CHAPTER II

THE OBLIGATIONS AND RIGHTS OF

EACH PARTY TO A NOTE,

CHECK, OR DRAFT

14. Promises to pay and orders to pay. - A credit exists whenever one person owes another. If Green owes Riley, Green can in writing promise to pay Riley, or Riley can in writing order Green to pay. Either the promise to pay or the order to pay is an instrument of credit. If Reed is confident that Green will pay money due Riley at an agreed time, he may be willing to take this promise of Green's in payment for what Riley owes him, especially if Riley guarantees the payment and pays interest for the delay. Similarly, Reed might take Riley's order on Green for a payment of money at a future time, if Riley guarantees the order and gives him a consideration for waiting. Thus instruments of credit can be used to settle other obligations and are made to pass from one person to another. The business of the world today is transacted largely by the exchange of such instruments of credit instead of money, but custom has grown into law and to pass from hand to hand readily, the order to pay and the promise to pay must be written according to prescribed forms. If these requirements are followed, the law gives the promise and the order certain characteristics which denote "negotiability," the promise being called a promissory note" and the order a "bill of exchange." Either is a "negotiable instrument." 1

1 This chapter is based principally upon the negotiable instruments law, which has been published in many forms, and annotated by many legal authorities.

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NEGOTIABLE INSTRUMENTS

15. Attributes of negotiable instruments. The chief attributes of negotiable instruments are:

(1) The rights of ownership pass from one person to another by indorsement and delivery, or by delivery (see 21, 22).

(2) The owner known as the holder has a legal title, all the rights of ownership, to the instrument. He can sue in his own name to recover its value from the person or persons liable for its payment.

(3) The holder's title, if he buys in good faith and for value, may be better than the title of the person from whom it was purchased (see 28, 29). Other contracts that are assignable and transferable give the purchaser no more rights than the seller had. Ross has a note made by Grant, which is payable to bearer. Perry steals it and sells it to Archer, who buys it in good faith. Perry has no title to transfer, but Archer has a perfectly good title, and he can recover the value of the note from Grant.

(4) Payment cannot be demanded until three days after the note or bill is due, unless these "days of grace" have been abolished by statute, as they have in most of the states of the United States.

(5) Negotiable instruments differ from other contracts in another way. James fails to pay his note to Boyer for $1000. Boyer sues with the note as evidence. He does not have to prove that he gave James a valuable consideration. The law presumes it. James can win if he can prove no consideration, but the burden is entirely upon him. The person suing upon other contracts cannot win without first establishing a good and sufficient consideration.

16. What constitutes a promissory note or a bill of exchange. A promissory note or bill of exchange may be written on a piece of wrapping paper with a burnt match, but it is simpler and safer to use ink, plenty of it, and blanks carefully prepared for the particular purpose (see

61). A note is made; a bill is drawn. The maker or drawer must sign the instrument. It is not sufficient to acknowledge a debt as "I owe Isaac Owens fifty dollars." It must be a promise to pay. A promise or order to pay ninety tons of pig iron will not do. It must promise or order to pay a definite sum of money. It is allowable

Dollars

Negotiable and payable at Merchants Miners Bank, Cak Hill, W.Va. Value received.

Andrew Windsor

to write such phrases as "with interest from date," "with exchange," or "with collection costs and attorney's fees if unpaid at maturity." A promise or order to pay $1000 from the 1923 profits of the Tungsten Co. is outside the requirements. No uncertainty as to the amount to be paid or condition of payment must exist. It is within the law to provide for payment in installments and to stipulate that the entire amount becomes due and payable upon the failure to pay any one installment. Almost any other condition strips the paper of its negotiability. Some states, as Ohio, do not permit the collection of attorney fees and commissions for collection of notes which are unpaid at maturity. If promises to pay such are in a note falling due in those states, the note remains negotiable, but the provisions are null and void. The person on whom an order is drawn must be named (To Ralph Black), or specified with reasonable certainty (To the President of the Red Brick Co.) in the order. The instrument must be

FORM OF NOTE OR DRAFT

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payable at sight, on demand, or at a fixed or determinable future time. If no time for payment is stated it is payable on demand (checks, for instance). "Five years after I graduate from college" is not determinable; the maker may flunk or die. "Five years after my death" is certain, as are the usual "Thirty days after sight (or date)" and

A bill of exchange. This is more commonly called a draft.

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one

"On or before Dec. 25, 1930." No note or order is negotiable unless it reads "pay to the order of —," pay to or order," "pay to or bearer," "pay to bearer," or similarly. To write pay to the order of a fictitious person, or cash," or some other word, is equivalent to making it payable to bearer. An order or promise is also nonnegotiable if it calls for any act in addition to the payment of money, as "We promise to pay to the order of thousand dollars and three hundred tons of steel rails "; but the maker may give the payee and succeeding owners of the instrument the option to require some act in lieu of the payment of money. Unless some statute, or decisions based on public policy, forbids, the party liable may waive the benefit of laws passed for his protection; he may confess judgment if the note is unpaid at maturity, and pledge securities or other property for the faithful performance of his obligations.

17. Definitions of promissory note and bill of exchange. The above are illustrations of the principal provisions of the Negotiable Instruments Law as to what constitutes a negotiable note or bill. This law is the outgrowth of centuries of mercantile practice crystallizing into the law merchant of England and the states of the United States and now adopted by statute in forty-seven states and in the District of Columbia. That law defines these instruments as follows:

A negotiable promissory note is an unconditional promise in writing made by one person (called the maker) to another (called the payee), signed by the maker, engaging to pay on demand or at a fixed or determinable future time a sum certain in money to order or to bearer. A bill of exchange is an unconditional order in writing addressed by one person to another, signed by the person giving it (called the drawer), requiring the person to whom it is addressed (called the drawee) to pay on demand or at a fixed or determinable future time a sum certain in money to order or bearer (called the payee).

18. Varieties of notes and bills. A promissory note under seal is a "bond" (see 251-252). The bond of a corporation or of a government is by law negotiable. Another style of a promissory note is a bank's "certificate of deposit" (see 38). A "check" is a demand bill of exchange drawn upon a bank by one who has funds in the bank (see 50-52). A bank draft is a check drawn by one bank upon another bank. "New York exchange" is usually a banker's check upon a New York City bank (see 90 and 138).

19. How a bill becomes an acceptance. Certified checks. In the case of a bill of exchange, which is an order, no value arises until the person on whom it is drawn agrees to obey the order. This act is called an "acceptance," and so far the bill is said to have been honored. To accept