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Negotiable Instruments and Liabilities
The 7 Requirements of negotiability
A negotiable instrument has to be in written form. This maker must present the negotiable instrument in either handwritten, typed, or printed. Writing in pencil, ink, or painting that is erasable is discourage as the written piece will be entitled to miscellaneous changes affecting its authenticity. The material for writing on should be non-erasable under any circumstance. What is written has to be done. The instrument should be portable or freely transferable. A clean sheet of firm paper might do.
The maker has to sign the agreement to show compliance. A signature validates the negotiable instrument. It gives delivery rights to the drawer. It makes the maker liable to the payment stated in the contract. Both maker and drawer may have to sign depending on the type of negotiable agreement. An agent may also sign on behalf of the maker or drawer. However, a signature involving both parties is recommended, as stated in article 3 of the Uniform Commercial Code, § 3-401.
There should be an unconditional promise or order to pay. The maker must sign a promissory note to pay despite any circumstances. Acknowledging the debt is not enough. The mode of payment is money. This mode sets a standard form of payment. However, it can be lifted for if the promise states three instances; an express condition to pay, that the guarantee or order is subject to or governed by another record or that rights or obligations concerning the promise or order is stated in another document (Uniform Commercial Code, article 3,§ 3-106(a)). The order to pay is a command to transfer money as applied in banks through cheques.
A fixed amount of money to be paid has to be stated in certainty in the negotiable instrument to avoid ambiguity (Yohannes, 2017, p. 2). It also prevents changes in the future, especially if the maker will pay later. Stating the amount prevents disagreements in the future between the two parties. It also ensures the maker is liable to pay the whole amount.
The maker may be permitted to a discount if he pays installment before the required time as an acknowledgment of effort. Similarly, a penalty could be issued if the maker makes a late payment. If the rate of interest is unspecified, the interest amount is calculated at the time of payment. The maker can pay with foreign money provided the instrument states amount payable in foreign cash, or the equivalent amount in dollars is calculated using the current bank-offered spot rate at the time of payment.
Payment is classified as payable on demand or payable at a definite time. An amount payable on demand is paid during submission of the written piece. An amount to be paid later should be bound within a specific period. The fixed period is subject to reduction or extension, depending on the drawer. Certain conditions are used to determine the fate of the fixed period. The maker is required to comply with the outcome, whatever the case. The difference between a demand instrument and a time instrument is the date on which the statute of limitations begins to run. A statute of limitations refers to a limit on the time a creditor has to file a lawsuit to collect the debt (“Requirements for Negotiability,” n.d.).
Moreover, payment should be payable to order or bearer. The amount payable to order or bearer must be stated in the instrument as ‘payable to order (or bearer) of, ‘followed by the name of the drawer. It is paid to a familiar person or organization. Money owed to bearer is issued to anyone who presents a draft of the negotiable instrument. If it is neither payable to order nor bearer, it is non-negotiable hence assignable and governed by contract law.
Exceptions of incompleteness may be accepted if the maker or debtor shows indisputable signs that he intends the agreement to be a negotiable instrument. An un-dated instrument can still be negotiable if the date of the instrument is not required to determine when it is payable (“Requirements for Negotiability,” n.d.). The holder is also entitled to complete the instrument if his position requires him to do so. A holder can treat an instrument as either a note or a draft if it is indefinite.
Relationship between Negotiable instruments and liabilities. How does it affect signing parties?
Negotiable instruments entitle the maker and drawer to individual liabilities. Once a party signs the negotiable instrument, he qualifies for liability. Primary and secondary parties have contract liability. However, secondary parties’ liability is conditional arising only when drawee fails to pay the required amount. An accommodation party also signs to give his name to other parties in the instrument. He may sign the instrument as maker, drawer, acceptor or endorser and hence liable as per the chosen capacity.
The maker is entitled to pay the amount on writing a negotiable instrument. He admits that the drawer exists and makes an unconditional promise to pay. The maker admits to filling the note in his consent. He also recognizes the ability and capacity of the drawer to endorse. The drawer similarly acknowledges the existence of the debtor and his position to endorse.
Can a party be liable for another party’s withdrawal?
According to (“LIABILITIES OF PARTIES IN NEGOTIABLE INSTRUMENTS,” n.d.), the drawer is entitled to give notice of dishonor to the holder in case important reasons prevent the maker from paying. In this case, the drawer is entitled to pay the holder. The law allows a drawer to withdraw liabilities by clearly stating it in the bill. The maker is liable to pay if the drawee, such as the bank, fails to pay the required amount. Once a bank certifies a check, it becomes liable to the holder. A party can, therefore, be responsible for another party’s withdrawal provided they participated as either maker, drawer, drawee or acceptor.
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Reference List
Legal Aspects of Corporate Management and Finance v. 1.0. (n.d.). [Epub] (v. 10 ed., Vol. 10). Retrieved from https://saylordotorg.github.io/text_legal-aspects-of-corporate-management-and-finance/s22-03-requirements-for-negotiability.html
Yohannes, A. (2017). FORMAL REQUIREMENTS OF NEGOTIABLE INSTRUMENTS. Ethiopian Legal Brief, 1–2. Retrieved from https://chilot.me/2017/02/formal-requirements-of-negotiable-instruments/
LIABILITIES OF PARTIES IN NEGOTIABLE INSTRUMENTS. (n.d.). Retrieved April 10, 2020, from https://batasnatin.com/law-library/mercantile-law/negotiable-instruments/1016-liabilities-of-parties-in-negotiable-instruments.html