Formal Requisites of Negotiability

Question 1

What is negotiability?

Answer 1

A negotiable instrument means a written and signed;

1. unconditional
2. promise or order to pay
3. a fixed amount of money, with or without interest or other charges described in the promise or order; that:
   
   1. is payable to order or to bearer;
   2. is payable on demand or at a definite time; and
   3. does not state any unauthorized undertaking or instruction by the person promising or ordering payment

Question 2

When is an offer “conditional”?

Answer 2

If it:

1. expressly states a condition to payment; or
2. states that the promise or order is subject to or governed by another writing

Question 3

Does merely referring to or stating that the promise or order arises out of a separate writing make the promise or order conditional?

Answer 3

No.

Question 4

When is a promise or order NOT conditional?

Answer 4

Not conditional merely because it:

1. refers to another writing for a statement of rights regarding collateral, prepayment, or acceleration;
2. limits payment to a particular source or fund;
3. requires as a condition to payment a countersignature by a person whose specimen signature appears on the promise or order;
4. contains a statement required by law that the holder is subject to claims and defenses of the original payee; or
5. states the consideration requires for the payment

Question 5

TRUE OR FALSE: a negotiable instrument cannot be subject to another writing, but may refer to another writing?

Answer 5

TRUE

Question 6

What is a “promise or order to pay”?

Answer 6

A note must contain a promise to pay. A draft must contain an order to pay.

A promise is a written undertaking to pay money signed by the person undertaking to pay.

An order is a written instruction to pay money signed by the person giving the order.

Question 7

What is “money”?

Answer 7

Any medium of exchange authorized or adopted by a government. Thus, an instrument may still be negotiable if it is payable in “currency”

Question 8

Does foreign currency defeat negotiability?

Answer 8

No. An instrument may be negotiable even if it calls for payment in foreign money.

Question 9

Will an instrument be negotiable if it calls for payment with something other than money?

Answer 9

No!

Question 10

To be negotiable, must the principal due under the instrument be fixed?

Answer 10

Yes.

Question 11

Does interest need to be fixed?

Answer 11

No. No interest will be due unless the instrument provides for the payment of interest. A variable interest rate or indexed rate may be used. The interest rate need not be determinable from the face of the instrument, and may require reference to other information.

Question 12

What if the instrument does not specify the interest rate?

Answer 12

If the instrument says that it is payable with interest, but doesn’t state how much interest, the rate on a court judgment will be implied.

Question 13

When is a promise or order “payable to order”?

Answer 13

If it is payable to the order of an identified person.

Question 14

When is a promise or order “payable to bearer”?

Answer 14

If it:

1. states that it is payable to bearer, to order of bearer, to order or bearer, to order and bearer, or otherwise indicates that the person in possession of the promise or order is entitled to payment;
2. Does not state a payee; or
3. States that it is payable to cash or otherwise indicates that it is not payable to an identified person

Question 15

If an instrument contains both order and bearer language, how is it treated?

Answer 15

It is treated as bearer paper.

Question 16

What governs the identification of the payee?

Answer 16

The person to whom an instrument is payable is governed by the intent of the person signing as or on behalf of the issuer (maker or drawer).

• If more than one person issues the instrument, any person intended by any signer may properly be paid.

Question 17

How may a payee be identified?

Answer 17

By any means, including name, office, account number, etc.

Question 18

Indorsement by misspelled payee’s name.

Answer 18

If the name of the person intended by the issuer to be the payee is misspelled that person may indorse using her actual name or the misspelled name.

Question 19

When is an instrument payable on “demand”?

Answer 19

If it states taht it:

1. is payable on demand or at sight or otherwise indicates that it is payable at the will of the holder; or
2. does not state a time for payment.

Question 20

When is an instrument payable at a definite time?

Answer 20

If it is payable:

1. on a fixed date;
2. on elapse of a specified period of time after sight or acceptance; or
3. at some time readily ascertainable at the time the instrument is issued.

Question 21

What if the instrument is payable on or after a stated time or event certain to happen, but uncertain as to time?

Answer 21

It is NOT negotiable. (example: an instrument “payable on my uncle Sam’s death” or “payable 30 days after my uncle Sam’s death” is not negotiable.)

Question 22

What if the instrument contains an acceleration clause?

Answer 22

Any clause that accelerates the time of payment upon the occurrence of an event or at the option of the maker or holder IS permissible and does NOT destroy negotiability. (example: an instrument “payable 100 years from date, but if my uncle Sam should die, payable on his death” is negotiable)

Question 23

What is an extension clause?

Answer 23

A clause that extends, rather than shortens, the time when payment is due. There are three types:

1. Extensions at the option of the maker;
2. Extensions that are automatic upon the happening of an event; and
3. Extensions at the option of the holder.

Question 24

What is the effect of an extension clause “at option of maker or on happening of event”?

Answer 24

May be included without destroying negotiability if the extension is to a further definite time stated in the instrument. (example: may be extended by the holder for one month after the due date NOT may be extended by the holder).

Question 25

What is the effect of an extension clause “at option of holder”?

Answer 25

This extension clause is ALWAYS permitted because the holder always has the option of giving extra time for payment.

Question 26

What three undertakings/instructions MAY be included?

Answer 26

1. An undertaking or power to give, maintain, or protect collateral;
2. An authorization or power to the holder to confess judgment or realize on or dispose of collateral; and
3. A waiver of the benefit of any law intended for the advantage or protection of the obligor

Question 27

What are the rules of construction?

Answer 27

If an instrument contains contradictory terms, typewritten terms control printed terms and handwritten terms control both. Words control figures unless the words are ambiguous or uncertain (illegible), in which case the figures control.

Question 28

Can a maker “opt out” of making the instrument negotiable?

Answer 28

A promise or order that otherwise meets the requirements of a negotiable instrument will not be negotiable if it contains a conspicuous statement that it is not a negotiable instrument or that Article 3 is not applicable.