Bills of Exchange Project

 A negotiable instrument is instrument  is a document guaranteeing the payment of a specific amount of money, either on demand, or at a set time, with the payer named on the document. More specifically, it is a document contemplated by or consisting of a contract contract,, which promises the payment of money without condition, which may be paid either on demand or at a future date. The term can have different meanings, depending on what law is being applied and what country it is used in and what context it is used in. Examples of negotiable instruments include promissory notes, notes , bills of exchange, exchange ,banknotes banknotes,, and cheques cheques.. ecause money is promised to be paid, the instrument itself can be used by the holder in due course as course  as a store of value. The instrument may be transferred to a third party! it is the holder of the instrument who will ultimately get paid by the payer on the instrument. Transfers can happen at less than the face value of the instrument and this is known as discounting ! this may happen for example if there is doubt about the payer"s ability to pay.

Definition#edit edit$$ %n the &ommonwealth of 'ations almost 'ations  almost all (urisdictions have codified the law relating to negotiable instruments instrumen ts in a ills of Exchange Act, Act , e.g. ills of Exchange Act )**+ in )**+  in the -, ills of Exchange  Act )/* in 'ew 0ealand, ills of Exchange Act )/ in Australia, #)$the 'egotiable %nstruments Act, )**) in %ndia and the ills of Exchange Act ))1 in Mauritius. The ills of Exchange Act2 ). defines a bill bill of exchange exchange as2 "an unconditional unconditional order order in writing, writing, addressed addressed by one one person to to another, signed by the person giving it, requiring the person to whom it is addressed to pay on demand, or at a fixed or determinable future time, a sum certain in money to or to the order of a specified person, or to bearer. +. defines a cheque cheque as2 "a "a bill of exchange exchange drawn drawn on a banker banker payable payable on demand" demand" 3. defines a promissory promissory note note as2 "an unconditional unconditional promise in writing writing made by one person person to another, signed by the maker, engaging to pay on demand, or at a fixed or determinable future time, a sum certain in money to or to the order of a specified person or to bearer."  Additionally  Additional ly most &ommonwealth &ommonwealth (urisdictions (urisdictions have separate &heques &heques Acts providing providing for additional additional protections for bankers collecting unendorsed or irregularly endorsed cheques, providing that cheques that are crossed and marked "not negotiable" or similar are not transferable, and providing for electronic presentation of cheques in inter4bank cheque clearing systems. edit$$ History #edit

&ommon prototypes of bills of exchanges and promissory notes originated in &hina &hina,, where special instruments instrumen ts called feitsyan feitsyan were  were used to safely transfer money over long distances during the reign of the Ta Tang ng 5ynasty 5 ynasty in the *th century.#+$ %n the mid4)3th century, the %lkhanid rulers of 6ersia printed the 7cha7 or 7chap7 which was used as paper money for limited usage for transactions between the court and the merchants for about three years before it collapsed. The collapse was caused by the court accepting the 7cha7 only at progressive discount. 8ater such document for money transfer used by Middle Eastern merchants, who had used the prototypes of bills of exchange 9 suftad(a suftad(a::softa softa from  from the *th century to present. ;uch prototypes came to be used later by the %berian and %talian merchants in the )+th century. %n %taly in the )39))?9)*th centuries, where the endorsement had appeared@ and ermany >)th century, formaliBation of Exchange 8aw@. %n England >and later in the nited ;tates@, exchange law was different from continental Europe because of different legal systems.#3$ systems. The modern emphasis on negotiability may also be traced to 8ord Mansfield. Mansfield . #1$

ermanic8ombards ermanic 8ombards documents  documents may also have some elements of negotiability negotiability..#<$

