Commercial Paper

There are basic requirements for the negotiability of commercial paper. The instrument must be in writing and signed by either its maker or its drawer. In addition, it must be either an unconditional promise, as in the case of a promissory note, or an order to pay a specific amount of money, such as a draft. It must be payable either on demand or at a fixed time to order or to bearer.

The requirement that the instrument must be in writing can be met in various ways. The paper can be printed, typed, engraved, or written in longhand, either in ink, pencil, or both. Ordinarily, specimens of commercial paper can be obtained from banks or stationery stores.

Similarly, there are a number of ways to comply with the signature requirement. The signature may legally be either handwritten, typed, printed, or stamped by a machine. Individuals who are unable to write their names can sign with a simple mark, such as an X. Also permissible are initials, a symbol, a business or TRADE NAME, or an assumed name.

The pledge or order for payment must be unconditional to insure certainty that the instrument will be paid, since it is used in place of money and as a means of obtaining credit.

When the paper includes an unconditional promise or order, supplementary facts can be mentioned that will not defeat its negotiability. For example, the paper can indicate the transaction was secured by a mortgage. It might mention a specific account or fund out of which payment is expected, although not required. Ordinarily, such a collateral statement is made for purposes of accounting and does not create a conditional promise or order to pay. Payment can, however, be limited to the total assets of a partnership, unincorporated association, or trust.

A promise to pay is conditional when it indicates that it is either subject to or governed by another agreement. When payment is conditional, negotiability is terminated and the instrument is not commercial paper. The holder of the paper cannot rely upon the face of the document to establish and fix his or her right to payment.

A paper does not qualify for treatment as a negotiable instrument if payment of it is to be made exclusively from a particular fund, unless such instrument is issued by a government or division thereof.

In dealing with a promissory note, practically any terms that state a definite promise will suffice to make the instrument legally enforceable. The phrase "I promise to pay" clearly demonstrates an unconditional pledge of payment; whereas an IOU is not deemed definite enough to warrant payment and, therefore, is not a negotiable instrument. There must be an order to pay in a check or a draft. A mere request, as in "I wish you would pay," is insufficient. Language used for courtesy, such as "please pay," does not, however, defeat the order. Suitable language to instruct payment would be "pay to the order of X."

The holder of the negotiable instrument must be able to ascertain the precise value of the paper by looking at its face. In certain instances, it might be necessary to compute interest, as in the case of a promissory note that bears a certain annual rate. A provision for interest does not impair the determination of the actual sum. In addition, certainty regarding the amount is not altered by the fact that the interest rate can differ before or after default or before or after a particular date.

The amount payable remains a fixed sum even in the event that it is paid in installments, or reduced by agreement of payment prior to a set time or increased following the date of payment. In addition, the certainty of the sum is not affected by a provision for collection of expenses and lawyer's fees.

The sum must be payable in money, which is a medium of exchange adopted by governments; otherwise, the document is not considered commercial paper.

An instrument must be payable either on demand or at a set time in order to have negotiability. Papers that are payable on demand are payable upon presentation, such as checks.

When a note or a draft is payable on, or prior to, a fixed date or for a set period thereafter, it is considered to be negotiable at a definite time. When an instrument is payable on or before a certain date, payment is required no later than the date indicated, although it can be made prior to that date. Similarly, a paper made payable at an established time after sight is payable at a definite time. After sight means that upon presentation of the instrument to the maker by the holder, payment will occur after the expiration of the time designated on the note. The payee of a note due one week after sight must be paid by the maker within a week of the date it is presented for payment. It need not be paid immediately upon presentation, since the terms of the note do not make it a demand instrument.

If the time provided for payment of an instrument is definite except for the presence of an acceleration clause, the time of payment of the instrument is still considered definite. That is, a note can provide that the time for payment will be accelerated if a certain event takes place or at the option of one of the parties to the agreement without destroying its negotiability. Also acceptable are extensions of the payment period, which can be made at the choice of the holder, maker, or acceptor, or immediately when a particular act occurs.

An instrument retains its negotiable quality even if it is undated, antedated, or postdated. An undated instrument takes effect immediately upon delivery to the payee. An antedated paper is given a date that has passed, and a postdated instrument is given a future date. In the event that an instrument is either antedated or postdated, the determination of the date on which it becomes legally operative is contingent upon the date that appears on its face and upon whether it is payable on demand or on a certain date. A postdated check cannot be cashed prior to the date appearing on its face, in spite of the fact that a check is ordinarily payable on demand.

An instrument is not negotiable if it is payable upon an occurrence of indefinite timing, even when the event is certain to happen, such as death.

The requirement that an instrument be made payable either to order or to bearer is met when the paper is made available to the bearer, or to an individual specifically designated, or to the order of that person, as in "X, or his order." An estate, trust, corporation, partnership, or unincorporated association may be designated as a payee of a commercial paper.

An instrument can be made payable to two or more people, either together or in the alternative. If the paper is made out to two parties together, as in "to X and Y," then both payees must endorse it before payment will be made. An instrument made out in the alternative, however, as in "To X or Y," requires endorsement by only one payee in order to be paid.

Checks and drafts are ordinarily written on printed forms, made payable both to order and bearer. An empty space is left between the words "pay to the order of" and "or bearer." When the name of the payee is inserted by the drawer, the paper is regarded as an order instrument in spite of the fact that the phrase "or bearer" is not deleted. In such instances, the presumption is that the drawer merely neglected to eliminate this language. An instrument is bearer paper, however, when it is made payable to a specific payee and the words "or bearer" are either typed or handwritten on the document as additions to it.

Bearer paper is made payable either to the holder, a specific individual, the bearer, or to cash. It is common for such an instrument to read "pay to the order of bearer." This occurs in the case where a printed form is used and the term bearer is written in following "pay to the order of." The word bearer serves to make the instrument bearer paper in such an instance.

Bearer instruments are tantamount to cash because they are freely transferrable from one person to another without requiring an endorsement. They are thereby not as secure as order instruments since if they are stolen, their terms permit payment to be made to whoever possesses them at the time they are presented for payment. Many banks require customers to endorse bearer paper prior to payment as a safety measure. This provides both the drawer and the bank with the name of the individual who is given payment.