Lecture 1: Introduction to Negotiable Instruments

Definition and Types

Negotiable Instruments: Written documents that represent a promise to pay a specific sum of money and can be easily transferred from one person to another.

Promissory Notes: A written promise by one party (the maker) to pay a certain sum of money to another party (the payee) at a specified time or on demand.

Drafts (Checks): A written order by one party (the drawer) instructing a second party (the drawee, usually a bank) to pay a specified sum of money to a third party (the payee).

Requirements for Negotiability

Unconditional Promise or Order to Pay: The promise or order must be clear and absolute, without any conditions attached.

Fixed Amount of Money: The instrument must state a specific sum of money to be paid.

Payable on Demand or at a Definite Time: The instrument must specify when payment is due, either on demand or at a specific date.

Payable to Order or to Bearer: The instrument must be payable either to a specific person named on the instrument (order paper) or to anyone who possesses the instrument (bearer paper).

In Writing and Signed by the Maker or Drawer: The instrument must be in writing and signed by the party making the promise (maker) or issuing the order (drawer).

Holder Status

Holder: A person who has legal possession of a negotiable instrument and the right to receive payment.

Bearer: A person who has possession of a negotiable instrument that is payable to bearer.

Negotiation: The transfer of a negotiable instrument from one person to another in a way that gives the transferee the right to receive payment.

Endorsement: A signature on the back of a negotiable instrument that transfers ownership.

Delivery: The physical transfer of a negotiable instrument.

Basic Policy Goals

Ease of Transfer: Negotiability facilitates the transfer of funds by making it easier for businesses and individuals to accept payment in the form of negotiable instruments.

Uniform Commercial Practice: Negotiability promotes consistency and predictability in commercial transactions by establishing a uniform set of rules for the transfer and enforcement of negotiable instruments.

Encourages Market Efficiency: By providing a reliable and easily transferable means of payment, negotiability enhances market efficiency and facilitates economic growth.

Reduces Transaction Costs: The ease of transfer and enforcement of negotiable instruments reduces transaction costs for businesses and individuals.

Provides Certainty and Security: Negotiability provides certainty and security to parties involved in commercial transactions by establishing clear rules and procedures for the transfer and enforcement of negotiable instruments.