Bus-115 (Business Law): Chapter 16 Guide
Sales contracts: Rights, duties, title and risk of loss and the nature of negotiable instruments
Learning Objectives
After reading this chapter, students should be able to accomplish the following objectives:
- State the purpose of a negotiable instrument.
- Explain those negotiable instruments that contain a promise to pay money.
- Explain those negotiable instruments that contain an order to pay money.
- Differentiate among the different types of checks and money orders.
- Identify the requirements of a negotiable instrument.
- Explain an assignment and a negotiation of an instrument.
- Name and describe four kinds of indorsements.
- Identify the implied warranties related to indorsements.
- Explain the contract that is made when people indorse negotiable instruments.
- Describe the legal effect of a forged indorsement.
Major Concepts
16-1. The Essentials of Negotiable Instruments
The law of negotiable instruments is found in Article 3 of the UCC. Under the UCC, a negotiable instrument is a written document signed by the maker that contains an unconditional promise or order to pay a fixed amount of money on demand or at a definite time to the bearer or to order. There are two basic kinds of negotiable instruments: promise instruments (including notes and certificates of deposit) and order instruments (including drafts and checks).
The following are parties to negotiable instruments: maker or co-maker; drawer; issuer; drawee; payee; bearer; holder; holder in due course; indorser; indorsee; and acceptor. To be negotiable, instruments must (1) be in writing; (2) be signed by the maker or drawer; (3) contain an unconditional promise or order to pay; (4) be made out for a fixed amount of money; (5) be payable on demand or at a definite time; and (6) except for checks, be payable to order or to bearer.
16-2. Transferring Negotiable Instruments
When an instrument is first delivered by the maker or drawer for the purpose of giving rights to any person, it is said to be issued. When the person to whom it is issued delivers it to a third party, it is transferred. Instruments can be transferred by assignment or by negotiation. An instrument is indorsed when the holder signs it, thereby indicating the intent to transfer ownership to another. Indorsements may be written in ink, typewritten, or stamped with a rubber stamp.
There are four commonly used types of indorsements: blank indorsements, special indorsements, restrictive indorsements, and qualified indorsements. Indorsements have threefold significance. In addition to being necessary to negotiate order paper, they create obligations on the part of the indorser. These obligations come in the form of implied warranties and a contractual promise to pay subsequent holders of the instrument. An unauthorized signature or indorsement is one made without actual, implied, or apparent authority.
