Chapter 20 Introduction to Commercial Papernovaonline.nvcc.edu/Descriptions/bus242ft/ppt/Ch20_PPT.pdfChapter 20 Introduction to Commercial ... • Negotiable instruments are highly

Chapter 20

Introduction to

Commercial

Paper

McGraw-Hill ©2010 The McGraw-Hill Companies, Inc. All rights reserved.

Essentials of Business Law

Characteristics

of Commercial Paper • Commercial paper: A term widely used in law to

describe a number of legally binding and commercially acceptable documents.

• Commercial paper such as notes, checks, and drafts are used to transfer money from one person to another.

• These documents are negotiable and are freely transferable.

• Negotiable instrument: A commercial paper is an unconditional written promise to pay, or pay to the order of another party, a certain sum of money on demand or at a definite time.

• Negotiable instruments are highly trusted and play an important role in everyday individual and business transactions.

PO: 1; Page: 291

Chapter 20-2


Difference between Commercial

Papers and Ordinary Contracts

• Presumption of Consideration

• It is assumed that the commercial paper is issued for value—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.

PO: 1; Page: 291

Chapter 20-3


Difference between Commercial Papers

and Ordinary Contracts (cont.)

• Negotiability versus Assignability

• Ordinary contracts may usually be assigned, but the

assignee, or the person to whom rights are

transferred, may receive only those rights held by the

person making the assignment (the assignor) at the

time of the transfer.

• The person who has acquired assigned rights to a

contract must notify the other party to the contract of

the assignment.

• These conditions do not apply to commercial paper

that is being negotiated (transferred).

PO: 1; Page: 291

Chapter 20-4


Kinds of Commercial Paper

• Promises to Pay

• Promissory note: 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

• There are situations in which a person orders another individual to pay a definite sum of money.

• Checks: 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.

• Drafts (bills of exchange): An unconditional written order to a person instructing him or her to pay money to another, third person.

PO: 2; Pages: 291–292

Chapter 20-5


The Meaning of

―Pay to the Order Of‖• The words, ―Pay to the order of,‖ give

commercial paper negotiability.

• Negotiability: The ability to be transferred freely from one person to another and be accepted as readily as cash.

• Order Instrument: An item of commercial paper containing the key words of negotiability, ―pay to the order of,‖ or their equivalent.

• Examples: Notes, drafts, and checks.

PO: 2; Pages: 292–293

Chapter 20-6


Parties to Commercial Paper

• The parties involved in a promissory note have the following names:

• Maker: The person who makes the promise.

• Comaker: A person whose name has been added to the promise to strengthen the promissory note.

• Payee: The person to whom the promise is made.

• The parties involved in a draft or a check have the following names.

• Drawer: The person who draws or creates the check or draft.

• Payee: The person who receives the money.

• Drawee: The person who is ordered to pay the money (in the case of a check, the drawee is a bank).

• Holder: Whoever is in possession of commercial paper.

PO: 3; Page: 293

• Parties involved in a promissory note:

• Maker: The person who makes the promise.

• Comaker: A person whose name has been added to the promise to strengthen the promissory note.

• Payee: The person to whom the promise is made.

• Parties involved in a draft or a check :

• Drawer: The person who draws or creates the check or draft.

• Payee: The person who receives the money.

• Drawee: The person who is ordered to pay the money (in the case of a check, the drawee is a bank).

• Holder: Whoever is in possession of commercial paper.

Chapter 20-7


Essentials for Negotiability of

Commercial Paper• To be negotiable under the Uniform Commercial

Code (UCC), a commercial paper must conform to the following requirements:

• It must be in writing and signed by the maker or drawer.

• It must contain an unconditional promise or order to pay a definite sum in money.

• It must be payable on demand or at a definite time.

• It must be payable to order, to bearer, or to cash.

• A draft or check must name or indicate the drawee with reasonable certainty.

PO: 4; Pages: 293–294

Chapter 20-8


Nonessentials for Negotiability of

Commercial Paper

• Because consideration is presumed, the words ―for

value received‖ are not needed.

• 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.

• If this date is not known, the date when the paper was

received is considered the date of issue.

• Commercial paper may be:

• Antedated (dated previously), or

• Postdated (dated ahead).

PO: 5; Pages: 294–295

Chapter 20-9


Nonessentials for Negotiability of

Commercial Paper (cont.)

• The place of business or home of a maker of a note is presumed to be where the instrument was drawn or where it is payable if this information is not given on the paper.

• 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 also not expressed in figures, this omission does not affect negotiability.

• The numbering of (or the failure to number) commercial paper does not affect its negotiability.

PO: 5; Page: 295

Chapter 20-10


Example: Negotiability of a

Commercial Paper • Trudy offered Milo a $500 promissory note in

payment for merchandise she had purchased. The note specified payment within 30 days. Milo refused to accept the note because it was handwritten in red ink and signed in the body of the instrument. In this case, Milo has incorrectly assumed that the note was not enforceable since it was handwritten in red ink. The note is valid and enforceable because the device used in writing a note does not affect the negotiability of the commercial paper.

PO: 5; Pages: 294–295

Chapter 20-11


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.

• However, many banks today prefer that the encoded routing number assigned a drawer (depositor) be shown on every check written by him or her.

PO: 6; Page: 295

Chapter 20-12


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.

• 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.

PO: 6; Page: 295

Chapter 20-13


Payment of Checks

• 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.

• Stale check: A check presented more than six months

after its date; will not be honored by banks.

