The Universal commercial Code (UCC) has been created to foster the free flow of commercial activity in the United States by making laws that are both reasonable and practical. Article 3 of this code deals with negotiable instruments. These contracts for payment serve as a substitute for actual money and make the flow of commerce move along at a faster rate. There are certain requirements that must be met for an item to be qualified as a negotiable instrument. First the instrument must be in writing.
This writing must also meet the permanence and portability requirements. The writing must be made on a permanent surface (not in the sand) and it must be portable and able to be transferred. Negotiable instruments written on paper satisfy these two requirements. The second requirement for negotiable instruments is that the maker or drawer signs them. Third, the instrument must also contain an unconditional promise or order to pay. Fourth, it must also contain a promise or order to pay a fixed amount of money.
This means that the value must be fixed and that the debt will be paid with a legal form of money. Fifth, the negotiable instrument cannot require any other undertaking in addition to the payment of money. For example it cannot require the payment of money and the completion of some type of other service. Finally the negotiable instrument must be payable on demand or at a definite time.
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The main reason for the negotiable instrument is its ability to be transferred by assignment or negotiation. Different types of Endorsements effect how the instrument can be negotiated. These types of endorsements are either blank or special, Unqualified or qualified, and nonrestrictive or restrictive. A blank endorsement does not specify a particular endorsee. It may consist of a mere signature. This signature converts the order paper into bearer paper that can be redeemed by any one who has possession of the check.
A special endorsement contains the signature of the endorser along and specifies to whom the instrument is payable. Unqualified endorsement is a promise by the endorser to pay the holder or any subsequent endorser the amount of the instrument if the maker drawer or accepter defaults on it. The order of the liability is the order in which they indore the instrument. In a qualified endorsement the endorser includes the notation “without recourse” that disclaims the liability of the endorser against default of drawer, maker or acceptor. Most endorsements are nonrestrictive; they do not have any conditions attached to the payment of funds. Occasionally an endorser includes some form of instruction in the endorsement.
This is called a restrictive endorsement. This may include an endorsements that are, conditional, for collection or deposit, or in trust. A person cannot be held contractually liable on a negotiable instrument unless his or her signature appears on it. One of the goals of article 3 of the UCC is to balance the rights of parties to negotiable instruments.
The concept of a holder in due course has been created to meet this goal. To be a holder in due coarse one must have taken the instrument for value in good faith, without any notice that it is overdue, dishonored or encumbered in any way, and bears no evidence of forgery or alterations. If a holder of an instrument meets these requirements he is given more rights than just a regular holder. He does not have to pay if a previous holder defaults on the instrument based on a personal defense.
The shelter principal also states that those to whom he transfers the instrument are also afforded this status. This balances the rights of those who have in good faith accepted an instrument with those who have been stiffed by someone who didn’t present the proper value for the issuance of the instrument.
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