Essentials of Business Law, 9th edition
INSTRUCTOR’S MANUAL
Chapter 22 Introduction to Commercial Paper
LESSON OVERVIEW
While the previous chapter dealt extensively with bankruptcy, Chapter 22 deals with the aspect of
commercial paper, its characteristics, and how it is different from ordinary contracts. Students will also
learn the distinction between the two basic kinds of commercial paper: promises to pay (notes) and
orders to pay (checks and drafts). This chapter identifies the parties to a commercial paper, and lists and
explains the essentials and the nonessentials for negotiability of commercial paper. Additionally, the
chapter discusses the various kinds of checks, and rules and procedures for stopping payment on a
check along with electronic funds transfers. Finally, students’ understanding of the topics is evaluated
through objective-type questions, discussion questions, and case scenarios. Students are encouraged to
conduct their own research through the use of the Internet and other sources.
CHAPTER OUTLINE
A. CHARACTERISTICS OF COMMERCIAL PAPER (p. 354)
1. Presumption of Consideration (p. 354)
2. Negotiability versus Assignability (p. 354)
B. KINDS OF COMMERCIAL PAPER (pp. 354-355)
1. Promises to Pay (pp. 356-357)
2. Orders to Pay (p. 355)
3. The Meaning of “Pay to the Order of” (p. 355)
C. PARTIES TO COMMERCIAL PAPER (p. 356)
D. ESSENTIALS FOR NEGOTIABILITY OF COMMERCIAL PAPER (pp. 356-357)
1. It Must Be in Writing and Signed by the Maker or Drawer (p. 356)
2. It Must Contain an Unconditional Promise or Order to Pay a Definite Sum in Money (p. 357)
3. It Must Be Payable on Demand or at a Definite Time (p. 357)
4. It Must Be Payable to Order, to Bearer, or to Cash (p. 357)
5. A Draft or Check Must Name or Indicate the Drawee with Reasonable Certainty (p. 357)
E. NONESSENTIALS FOR NEGOTIABILITY OF COMMERCIAL PAPER (p. 358)
F. CHECKS (pp. 358-363)
1. Relationship between Bank and Depositor (p. 359)
2. Payment of Checks (p. 359)
3. Check Clearing for the 21st Century Act (p. 359)
4. Certified Checks (pp. 359)
5. Cashier’s Checks (pp. 360-361)
6. Traveler’s Checks (p. 361)
7. Money Orders (p. 361)
8. Bad Checks (p.361)
9. Forged and Raised Checks (pp. 361-362)
10. Postdated Checks (p. 361)
11. Stopping Payment on Checks (p. 362)
G. ELECTRONIC FUNDS TRANSFER SYSTEMS (pp. 363-364)
1. Applications of Electronic Funds Transfer Systems (pp. 365-366)
2. The Electronic Funds Transfer Act (p. 366)
H. CHAPTER SUMMARY (pp. 366-367)
I. CHAPTER ASSESSMENT (pp. 367-373)
1. Matching Key Terms (pp. 368-369)
2. True/False Quiz (pp. 369)
3. Discussion Questions (pp. 370)
4. Thinking Critically About the Law (p. 370-371)
5. Case Questions (pp. 371-373)
6. Case Analysis (pp. 305-307)
7. Legal Research (p. 373)
KEY TERMS
Key terms are listed at the beginning of the chapter, posted in the student textbook margins, and placed
in bold in the copy. They are listed here for your quick reference.
§ commercial paper (p. 354)
§ negotiable instrument (p. 354)
§ promissory note (p. 354)
§ check (p. 355)
§ draft (p. 355)
§ negotiability (p. 355)
§ order instrument (p. 355)
§ stale check (p. 359)
§ Check 21 (p. 359)
§ certified check (p. 359)
§ cashier’s check (p. 360)
§ traveler’s check (p. 361)
§ bad check (p. 361)
§ forgery (p. 361)
§ forged check (p. 361)
§ raised check (p. 361)
§ postdated check (p. 362)
§ stop-payment order (p. 363)
§ electronic funds transfer (p. 363)
§ Electronic Funds Transfer Act of 1979 (p. 364)
LEARNING OUTCOMES
The chapter Learning Outcomes will help you and the students discover the concepts and information
that should be understood upon completion of the chapter. You may want to access the PowerPoint
(PPT) slides for Chapter 22 when you begin the study of the chapter and discuss each Learning
Outcome. Each Learning Outcome will be covered separately in the Instructor Notes, but they are
shown here in total as an overview of the sections being presented in Chapter 22. The corresponding
text page numbers and PPT slides are listed next to each objective. These slides should be used to
reinforce the main points of the lecture.
