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Negotiable Instruments
A Negotiable Instrument is a signed writing containing an unconditional promise or order to pay a sum certain in money, either on demand or at a definite time in the future. Negotiable instruments are used to facilitate commerce, and to avoid the need to carry and exchange large amounts of cash. Every State has adopted Article 3 of the Uniform Commercial Code (with some modifications) as the principal law governing negotiable instruments. The Uniform Commercial Code (UCC) defines a negotiable instrument as an unconditional promise in writing that orders the payment of a fixed amount of money.
Drafts and Notes are negotiable instruments. A draft is an instrument that orders a payment to be made. A check is an example of a Draft. A check is a Draft that is drawn on a bank, as drawee, that is payable on demand. In contrast, a Note is a document that promises that a payment will be made.
To be considered negotiable, an instrument must meet the requirements in Article 3 of the UCC. Transfer of a negotiable instrument is accomplished by delivery, or by endorsement and delivery. Negotiable instruments made payable to the bearer are transferred by delivery, and those made payable to order are transferred by endorsement and delivery. Some useful definitions in relation to negotiable instruments include:
- Acceptor means a drawee that has accepted a draft.
- Bearer means the person holding a negotiable instrument.
- Drawee means a person ordered in a draft to make payment.
- Drawer refers to a person who signs or is identified in a draft as a person ordering payment.
- Good faith means the observance of reasonable standards of fair dealing.
- Maker is a person who signs or is identified in a note as a person undertaking to pay.
- Order means a written instruction to pay money, signed by the person giving the instruction.
- Ordinary care means observance of reasonable commercial standards with respect to the business in which the person is engaged.
- Payable to bearer means the person in possession of the promise or order is entitled to payment.
- Promise means a written undertaking to pay money signed by the person undertaking to pay.
- Remitter means a person who purchases an instrument from its issuer if the instrument is payable to an identified person other than the purchaser.
© 2011 by Michael C. Dennis. All Rights Reserved. Michael is the author of "Credit and Collection Handbook."