After reading this chapter, students should be able to:
- Explain what a negotiable instrument is.
- Assess the importance of negotiable instruments.
- Distinguish between the two basic types of negotiable instruments - promises to pay, and order to pay.
- Describe the types of negotiable instruments, and name the parties to each kind of negotiable instrument.
- Summarize the elements necessary to make an instrument negotiable.
- Point out that certain added language and omissions do not affect the negotiability of an instrument.
A negotiable instrument is a signed writing (record) that can be used either as a substitute for money or as a means of extending credit. There are two classifications of negotiable instruments: promises to pay and orders to pay. Within these two classifications, the UCC specifies four types of instruments: drafts and checks, which are orders to pay, and promissory notes and certificates of deposit,which are promises to pay. Notes and certificates of deposit have two parties. The maker is the person making the promise to pay, and the payee is the person to whom the note and certificate of deposit are made payable. Drafts and checks have three parties. The person issuing the draft or check is the drawer, the person ordered to pay is the drawee, and the person to whom the draft or check is payable is the payee. A check is a type of draft in which the drawee is always a bank and the drawer is the depositor. Instruments may be either negotiable or nonnegotiable depending on the language used in the instrument.
To be negotiable, an instrument must meet the following requirements: It must (1) be in writing, (2) be signed by the maker or drawer, (3) contain an unconditional promise or order to pay, (4) state a fixed amount of money, (5) be payable on demand (or at sight) or at a definite time, (6) be payable to order or to bearer, and (7) designate a drawee (in the case of a draft) with reasonable certainty.
Certain language that is added, such as the place where the instrument is payable and the words Value received, has no effect on negotiability. Certain information that is lacking, such as the date of issue of the instrument, the place of payment, and the sum in figures, likewise has no effect on the negotiability of the instrument; neither does the practice of postdating or antedating a check. If a party adds handwritten or typewritten language that is inconsistent with the preprinted language on the instrument (note or draft), the handwriting takes precedence over both the typewritten and preprinted language. Typewritten language takes precedence over preprinted language. Finally, under Revised Article 3, a check lacking the words to the order of is still negotiable.