190 MODULE 25 COMMERCIAL PAPER

(2) It is a definite time if payable

(a) On a certain date, or
(b) A fixed period after sight, or
(c) Within a certain time, or
(d) On a certain date subject to acceleration
1] For example, when a 'payment is missed, total balance may become due at once
(e) On a certain date subject to an extension of time if
1] At option of holder, or
2] At option of maker or drawer only if extension is limited to a definite amount of time
(3) It is not definite if payable on an act or event that is not certain as to time of occurrence
EXAMPLE: An instrument contains a clause stating that it is payable ten days after drawer
obtains a bank
loan. This destroys negotiability.
6. Must be payable to order or to bearer unless it is a check (these are magic words of ne-
gotiability and are often a central issue on the CPA exam)
(1) Instrument is payable to order if made payable to the order of
(a) Any person, including the maker, drawer, drawee, or
payee
(b) Two persons together or alternatively
(c) Any entity
(2) Instrument is also payable· to order if it is payable "to A or order"
(3) Instrument other than a check is not payable to order if it is only payable to a person (e.g.,
"Pay John Doe")
EXAMPLE: A draft that is otherwise negotiable states: "Pay to XYZ Corporation." This statement destroys
negotiability because the draft is not payable "to the order of' XYZ Corporation.
(a) It is not negotiable
(b) "Pay to the order of John Doe" would be negotiable
(4) If a check says "pay to A," it is negotiable order paper-this is not true of other instruments
(5) Instrument is payable to bearer if it is payable to
(a) "Bearer"
(b) "Cash"
(c) "A person or bearer" is bearer paper if "bearer" handwritten
1] However, "pay to John Doe, the bearer" is not negotiable because it is not payable to
order or to bearer but to a person and simply refers to him as the bearer
(d) "Order of bearer" or "order of cash"
(e) Pay to the order of (payee left blank) is bearer paper unless holder inserts payee's name
(6) Instrument cannot be made payable to persons consecutively (i.e., maker cannot specify sub sec
quent holders)
,
7. Interpretation of Ambiguities in Negotiable Instruments
8. Contradictory terms
9. Words control over figures
10. Handwritten terms control over typewritten and printed (typeset) terms
11. Typewritten terms control over printed (typeset) terms
12. Omissions
a. Omission of date does not destroy negotiability unless date necessary to determine when pay~ble
EXAMPLE: A check is not dated. It is still negotiable because a check is payable on demand.
EXAMPLE: A draft states that it is payable thirty days after its date. If the date is left off, it is not payable at a
definite time and, therefore, it is not negotiable. .
13. Omission of interest rate is allowed. because the judgment rate of interest (rate used on a court
judgment) is automatically used
14. Statement of consideration or where instrument is drawn or payable not required