After completing this chapter, the students will be able to:
1. Explain the characteristics of commercial paper and how it differs from ordinary contracts. (p.
354, PPT slides 2-4)
2. Distinguish between the two basic kinds of commercial paper: promises to pay (notes) and orders
to pay (checks and drafts). (pp. 334-335, PPT slides 5-6)
3. Identify the parties to commercial paper. (p. 356, PPT slide 7)
4. List and explain the essentials for negotiability of commercial paper. (pp. 356-357, PPT slide 8)
5. List and explain the nonessentials for negotiability of commercial paper. (p. 358 PPT slides 9-11)
6. Discuss the various kinds of checks and the rules and procedures for stopping payment on a
check. (pp. 358-363, PPT slides 12-25)
7. Discuss electronic funds transfers and provide several examples of these. (pp. 363-364, PPT
slides 26-29)
7.
LECTURE OUTLINE
A. CHARACTERISTICS OF COMMERCIAL PAPER
Commercial paper is a term widely used in law to describe a number of legally binding and
commercially acceptable documents, such as notes, checks, and drafts, that are used to transfer money
from one person to another. These documents are negotiable—that is, they are freely transferable— and
they circulate throughout our commercial system almost as readily
as cash. Commercial paper is sometimes referred to as negotiable instruments.
Commercial paper differs from ordinary contracts in two important ways: presumption of consideration
and assignability.
1. Presumption of Consideration
The law presumes that commercial paper is issued for value, that is, for consideration. A
party to a simple contract who is seeking to enforce the promise contained in the
agreement must prove that he or she gave consideration; however, a party to commercial
paper who is trying to collect payment does not. Instead, the person trying to avoid
payment must prove that he or she received no consideration.
2. Negotiability versus Assignability
The conditions that relate to ordinary contracts do not apply to commercial paper that is
being negotiated (transferred). The person to whom commercial paper is transferred may
acquire a better right to it than the person who made the transfer.
B. KINDS OF COMMERCIAL PAPER
There are many different kinds of commercial paper. The two basic types of commercial paper are
promises to pay (notes) and orders to pay (checks and drafts).
1. Promises to Pay
A promissory note is, as the name suggests, a written note or letter in which one person
promises to pay a certain amount of money to another at a definite time.
2. Orders to Pay
There are situations in which a person orders another individual to pay a definite sum of
money. This form of commercial paper includes checks and drafts.
A check is a written order drawn on a bank by a depositor that requests the bank to pay,
on demand and unconditionally, a definite sum of money to the bearer of the check or to
the order of a specified person.
A draft, or bill of exchange, is an unconditional written order to a person instructing
him or her to pay money to another, third person.
3. The Meaning of “Pay to the Order of”
The key words, “Pay to the order of,” give commercial paper negotiability, or the ability
to be transferred freely from one person to another and be accepted as readily as cash.
An item of commercial paper containing the key words of negotiability, “pay to the
order of,” or their equivalent, is an order instrument.
C. PARTIES TO COMMERCIAL PAPER
The parties involved in a promissory note have particular names. The person who makes the promise is
called the maker. If the maker has someone else add his or her name to the promise, to strengthen it, the
other person is known as the comaker. The person to whom the promise is made is the payee.
Similarly, the parties involved in a draft or a check have particular names. The person who draws or
creates the check or draft is called the drawer. The person who receives the money is called the payee.
The person who is ordered to pay the money is called the drawee (in the case of a check, the drawee is
a bank). Whoever is in possession of commercial paper is called the holder.