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CHAPTER 21 NEGOTIABILITY

CHAPTER 21 NEGOTIABILITY. DAVIDSON, KNOWLES & FORSYTHE Business Law: Cases and Principles in the Legal Environment (8 th Ed.). FORMAL REQUIREMENTS FOR NEGOTIABILITY: ARTICLE 3. Negotiable instrument is a formal contract and carries rights under contract law.

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CHAPTER 21 NEGOTIABILITY

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  1. CHAPTER 21NEGOTIABILITY DAVIDSON, KNOWLES & FORSYTHE Business Law: Cases and Principles in the Legal Environment (8th Ed.)

  2. FORMAL REQUIREMENTS FOR NEGOTIABILITY: ARTICLE 3 • Negotiable instrument is a formal contract and carries rights under contract law. • Instrument must meet each and every requirement in order to fall within coverage of Article 3. • Missing elements removes instrument from Article 3 and places it under common law.

  3. FORMAL REQUIREMENTS FOR NEGOTIABILITY: ARTICLE 3 • Requirements for negotiability: • Payable to bearer, to order at time it is issued, or first comes into possession of a holder. • Payable on demand or at a definite time. • Does not state any other undertaking or instruction by person promising or ordering payment to do any act in addition to the payment of money.

  4. FORMAL REQUIREMENTS FOR NEGOTIABILITY: ARTICLE 3 • To qualify as negotiable instrument: • Be inwriting. • Be signed by maker or drawer. • Contain an unconditional promise or order to pay. • Be payable on demand or definite time. • Be payable to order or to bearer.

  5. FORMAL REQUIREMENTS FOR NEGOTIABILITY: ARTICLE 3 • Writing Requirement. • Right must be tangible. • Simplest way to prove that the right exists. • Negotiable instruments: • Checks; • Drafts; • Certificates of Deposit; or • Notes. • These writings have blanks and are pre-encoded with magnetic ink.

  6. FORMAL REQUIREMENTS FOR NEGOTIABILITY: ARTICLE 3 • Writing Requirement. • Commercial paper is equally valid: • When prepared on a scratch paper. • Blank sheet of paper. • Or any other relatively permanent thing.

  7. FORMAL REQUIREMENTS FOR NEGOTIABILITY: ARTICLE 3 • Signature Requirement. • Protection from fraud or trickery. • Types of signatures: • Manual subscription. • Any symbol executed or adopted by a party with present intention to authenticate a writing. • No difference where instrument is signed.

  8. FORMAL REQUIREMENTS FOR NEGOTIABILITY: ARTICLE 3 • Unconditional Promise or Order Requirement. • Promise or order unconditional unless it states: • An express condition to payment. • The promise or order is subject to or governed by another writing. • Rights or obligations with respect to promise or order are stated in another writing.

  9. FORMAL REQUIREMENTS FOR NEGOTIABILITY: ARTICLE 3 • Unconditional Promise or Order Requirement. • Promise or order is not made conditional: • By reference to another writing for a statement of rights. • Because payment is limited to resort to a particular source of funds.

  10. FORMAL REQUIREMENTS FOR NEGOTIABILITY: ARTICLE 3 • Unconditional Promise or Order Requirement. • Promise or order requires, as a condition to payment, a countersignature by a person whose specimen signature appears on the promise or order, the condition doesn’t make the promise or order conditional.

  11. FORMAL REQUIREMENTS FOR NEGOTIABILITY: ARTICLE 3 • Fixed Amount of Money Requirement. • Holder must know how much money is to be received when instrument is paid. • “Money” means a medium of exchange. • Instrument is presumed to be issued without interest unless specifically called for in instrument. • Instrument can call for payment of interest at a variable rate.

  12. FORMAL REQUIREMENTS FOR NEGOTIABILITY: ARTICLE 3 • Determinable Time Requirement. • Holder wants to know when payment is expected. • Instrument payable on demand or at a definite time. • Payee or holder able to tell when payable by looking at face amount of instrument.

  13. FORMAL REQUIREMENTS FOR NEGOTIABILITY: ARTICLE 3 • Words of Negotiability Requirement. • Instrument must contain words of negotiability. • “Pay to the order of”; or • “Pay to bearer”. • Words important because law reads them as authorizing the free transfer of the instrument. • Failing to use these terms is denial of free transferability and denial of negotiability.

  14. CONSTRUCTION AND INTERPRETATION: ARTICLE 3 • Instrument contains contradictory terms: • Typewritten terms prevail over printed terms. • Handwritten terms prevail over both. • Words prevail over numbers.

  15. REQUIREMENTS FOR NEGOTIABILITY: ARTICLE 7 • More relaxed in determining whether a document of title is negotiable. • Document of title is negotiable if: • Document states goods are to be delivered to “bearer” or or “order” of named person. • In international trade, if it runs to a named person or assigns.

  16. REQUIREMENTS FOR NEGOTIABILITY: ARTICLE 7 • Every other document title is deemed nonnegotiable. • More concerned with the rights of the parties to the goods than with the rights of the parties in the documents covering the goods.

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