edit$$ Negotiable instruments distinguished from other types of contracts #edit

 An )*C/ ill ill of Exchange Exchange payable in 8ondon with with ritish Foreign Bill revenue revenue stamps attached.  A negotiable negotiable instrument instrument can can serve to convey convey value constituting constituting at least least part of the the performance performance of acontract contract,, albeit perhaps not obvious in contract formation, in terms inherent in and arising from the requisite offer and acceptance and acceptance  and conveyance of consideration. The underlying contract contemplates the right to hold the instrument as, and to negotiate the instrument to, a holder in due course,, the payment on which is at least part of the performance of the contract to which the course negotiable instrument is linked. The instrument, memorialiBing2 >)@ the power to demand payment! and, >+@ the right to be paid, can move, for example, in the instance of a 7 bearer instrument7, instrument 7, wherein the possession of the document itself attributes and ascribes the right to payment. &ertain exceptions exist, such as instances of loss or theft of the instrument, wherein the possessor of the note may be a holder, but not necessarily a holder in due course. 'egotiation requires a valid endorsement  of  of the negotiable instrument. The consideration constituted by a negotiable instrument is cogniBable as the value given up to acquire it >benefit@ and the consequent loss of value >detriment@ to the prior holder! thus, no separate consideration is required to support an accompanying contract assignment. The instrument itself is

understood as memorialiBing the right for, and power to demand, payment, and an obligation for payment evidenced by the instrument itself with possession as a holder in due course being the touchstone for the right to, and power to demand, payment. %n some instances, the negotiable instrumentt can serve as the writing memorialiBing instrumen memorialiBing a contract, thus satisfying any applicable ;tatute of =rauds as =rauds  as to that contract. The holder in due course# course #edit edit$$ The rights of a holder in due course of a negotiable instrument are qualitatively, as matters of law, superior to those provided by ordinary species of contracts2

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The rights to payment are not sub(ect to set4off , and do not rely on the validity of the underlying contract giving rise to the debt >for example if a cheque was drawn for payment for goods delivered but defective, the drawer is still liable on the cheque@

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'o notice need be given to any party liable on the instrument for transfer of the rights under the instrument by negotiation. Dowever, payment by the party liable to the person previously entitled to enforce the instrument 7counts7 as payment on the note until adequate notice has been received by the liable party that a different party is to receive payments from then on. #.&.&. 34 ?/+>b@$

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Transfer free of equitiesFthe holder in due course can hold better title than the party he obtains it from >as in the instance of negotiation of the instrument from a mere holder to a holder in due course@

'egotiation often enables the transferee to become the party to the contract through a contract assignment >provided for explicitly or by operation of law@ and to enforce the contract in the transferee4assigneeGs own name. 'egotiation can be effected by endorsement and delivery > order instruments@, instruments @, or by delivery alone > bearer instruments@. instruments @. edit$$ Classes#edit 6romissory notes and bills of exchange are two primary types of negotiable instruments. Promissory note# note #edit edit$$  Although possibly possibly non4negotiab non4negotiable, le, a promissory note may be a negotiable instrument if it is an unconditional promise in writing made by one person to another, signed by the maker, engaging to pay on demand to the payee the  payee,, or at fixed or determinable future time, certain in money, to order or to bearer. >see ;ec. )1@ #?$ The law applicable to the specific instrument will determine whether it is a negotiable instrument or a non4negotiable instrument. ank note is note is frequently referred to as a promissory note, a promissory note made by a bank and payable to bearer on demand. According to the section 1 of the %'5%A' 'EHT%A8E A&T )**), 7a 6romissory 'ote is an writing >not being a

bank note or currency note@, containing an unconditional undertaking, signed by the maker to pay a certain sum of money only to or to the order of a certain person or the bearer of the instrument7. Introduction of bill of exchange #edit edit$$  A bill bill of exchange exchange or 7draft7 7draft7 is a written order order by the drawer  to  to the drawee to pay money to the payee the  payee..  A common common type of of bill of exchange exchange is the cheque >check  in American  in American English English@, @, defined as a bill of exchange drawn on a banker and payable on demand. ills of exchange are used primarily in international trade, and are written orders by one person to his bank to pay the bearer a specific sum on a specific date. 6rior to the advent of paper currency, bills of exchange were a common means of exchange. They are not used as often today.