PO: 6; Page: 295

Chapter 20-14


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.• Certified check: A check that the bank has promised to pay

when it is presented for payment.

• Liability• If a drawer of a check has the bank certify it, he or she remains

conditionally liable for payment of the check until the holder can reasonably present it for payment.

• However, when a check is certified at the request of the payee or holder, while the drawee is still responsible for eventual payment, the drawer and all prior indorsers are released from all liability.

• The reason is the payee or holder could have requested payment instead of certification.

PO: 6; Page: 296

Chapter 20-15


Cashier’s Check

• Sometimes called an official check, a teller’s check, or a bank check.

• It is issued by the cashier or other designated officer of a bank and drawn against bank funds.

• A depositor may request such a check when he or she intends to use it to pay for merchandise from an out-of-town dealer who will not accept a personal check.

• 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.

PO: 6; Page: 297

Chapter 20-16


Traveler’s Check

• A certified check issued in a denomination of $10 or more by certain banks, travel agencies, and financial services companies. • For persons who are traveling, especially in

foreign countries, traveler’s checks are a safe form in which to carry money.

• Only the purchaser who signed the checks when he or she bought them may negotiate them.

PO: 6; Page: 297

• A certified check issued in a denomination of $10 or more by certain banks, travel agencies, and financial services companies.

• For persons who are traveling, especially in foreign countries, traveler’s checks are a safe form in which to carry money.

• Only the purchaser who signed the checks when he or she bought them may negotiate them.

Chapter 20-17


Bad Checks and Forgery

• Bad Checks• Bad check: One against a bank in which the drawer

has insufficient funds on deposit to cover the check or no funds at all.

• It is a criminal offense for a person to intentionally issue a check drawn on a bank in which that person has an account but has insufficient funds on deposit.

• Forged and Raised Checks• Forgery: The act of fraudulently making or altering a

note, check, draft, or some other document, causing the financial loss of another.

• Both the intent to defraud and the creation of a liability must be proved in order for an act to constitute forgery.

• A person who commits a forgery is guilty of a crime.

PO: 6; Pages: 297–298

Chapter 20-18


Forgery

• Two common types of forgery:• A forged check

• A raised check

• Liability for Forged Checks

• A depositor who opens a checking account with a bank must fill out a signature card and leave it on file with the bank.

• The bank is then assumed to know the depositor’s signature and is liable if it pays any checks on which the drawer’s signature has been forged.

PO: 6; Page: 298

Chapter 20-19


Postdated Checks and Stopping

Payment on Checks• Postdated Checks

• A check 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 person also may postdate a check for self-protection when some act is to be completed by the payee before the date of the check.

• Stopping Payment on Checks

• 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.

PO: 6; Pages: 298–299

Chapter 20-20


Example: Stopping Payment

on Checks• Isabel owed Juan $500, and gave him a check for

the amount as repayment for the debt. Later, Isabel realized that she had already paid Juan in cash. She tried to contact Juan several times to correct the misunderstanding. She was unable to reach him, so she asked her bank to stop payment on the check. While the bank honored her request, it charged Isabel a service fee. In this case, the bank is justified in asking for the fee since a small service charge is usually made by the bank for carrying out a stop-payment order.

PO: 6; Page: 298-299

Chapter 20-21


Electronic Funds Transfer Systems

and Automated Teller Machines• Electronic funds transfer (EFT): A system that offers a variety

of convenient and useful applications such as ATMs, point-of-sale (POS) systems, direct deposit and withdrawals, etc.

• Automated Teller Machines (ATM)

• An ATM performs many functions that tellers in banks do.

• Customers activate the ATM by using their debit or credit card and will be able to select a transaction.

• Using an ATM, customers can:

• Inquire about the status of their account.

• Withdraw cash (in local currencies).

• Make deposits.

• Transfer funds from one account to another.

PO: 7; Page: 299

Chapter 20-22


Point of Sale &

Direct Deposits and Withdrawals• Point-of-Sale Systems

• A point-of-sale system allows a consumer to transfer funds from a bank account to the merchant’s bank account to pay for merchandise purchased.

• Direct Deposits and Withdrawals• The electronic movement of funds from one

bank account to another has many useful applications.

PO: 7; Page: 300

Chapter 20-23


Other EFTs

• Some services give customers who have personal computers access to information about their accounts, allow depositors to transfer funds from one account to another, and permit bank customers to authorize the bank to pay regular bills.

• Pay-by-phone systems allow depositors to telephone their bank’s computer and authorize payment of certain bills and transfer funds to other accounts or to third parties.

• Transfer of funds between banks has revolutionized the worldwide banking system because of its speed in processing financial settlements and international trade.

PO: 7; Pages: 300–301

Chapter 20-24


The Electronic Funds Transfer Act

• The most comprehensive federal legislation is the Electronic Funds Transfer Act of 1979 (EFTA), which went into full effect in 1980. • The act establishes the rights, responsibilities, and liabilities of

consumers in dealings with financial institutions.

• The primary purpose of the act is to protect consumers.

• 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. • If the customer fails to notify the issuer within two days, the

consumer’s liability increases to $500.

• 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.

PO: 7; Page: 301

Chapter 20-25

Documents

Chapter 20 Introduction to Commercial Papernovaonline.nvcc.edu/Descriptions/bus242ft/ppt/Ch20_PPT.pdfChapter 20 Introduction to Commercial ... • Negotiable instruments are highly