Law for Business, 17e, by Ashcroft and Ashcroft, © 2011 Cengage Learning 20.1 Law for Business, 17e by Ashcroft and Ashcroft Chapter 20: Nature of Negotiable Instruments

20.2 Chapter 20 Objectives Discuss how negotiable instruments are transferred. Differentiate between bearer paper and order paper. Describe an electronic fund transfer.

20.3 Negotiable Instruments Negotiable instruments are writings that can be transferred from person to person as a substitute for money or an instrument of credit. The law merchant refers to rules applied by 15th century English merchants who had disputes. These were settled by special courts set up by merchants themselves.

20.4 Negotiable Instruments Negotiation is transferring ownership of negotiable instrument to another party. An indorsement is the signature of the owner made on the back of an instrument. Holders in due course acquire rights superior to those of the original owner.

20.5 Order and Bearer Paper What is the difference between order paper and bearer paper? What is the difference between a draft and a promissory note? What else can a draft be called? Is a draft considered order paper or bearer paper? Can one make bearer paper into order paper easily? How? Activity

20.6 Example of Promissory Note Payee Maker

20.7 Example of a Draft Drawer Drawee/ Acceptor Payee

20.8 Electronic Fund Transfers An electronic fund transfer (EFT) is a transfer of funds initiated by electronic terminal, telephonic instrument, or computer or magnetic tape that instructs or authorizes a financial institution to debit or credit an account.

20.9 Types of Electronic Fund Transfers Preauthorized debits and credits Point-of-sale Check truncation ATMs

Law for Business, 17e, by Ashcroft and Ashcroft, © 2011 Cengage Learning The next chapters give you more information about negotiable instruments.

Law for Business, 17e, by Ashcroft and Ashcroft, © 2011 Cengage Learning Law for Business, 17e by Ashcroft and Ashcroft Chapter 21: Essentials of Negotiability

20.12 Chapter 21 Objectives List seven requirements of negotiability. Explain the requirements for issuance and delivery of a negotiable instrument. State whether a negotiable instrument must be dated and whether the location of making payment must be indicated.

20.13 Requirements for a Promissory Note Must be in writing and signed by the party executing it. Must contain either an order to pay or a promise to pay. Must be unconditional. Must provide for payment of a fixed amount of money. (continued on next slide)

20.14 Requirements for a Promissory Note Must be payable either on demand or at a fixed or definite time. Must be payable to the order of a payee or to bearer. Payee and drawee must be designated with reasonable certainty. (These are explained more fully in the next slides)

20.15 Signed Writing Must be written, but law does not require any particular form. Can be handwritten, typed, partly written and partly typed, or signed by mechanical means. Common place is lower right-hand corner, but that location is not mandatory. Can be signed by authorized agents.

20.16 Promise to Pay For a draft, the word “order” is not required, but the intent must be clear. A note must contain a promise to pay.

20.17 Unconditional Cannot be contingent upon anything nor contain the word “if.” Reference to consideration that does not condition the promise does not destroy negotiability.

20.18 Fixed Amount of Money Need not be in American money, but must be in some recognized currency. Cannot be in scrip, gold bullion, bonds, or other assets. Cannot be dependent on anything. Wording must be clear as to exact amount.

20.19 Payable on Demand and to Order Must be payable on demand or sight. If no time is specified, it is payable on demand. Must be payable to “order” or “bearer.” Word “order” is not necessary, but recommended to avoid confusion.

20.20 Issue and Delivery Issue is the first delivery of an instrument for the purpose of giving rights of the instrument to any person. Delivery is the intentional transfer of possession and control of an instrument. To negotiate order paper, it must be indorsed and delivered to the new holder.

20.21 Date and Place Instrument need not be dated, although it is recommended. The name of the place where the instrument was drawn or where it is payable need not be specified.

20.22 The End Do you understand the essence of negotiability now? If not, review the text material and study the cases.

Law for Business, 17e, by Ashcroft and Ashcroft, © 2011 Cengage Learning Law for Business, 17e by Ashcroft and Ashcroft Chapter 24: Liabilities of Parties and Holders in Due Course

20.24 Chapter 24 Objectives Summarize the rules for primary and secondary liability. Explain the procedures for an agent to use when executing a negotiable instrument. Define holder in due course and holder through a holder in due course. Discuss the special rules for holders of consumer paper.

20.25 Liability for the Face of the Paper Primary liability – First one called on to carry out terms of paper. Secondary liability (indorsers and drawers) Paper must be properly presented for payment through presentment. Paper must be dishonored. Notice must be given to the party who is to be held secondarily liable. Certifi- cate of dishonor is called protest.

20.26 Guarantors Upon indorsement, the words “payment guaranteed” escalates liability to primary status. “Collection guaranteed” ensures secondary liability. Guarantors are called in to enhance the security of an instrument.

20.27 Unauthorized Signatures Do not usually bind persons whose names are to be used Considered a forgery Exceptions to forgery rule: When person whose name is signed ratifies the signature When negligence of the person whose name is signed has contributed to forgery.

20.28 Liability for Warranties Transferor is entitled to enforce the instrument Transferor is entitled to enforce the instrument Transferor has no knowledge of insolvency of the maker Transferor has no knowledge of insolvency of the maker Instrument is not subject to defense or claim Instrument is not subject to defense or claim All signatures are genuine or authorized All signatures are genuine or authorized Instrument has not been altered Instrument has not been altered

20.29 Liability of Agents An agent may sign an instrument, and the principal, not the agent, will be bound. The agent has: Indicated a representative capacity and Identified the person represented.

20.30 Holder in Due Course Conditions under which a holder in due course may obtain an instrument: Take instrument in good faith and for value. Have no notice the instrument is overdue or has been dishonored through an uncured default. Have had no notice of any defense against or claim to the instrument.

20.31 Holder Through a Holder in Due Course A holder through a holder in due course may benefit even though not a holder in due course. Holders of consumer paper (goods or services used primarily for personal, family, or household purposes) Subject to all claims, defenses, and setoffs of original purchaser Setoff : Claim by the party being sued against the party suing

Law for Business, 17e, by Ashcroft and Ashcroft, © 2011 Cengage Learning Any questions or problems?