Section 23.2

1. Section 23.2

2. What You’ll Learn • How to state the requirements of negotiability (p. 511) • How to describe the importance of dates on negotiable instruments (pp. 513-514)

3. What You’ll Learn • How to identify the controlling words on negotiable instruments (p. 515)

4. Why It’s Important Recognizing the negotiability and controlling words of instruments will help you make meaningful business and financial decisions.

5. Legal Terms • demand paper (p. 514) • definite-time paper (p. 514) • words of negotiability (p. 514)

6. Section Outline Drafting Instruments Written Instrument Signature of Maker or Drawer Unconditional Promise or Order Fixed Sum of Money Payable on Demand or at a Definite Time Payable to Order or Bearer Dates and Controlling Words

7. Pre-Learning Question What makes an instrument negotiable?

8. Drafting Instruments To be negotiable, an instrument must satisfy specific criteria. It must • Explain the elements of negotiable instruments. • Bear the signature of the maker or drawer.

9. Drafting Instruments • Be an unconditional promise or order to pay. • Be made out for a fixed amount of money. • Be payable on demand or at a definite time. • Be payable to order or to bearer.

10. 23.2 Requirements of Negotiability

11. Written Instrument The promise, or order, to pay must be in writing. It can be printed, typed, handwritten in pen or pencil, or expressed by using any other tangible form of writing.

12. Written Instrument However, writing a negotiable instrument in pencil could lead to forgery, and the person who drew the instrument would be responsible for any loss caused by the negligent drawing.

13. Signature of Maker or Drawer The maker must sign a note, and the drawer must sign a draft.

14. Signature of Maker or Drawer A signature may be any mark, such as one’s initials, that is placed on the instrument with the intention of serving as a signature.

15. Unconditional Promise or Order The promise in the note, or the order in the draft, must be unconditional. If either is qualified in any way, the instrument is not negotiable.

16. Unconditional Promise or Order Statements requiring that certain things be done or that specific events take place make the instrument a simple contract rather than a negotiable instrument.

17. Fixed Sum of Money A negotiable instrument must be payable in a fixed sum of money.

18. Payable on Demand or at a Definite Time Negotiable instruments must be payable on demand or at a definite time. This requirement makes it possible to determine when the debtor or promisor can be compelled to pay.

19. Demand Paper An instrument is payable on demand when it so states, or when it is payable “on sight” or “on presentation.” These instruments are called demand paper.

20. Definite-Time Paper An instrument is called definite-time paper when it is payable on or before a stated date or if the instrument is payable “one year after date” or “thirty days after sight.”

21. Payable to Order or Bearer Negotiable instruments, except for checks, must be payable to order or to bearer. The words to the order of and to bearer are called words of negotiability.

22. On her birthday, Janice received a note from her great-grandmother that read, “Upon her graduation from college, I will pay Janice a sum of not less than $10,000.” Why is this not a negotiable instrument?

23. ANSWER No definite time, no words of negotiability, not unconditional, and no fixed sum of money.

24. Dates and Controlling Words The omission of the date does not affect the negotiability of an instrument. When the date is omitted, the date on which the instrument is received is considered to be date of issue.

25. Dates and Controlling Words • Handwritten terms control typed and printed terms. • Typed terms control printed terms. • Words control figures, except when the words are unclear.

26. Section 23.2Assessment Reviewing What You Learned • What are the six requirements of negotiability?

27. Section 23.2Assessment Reviewing What You Learned Answer Must (1) be in writing, (2) have the signature of the maker or drawer, (3) be an unconditional promise or order to pay,

28. Section 23.2Assessment Reviewing What You Learned Answer (4) be made out for a fixed amount of money, (5) be payable on demand or at a defined time, and (6) be payable to order or bearer.

29. Section 23.2Assessment Reviewing What You Learned • Explain why it is important to have a date on a negotiable instrument.

30. Section 23.2Assessment Reviewing What You Learned Answer A date is important if the instrument is a definite-time paper, and it is payable on or before a stated date. This makes it possible to determine when the debtor or promisor can be compelled to pay.

31. Section 23.2Assessment Reviewing What You Learned • When do words control figures, and what is the exception?

32. Section 23.2Assessment Reviewing What You Learned Answer Words always control figures except when the words are unclear.

33. Section 23.2Assessment Critical Thinking Activity Negotiable Instruments Why do you think a person who writes a negotiable instrument in pencil would be responsible for any loss caused by negligence? Explain your answer.

34. Section 23.2Assessment Critical Thinking Activity Answer Negotiable Instruments Answers will vary but could state that a person who uses a pencil to draw a negotiable instrument should recognize that using a pencil could easily lead to forgery.

35. Section 23.2Assessment Legal Skills in Action Requirements of Negotiability You are a clerk for a negotiable instrument attorney. It is important that you remember the six requirements of negotiability.

36. Section 23.2Assessment Legal Skills in Action Requirements of Negotiability In groups of four or five, write a skit, rap song, poem, or silly story that will help you remember the requirements. Present your creative work to the entire class.

37. Section 23.2Assessment Legal Skills in Action Answer Requirements of Negotiability Skits, rap songs, poems, or silly stories will vary.

38. End of Section 23.2