The Function and Creation of Negotiable Instruments

Articles 3 and 4 of the UCC

A “negotiable instrument” is a signed writing containing an unconditional promise to pay an exact sum of money. History of negotiable instruments began in England “bills of exchange” so that merchants were able to exchange money while keeping their money safe in the banks.
Today, UCC Article 3.

The Function of Instruments

To function as a substitute for money or credit device.
In order for an instrument to operate practically, it has to be easily transferable.
Laws of assignment did not allow for ease of transfer because the assignee was always subject to the defenses that could be used against the assignor. Article 3 provided that some defenses could not be used against certain assignees.

Types of Negotiable Instruments

Drafts and checks are 3 party instruments: Drawer, Drawee and Payee.

• Checks (cashier’s, teller’s and traveler’s) are drafts on a bank.
• Trade acceptances seller is drawer and payee.
Case 24.1: Flatiron Linen v. First American State Bank (2001).
Promissory Notes are two party instruments:
• Maker (Promisor) and
• Bearer (Promisee).
Certificates of deposit (CDs): two party instruments.
Case 24.2: U.S. v. Durbin (1999).

Requirements for Negotiability

Writing signed by the maker or the drawer. Unconditional promise or order to pay a fixed amount of money.
Payable on demand or at a definite time.
Acceleration and Extension clauses.
Be payable to order or to bearer, unless it is a check. Case 24.3: Barclay’s Bank v. Johnson (1998).

Factors Not Affecting Negotiability

• Omission of date.
• Postdating or antedating.
• No place for payment: address or Drawee or maker or, if none, place of business or, if none, residence.

Factors Not Affecting Negotiability

• Handwritten over typewritten or printed.
• Words over numbers.
• With interest = judgment rate.
• Mention of collateral.