ill of exchange, )33  A bill bill of exchange exchange is essentially an an order made by one one person to another to pay money money to a third person. A bill of exchange requires in its inception three partiesFthe drawer, the drawee, and the payee. The person who draws the bill is called the drawer. De gives the order to pay money to the third party. The party upon whom the bill is drawn is called the drawee. De is the person to whom the bill is addressed and who is ordered to pay. De becomes an acceptor when he indicates his willingness to pay the bill. The party in whose favor the bill is drawn or is payable is called the payee. The parties need not all be distinct persons. Thus, the drawer may draw on himself payable to his own order. A bill of exchange may be endorsed by the payee in favour of a third party, who may in turn endorse it to a fourth, and so on indefinitely. The 7holder in due course7 may claim the amount of the bill against the drawee and all previous endorsers, regardless of any counterclaims that may have disabled the previous payee or endorser from doing so. This is what is meant by saying that a bill is negotiable. %n some cases a bill is marked 7not negotiable7 9 see crossing of cheques. cheques . %n that case it can still be transferred to a third party, but the third party can have no better right than the transferor. edit$$ In the United States #edit %n the nited ;tates, Article 3 and Article 1 of the niform &ommercial &ode >&&@ &ode  >&&@ govern the issuance and transfer of negotiable instruments, unless the instruments are governed by Article * of the &&. The various ;tate law enactments of niform &ommercial &ode 39)/1>a@ through >d@ set forth the legal definition definition of what is and what is not a negotiable instrument 2

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§ 3–104. N!"TI#$% IN&T'()NT. >a@ Except as provided in subsections >c@ and >d@, 7negotiable instrument7 means authoriBation or power to the holder to confess (udgment or realiBe on or dispose

negotiable or is not an instrument governed by this Article.

Thus, for a writing to be a negotiable instrument under Article 3, #C$ the following requirements must be met2 ). The promis promise e or order order to pay must must be uncondit unconditiona ional! l! +. The payme payment nt must be a specific specific sum of of money, money, although although interest may be added to the sum! 3. The payment payment must must be made on on demand demand or at a definite time! 1. The instrument instrument must not not require the the person promising payment payment to perform perform any act other than than paying the money specified! <. The instru instrument ment must must be payable payable to bearer bearer or or to order. order. The latter requirement is referred to as the 7words of negotiability72 a writing which does not contain the words 7to the order of7 >within the four corners of the instrument or in endorsement on the note or in allonge allonge@@ or indicate that it is payable to the individual holding the contract document >analogous to the holder in due course@ is not a negotiable instrument and is not governed by Article 3, even if it appears to have all of the other features of negotiability. The only exception is that if an instrument meets the definition of a cheque >a bill of exchange payable on demand and drawn on a bank bank@@ and is not payable to order >i.e. if it (ust reads 7pay Iohn 5oe7@ then it is treated as a negotiable instrument. && Article 3 does not apply to money, to payment orders governed by Article 1A, or to securities governed by Article *. #*$ Negotiation and endorsement #edit edit$$ 6ersons other than the original obligor and obligee can become parties to a negotiable instrument. The most common manner in which this is done is by placing one"s signature signatureon on the instrument >JendorsementK@2 if the person who signs does so with the intention of obtaining payment of the instrument or acquiring or transferring rights to the instrument, the signature is called an endorsement . There are five types of endorsements contemplated by the &ode, covered in &&  Article 3, ;ections ;ections +/19+/?22 +/19+/?

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 An endorsement endorsement which purports to transfer the the instrument instrument to a specified specified person is aspecial a special endorsement  9  9 for example, 76ay to the order of Amy7!

