D. ESSENTIALS FOR NEGOTIABILITY OF COMMERCIAL PAPER
To be negotiable under the Uniform Commercial Code (UCC), commercial paper must conform to the
following requirements [UCC 3-104(1)].
1. It Must Be in Writing and Signed by the Maker or Drawer
The commercial paper may be handwritten, printed, or written by any other means that
will make a mark. The device used in writing a note does not affect its negotiability.
Anything that will make a mark is satisfactory.
2. It Must Contain an Unconditional Promise or Order to Pay a Definite Sum
in Money
The promise in a note, or the order in a check or draft, must be unconditional.
Statements requiring that certain things be done or that specific events take place before
payment make the instrument a simple contract rather than commercial paper.
Commercial paper must be payable in money—any money that has a known or
established value. An instrument payable in a foreign currency is nonetheless negotiable.
3. It Must Be Payable on Demand or at a Definite Time
Commercial paper must be payable on demand or at some definite time. A note payable
“on or before July 1, 20––,” or “one month after sight,” or “on presentation” is
negotiable because the time of payment is certain.
4. It Must Be Payable to Order, to Bearer, or to Cash
Unless an instrument contains words of negotiability such as “payable to bearer” or
“payable to the order of” or “payable to cash,” it is not negotiable.
5. A Draft or Check Must Name or Indicate the Drawee with Reasonable
Certainty
The person who is expected to pay a draft or check must be named or otherwise
indicated in the instrument with reasonable certainty for the instrument to be considered
negotiable.
E. NONESSENTIALS FOR NEGOTIABILITY OF COMMERCIAL PAPER
Certain items may be omitted from commercial paper without affecting its negotiability. Because
consideration is presumed, the words “for value received” are not needed. Also, the consideration or
value given by the maker or the drawer need not be specified.
If the date of a note, check, or draft is not indicated, the holder may write in the date when the
instrument was issued without affecting its negotiability. In a note, draft, or check, if the amount
payable expressed in figures differs from the sum stated in words, the amount expressed in words is
considered the true one. If the sum stated in words is not also expressed in figures, this omission does
not affect negotiability.
The numbering of (or the failure to number) commercial paper does not affect its negotiability.
F. CHECKS
The check is used more than any other instrument of credit as a means of making payment, both to
settle debts and to pay for purchases. Checks need not be made out on the printed forms supplied by
banks. Any writing that includes the essential elements of negotiability is considered a valid check
when signed and delivered by the drawer.
1. Relationship between Bank and Depositor
A check provides a safe means of transferring money and serves as a receipt when paid
and canceled by the bank. It may circulate through several persons, banks, and
organizations. The bank must honor a check when it is properly drawn against the
money the drawer has on deposit or the bank will be liable to the drawer for damages.
2. Payment of Checks
Checks are always payable on demand. The UCC provides that, with respect to the
liability of the drawer, a reasonable length of time for presentation for payment is 30
days after the date appearing on the check or after issue (the date the check is actually
written), whichever is later. A bank may pay a check presented more than 30 days after
its date, but
it is not required to do so. A check presented more than six months after its date is
known as a stale check (UCC 4-404). Stale checks will not be honored by banks.
3. The Check Clearing for the 21st Century Act (Check 21)
The law revolutionized the manner in which checks are handled by banks;
Check 21 created efficiency in check handling by allowing banks to create digital
substitutes of checks to be handled electronically, thereby removing paper checks from
the process. Electronic check transfers occur almost instantaneously.
4. Certified Checks
A merchant who sells goods to a person whose credit standing is not known may request
the customer to make payment by certified check, a check that the bank has promised to
pay when it is presented for payment.
There is no time limit for the presentation of a certified check for payment. The bank
must honor it whenever the holder demands payment.
5. Cashier’s Checks
A cashier’s check, sometimes called an official check, a teller’s check, or a bank check,
is issued by the cashier or other designated officer of a bank and drawn against bank
funds. A cashier’s check is made payable either to the depositor who purchases it from
the bank or to the person who is to cash it.
6. Traveler’s Checks
A traveler’s check is a certified check issued in a denomination of $10 or more by
certain banks, travel agencies, and financial services companies. Only the purchaser who
signed the checks when he or she bought them may negotiate them. They are convenient
because they are accepted almost all over the world.
7. Money Orders
A money order is similar in form to a personal check and may be purchased at a bank or
other third-party location. Since the funds are prepaid, much like a cashier’s check, a
money order is considered a more trusted method of payment than a personal check. A
money order, however, is limited in maximum face value.
8. Bad Checks
A bad check is one against a bank in which the drawer has insufficient funds on deposit
to cover the check or no funds at all. Most states have statutes making a person who
issues a check drawn on a bank in which he or she has no account guilty of the criminal
offense of larceny.
9. Forged and Raised Checks
Forgery is the act of fraudulently making or altering a note, check, draft, or some other
document, causing the financial loss of another.
A forged check, one signed by a person other than the drawer, and a raised check, one
on which the amount has been raised by the payee or bearer, are two of the most
common types of forgery.
