint. If the plaintiff isn't successful, judgment will be given in the to recover on the instrument.
Usage
While bearer instruments are rarely created as such, a holder of commercial paper In the global money market, commercial paper is an unsecured promissory note with a fixed maturity of 1 to 270 days. Commercial Paper is a money-market security issued by large banks and corporations to get money to meet short term debt obligations (for example, payroll), and is only backed by an issuing bank or corporation's promise to pay the with the holder designated as payee can change the instrument to a bearer instrument by an endorsement. The proper holder simply signs the back of the instrument and the instrument becomes bearer paper, although in recent years, third party checks are not being honored by most banks unless the original payee has signed a notarized document stating such.
Alternately, an individual or company may write a check A cheque or check is a piece of paper (usually) that orders a payment of money. The person writing the cheque, the drawer or maker, usually has a chequing account where their money is deposited. The maker writes the various details including the money amount, date, and a payee on the cheque, and signs it, ordering their bank, know as the drawee, payable to "Cash" or "Bearer" and create a bearer instrument. Great care should be taken with the security of the instrument, as it is legally almost as good as cash.
Exceptions
Under the Code, the following are not negotiable instruments, although the law governing obligations with respect to such items may be similar to or derived from the law applicable to negotiable instruments:
- Letters of credit A standard, commercial letter of credit is a document issued mostly by a financial institution, used primarily in trade finance, which usually provides an irrevocable payment undertaking, which are governed by Article 5 of the Code
- Bills of lading and other documents of title, which are governed by Article 7 of the Code
- Securities A security is a fungible, negotiable instrument representing financial value. Securities are broadly categorized into debt securities and equity securities, e.g., common stocks; and derivative contracts, such as forwards, futures, options and swaps. The company or other entity issuing the security is called the issuer. A country's regulatory, such as stocks The stock or capital stock of a business entity represents the original capital paid into or invested in the business by its founders. It serves as a security for the creditors of a business since it cannot be withdrawn to the detriment of the creditors. Stock is distinct from the property and the assets of a business which may fluctuate in and bonds In finance, a bond is a debt security, in which the authorized issuer owes the holders a debt and, depending on the terms of the bond, is obliged to pay interest and/or to repay the principal at a later date, termed maturity. A bond is a formal contract to repay borrowed money with interest at fixed intervals, which are governed by Article 8 of the Code
- Deeds A deed is a signed and usually sealed legal instrument in writing used to grant a right. Deeds have historically been part of the broader category of instruments under seal, requiring only the affixing of a common seal to render them valid. Today, however, deeds are instruments in solemn form which require the author's signature and a number of and other documents conveying interests in real estate, although a mortgage may secure a promissory note which is governed by Article 3
- IOUs An IOU is usually an informal document acknowledging debt. The term is derived from the opening phrase "I owe unto" and/or the pronunciation of "I owe you". An IOU differs from a promissory note in that an IOU is not a negotiable instrument and does not specify repayment terms such as the time of repayment. IOUs usually specify
External links
References
Categories: Securities | Legal documents | Payment systems Articles about ways money can be moved between persons, organizations, and locations, as well as how financial transactions can be executed | Negotiable instrument law | Business law Business law consists of many different areas typically taught in law school curricula, including: Contracts, the law of Corporations and other Business Organizations, Securities Law, Intellectual Property , Antitrust, Secured Transactions, Commercial Paper, Income Tax, Pensions & Benefits, Trusts & Estates, Immigration Law, Labor Law, | Economics terminology | Accounting source documents
Sun, 27 Jun 2010 13:42:44 GMT+00:00
Helium Negotiable instruments are financial instruments and other forms of specialized contract that give an unconditional and transferable ...
Henrik
hu, 22 Jul 2010 09:08:57 GM
accommodation party means a person who has signed a . negotiable instrument. as a marker, drawer acceptor or endorser without receiving the value thereof and for the purpose of lending his name to some other person; ...