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 An endorsement endorsement by the the payee or holder which which does not not contain any additiona additionall notation >thus >thus purporting to make the instrument payable to bearer@ is an endorsement in blank or  blank or blank blank endorsement ;

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 An endorsement endorsement which purports to require that the funds funds be applied applied in a certain certain manner >e.g. 7for deposit only7, 7for collection7@ is a restrictive endorsement ! and,

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 An endorsement endorsement purporting purporting to disclaim disclaim retroactive retroactive liability is called called a qualified endorsement  >through  >through the inscription of the words 7without recourse7 as part of the endorsement on the instrument or in allonge allonge to  to the instrument@.

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 An endorsement endorsement purporting purporting to add add terms and and conditions conditions is called a conditional endorsement  9  9 for example, 76ay to the order of Amy, if she rakes my lawn next Thursday 'ovember )
%f a note or draft is negotiated to a person who acquires the instrument ). in good faith! faith! +. for  value  value!! 3. wit witho hout ut noti notice ce of an any y defenses to payment, the transferee is a holder in due course and can enforce the instrument without  being  being sub(ect to defenses which the maker of the instrument would be able to assert against the original payee, except for certain real defenses. defenses . These real defenses include >)@ forgery of the instrument! >+@ fraud as to the nature of the instrument being signed! >3@ alteration of the instrument! >1@ incapacity of the signer to contract! ><@ infancy of the signer! >?@ duress! >C@ discharge in bankruptcy! and, >*@ the running of a statute of limitations as to the validity of the instrument. The holder-in-due-course rule  is a rebuttable  presumption  presumpti on that  that makes the free transfer of negotiable instruments feasible in the modern economy. A person or entity purchasing an instrument in the ordinary course of business can reasonably expect that it will be paid when presented to, and not sub(ect to dishonor by, the maker, without involving itself in a dispute between the maker and the person to whom the instrument was first issued >this can be contrasted to the lesser rights and obligations accruing to mere holders@. Article 3 of the niform &ommercial &ode as enacted in a particular ;tate"s law contemplate real defenses available defenses  available to purported holders in due course. The foregoing is the theory and application presuming compliance with the relevant law. 6ractically, the obligor4payor on an instrument who feels he has been defrauded or otherwise unfairly dealt with by the payee may nonetheless refuse to pay even a holder in due course, requiring the latter to resort to litigation to recover on the instrument.

(sage# (sage#edit edit$$ Lhile bearer instruments are rarely created as such, a holder of commercial paper  with  with the holder designated as payee can change the instrument to a bearer instrument by an endorsement. The proper holder simply signs the back of the instrument and the instrument becomes bearer paper, although in recent years, third party checks are not being honored by most banks unless the original payee has signed a notariBed document stating such.  Alternatively,  Alternative ly, an an individual individual or company company may write a check check payable  payable to 7cash7 or 7bearer7 and create a bearer instrument. reat care should be taken with the security of the instrument, as it is legally almost as good as cash. xce*tions# xce*tions #edit edit$$ nder the &ode, the following are not negotiable instruments, although the law governing obligations with respect to such items may be similar to or derived from the law applicable to negotiable instruments2

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ills of lading and lading and other documents of title, which are governed by Article C of the &ode. Dowever, under admiralty law, law, a bill of lading may either be a negotiable or "order" bill of lading or a nonnegotiable or "straight" bill of lading.

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5eeds and 5eeds  and other documents conveying interests in real estate, although a mortgage mortgagemay may secure a promissory note which is governed by Article 3

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%Hs

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8etters of credit, credit , which are governed by Article < of the &ode

edit$$ Modern relevance#edit  Although often often considered considered foundational foundational in business business law, law, the modern modern relevance relevance of negotiability negotiability has been questioned. #)/$ 'egotiability can be traced back to the )C//s and 8ord Mansfield, Mansfield , when money money and  and liquidity was relatively scarce. #1$ The holder in due course rule course  rule has been limited by various statutes.#1$ &oncerns have also been raised that the holder in due course rule course  rule does not align the incentives of the mortgage originators and the assignees efficiently .#1$