10. Postdated Checks
A postdated check is one that is dated later than the date the check is written. A person
may write a postdated check when insufficient funds are in the bank at the time the
check is drawn, but the person expects to deposit sufficient funds to cover it by the date
on the check.
A postdated check may not be cashed by the payee before the date shown on the check.
By accepting a postdated check, the payee agrees to not cash it before the date indicated.
11. Stopping Payment on Checks
A stop-payment order is an instruction a depositor gives to his or her bank not to pay a
particular check. The notice can be given at any time before a check is presented for
payment. If the bank does not do as requested by the drawer and cashes the check, it is
liable to the depositor for the amount paid. If the drawer of a check dies before the check
is paid, the bank may nevertheless honor it.
G. ELECTRONIC FUNDS TRANSFER SYSTEMS
Electronic funds transfer (EFT) refers to a variety of electronic applications for handling money.
1. Applications of Electronic Funds Transfer Systems
EFT systems offer a variety of convenient and useful applications, including ATMs,
point-of-sale systems, and direct deposit and withdrawal, to name a few.
Some banks offer a service that gives customers who have personal computers access to
information about their accounts, allows depositors to transfer funds from one account
to another, and permits bank customers to authorize the bank to pay regular bills.
Pay-by-phone systems have been introduced that allow depositors to telephone their
bank’s computer and authorize payment of certain bills and transfer funds to other
accounts or to third parties. The transfer of funds between banks is still another
application of EFT.
2. The Electronic Funds Transfer Act
The most comprehensive federal legislation in this area is the Electronic Funds Transfer
Act (EFTA) of 1979, which went into full effect in 1980. The Electronic Funds
Transfer Act (EFTA) is a federal statute that establishes the rights, responsibilities, and
liabilities of consumers in dealings with financial institutions.
The EFTA limits consumer liability to $50 if the consumer notifies the card issuer within
two days of learning that a card has been lost or stolen.
The EFTA also requires the institution to provide written receipts each time an ATM is
used, and monthly statements on which electronic transactions are shown.
INSTRUCTOR NOTES
A resulting answer or explanation is provided below for each Learning Outcome in Chapter 22. Every
outcome is also mapped to corresponding text page numbers, PPT slides, and relevant chapter
assessment exercises and activities for ease of reference and use.
LO1. Explain the characteristics of commercial paper and how it differs from ordinary contracts.
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. Commercial paper consists of contracts but differs from ordinary contracts
in two ways: the presumption of consideration and assignability.
Text Pages: 354
PowerPoint: Slides 2-4
Discussion Questions: 26
LO2. Distinguish between the two basic kinds of commercial paper: promises to pay (notes) and
orders to pay (checks and drafts).
Promises to pay consist of a written note or letter in which one person promises to pay a certain
amount of money to another at a definite time. Orders to pay typically use an expression such as “pay
to the order of” and give commercial paper negotiability.
Text Pages: 354-355
PowerPoint: Slides 5-6
Discussion Questions: 27
LO3. Identify the parties to commercial paper.
The parties involved in a promissory note include the maker, the comaker, and the payee. The parties
involved in a draft or a check include the drawer, the payee, the drawee, the holder, and the holder in
due course.
Text Pages: 356
PowerPoint: Slide 7
LO4. List and explain the essentials for negotiability of commercial paper.
For commercial paper to be negotiable, it must be in writing and signed by the maker or drawer,
contain an unconditional promise or order to pay a definite sum of money, be payable on demand or at
a definite time, and be payable to order or to bearer. A draft must name or indicate the drawee with
reasonable certainty.
Text Pages: 356-357
PowerPoint: Slide 8
Case Analysis: 40, 42, 43
LO5. List and explain the nonessentials for negotiability of commercial paper.
Nonessentials for negotiability include the words “for value received” or specific mention of the
consideration or its value (because consideration is assumed). Dates, specifying the place of business or
home of the maker of the note, and numbering the commercial paper are all nonessential to
negotiability.
Text Pages: 358
PowerPoint: Slides 9-11
LO6. Discuss the various kinds of checks and the rules and procedures for stopping payment on a
check.
A certified check is a check that the bank has promised to pay when it is presented for payment. A
cashier’s check is issued by the cashier or other designated officer of a bank and drawn against bank
funds. A traveler’s check is a certified check issued in a denomination of $10 or more by certain banks,
travel agencies, and financial services companies. A depositor at a bank can place a stop-payment order
by giving the bank an instruction not to pay a particular check.
Text Pages: 358-363
PowerPoint: Slides 12-25
Discussion Questions: 28-30
Thinking Critically About the Law: 33-35
Case Questions: 36-39
Case Analysis: 41
LO7. Discuss electronic funds transfers and provide several examples of these.
Electronic funds transfer systems offer convenient and useful electronic money-handling applications,
including automatic teller machines, point-of-sale systems, and direct deposit and withdrawals, among
others.
Text Pages: 363-364
PowerPoint: Slides 26-29
Discussion Questions: 31
Thinking Critically About the Law: 32