![]() The holder of negotiable paper may have greater rights than the original issuee. This possibility makes the note far less valuable to Tim. If Robert has a defense against his obligation to pay Sarah for the equipment (e.g., the equipment is faulty), he could assert that defense against his obligation to pay Tim if he presents the promissory note for payment. She transfers the note to Tim, who is now the holder. So, Sarah is the holder of a promissory note that is non-negotiable. Robert gives Sarah a non-negotiable promissory note to pay for the goods. As such, the value of non-negotiable instrument is far less valuable to a subsequent transferee who cannot be certain that she will receive payment without being subject to a payor defense.Įxample: Sarah enters into a contract to sell equipment to Robert. This means that, if the original party loses his right to be paid (think of defenses to payment of a contract), so does the transferee of the commercial paper. That is, she has the exact same rights in the instrument as the original issuee held. The rights of a holder of each type of paper is as follows: What is Non-negotiable Commercial Paper?Īn individual in possession of a non-negotiable instrument stands in the shoes of the original issuee. Next Article: Requirements for Commercial Paper to be Negotiable Back to: COMMERCIAL PAPER What are the Characteristics of Commercial Paper? This is because the holder has fewer rights in enforcing payment of the non-negotiable, commercial paper. Paper that is not negotiable may still be transferred however, it is far less valuable than negotiable paper. ![]() Negotiability concerns the rights of the holder of commercial paper. To be a substitute for money, commercial paper must be freely transferable in the marketplace. Negotiation is the transfer of negotiable paper from one holder to another. Primarily, this exception applies to drafts drawn on third-party institutions that inadvertently leave off the to order language, but the nature of the paper is obvious.Update Table of Contents What is negotiability and why is it important? What are the Characteristics of Commercial Paper? What is Non-negotiable Commercial Paper? What is Negotiable Commercial Paper? Discussion Question Practice Question Academic Research What is negotiability and why is it important? If all other requirements are met, the UCC provides an exception to the order paper or bearer paper requirement for commercial paper to be negotiable, but this exception does not apply to notes. If the paper is made out to order of gift or order of cash or pay to order of (blank space), it is bearer paper. Note: Bearer paper may also use the wording order. It can be redeemed by any holder of the paper, subject to certain defenses. If the commercial paper is made out to bearer or it is not made out to any specific person, it is bearer paper. ![]() Note: If the note is simply made out to pay a particular person without the word order, it is not negotiable. Signing the instrument makes it bearer paper, unless the signor identifies a person to whom the instrument is being transferred. This generally requires the identified person to indorse (sign) the instrument. That is, the payee of the instrument can designate someone else to receive payment. Including the word order indicates that the instrument is not limited to only one person. Order paper must include the words pay to the order of (identified person) or to (identified person) or order. To constitute a negotiable instrument (both notes and drafts), an instrument must be either order paper or bearer paper. Update Table of Contents What is order paper? What is bearer paper? Discussion Question Practice Question Academic Research
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