Negotiable Instruments Overview

Definitions

• Negotiable Instrument: A written document that promises payment to a specified person or the holder, which is transferable by endorsement or delivery.
• Must meet these criteria:
  • Unconditional promise to pay
  • Fixed amount of money
  • Payable on demand or at a specified future time
  • Payable to order or bearer

Types of Negotiable Instruments

1. Promissory Notes

   • A written promise by one party (the maker) to pay a specified sum to another (the payee) either on demand or at a future date.
   • Types:
     • Demand Promissory Note: Payable upon request.
     • Time Promissory Note: Payable at a defined future date.

2. Bills of Exchange

   • An order from one party (the drawer) to another (the drawee) to pay a sum of money to a third party (the payee) at a specific time.
   • Key Terms:
     • Drawer: The person who writes the bill.
     • Drawee: The person directed to pay.
     • Payee: The recipient of payment.

3. Checks

   • A specific type of bill of exchange that is drawn on a bank and payable on demand.
   • Key components:
     • Drawer: The account holder who writes the check.
     • Drawee: The bank holding the drawer's account.
     • Payee: The person or entity to whom the check is issued.

4. Certificates of Deposit (CDs)

   • A written acknowledgment from a bank that a sum of money has been deposited for a specified period, promising to pay back the principal plus interest.
   • Key characteristics:
     • Fixed term
     • Fixed interest rate
     • Non-transferable (most cases), but may be negotiable.

5. Bearer Instruments

   • Instruments that are payable to the person who possesses (bears) them.
   • No endorsement is necessary for transferring ownership.

6. Order Instruments

   • Instruments that require endorsement for transfer.
   • Payable only to the person specified and their endorsed assignee.

Important Concepts

• Negotiability: The ease of transferability of the instrument from one party to another.
• Endorsement: The signature or statement by the holder that allows transfer of the instrument to another party.
• Holder in Due Course: A person who takes a negotiable instrument for value, in good faith, and without notice of any defects, granting them special rights.

Legal Framework

• Governed by the Uniform Commercial Code (UCC) in the United States and similar laws in other jurisdictions.
• Provides rules for creating, transferring, and enforcing negotiable instruments.

Negotiable Instruments

• A written document promising payment to a specific person or holder
• Can be transferred through endorsement or delivery

Criteria for Negotiable Instruments

• Unconditional promise to pay
• Fixed amount of money
• Payable on demand or at a specific future time
• Payable to order or bearer

Types of Negotiable Instruments

Promissory Notes

• Written promise to pay a specific sum
• Made by one party (maker) to another (payee)
• Can be payable on demand or at a future date
• Types:
  • Demand Promissory Note: Payable on request
  • Time Promissory Note: Payable at a defined future date

Bills of Exchange

• Order from one party (drawer) to another (drawee) to pay a sum of money to a third party (payee)
• Key terms:
  • Drawer: The person who writes the bill
  • Drawee: The person directed to pay
  • Payee: The recipient of payment

Checks

• A specific type of bill of exchange drawn on a bank, payable on demand
• Key Components:
  • Drawer: The account holder who writes the check
  • Drawee: The bank holding the drawer's account
  • Payee: The person or entity to whom the check is issued

Certificates of Deposit (CDs)

• Bank acknowledgement of a deposited sum for a set period, promising to pay back principal + interest
• Key characteristics:
  • Fixed term
  • Fixed interest rate
  • Non-transferable (mostly), but may be negotiable

Bearer Instruments

• Instruments payable to the possessor
• No endorsement needed for ownership transfer

Order Instruments

• Instruments requiring endorsement for transfer
• Payable only to a specified person and their endorsed assignee

Important Concepts

• Negotiability: Ability to transfer the instrument easily
• Endorsement: Holder's signature or statement to transfer an instrument to another party
• Holder in Due Course: Someone who takes a negotiable instrument for value, in good faith, without notice of defects, granting them special rights

Legal Framework

• Governed by the Uniform Commercial Code (UCC) in the US and similar laws in other jurisdictions
• Sets rules for creating, transferring, and enforcing negotiable instruments