University:
Indiana University Bloomington
Course:
Financial and Managerial Accounting: Information for Decisions - John J. Wild
Academic year:

2024
Views:

62

Pages:

2
Author:

bratrochanter

Summary: Special Terms and Ambiguities in Negotiable Instruments 1. Requirements for Negotiability To qualify as a negotiable instrument, a document must meet specific formal requirements under UCC Section 3-104:        In Writing & Signed: Must be handwritten, typed, or printed, with a valid signature (including authorized marks or symbols). Unconditional Promise or Order: Must be payable without conditions and fully self-contained, requiring no reference to external documents. Fixed Amount of Money: Specifies a principal amount payable, with interest or fees allowed if clearly stated. Payable in Money: Must involve payment in currency authorized by a government or international agreement. Payable on Demand or at a Definite Time: Includes instruments payable immediately, at a fixed date, or upon a determinable future event. Payable to Bearer or Order: Indicates payment to a named party or bearer, though checks need not explicitly use these phrases. No Other Undertakings: Additional clauses may involve securing collateral, confessing judgment, or waiving protections, but no extraneous obligations. 2. Special Terms and Conflicts   Permitted Clauses: Instruments may include terms for securing or disposing of collateral, confessing judgment, or waiving legal protections without losing negotiability. Ambiguities and Conflicting Terms: UCC Section 3-114 provides rules for resolving discrepancies: o Handwritten terms control over typed or printed terms. o Typed terms control over printed terms. o Words control over numbers (e.g., "$1,000" vs. "one thousand dollars"—the latter prevails). Case Example: Galatia Community State Bank v. Kindy This case involved a check with conflicting amounts:   $5,550 imprinted in figures by a check-writing machine (on the line for words). $6,550 written in figures (in the standard numerical box). The court held that the machine-imprinted amount ($5,550) controls, treating it as equivalent to words for resolving conflicts under UCC. This highlights the principle that terms less prone to alteration (e.g., handwritten or machineimprinted) generally prevail in conflicts. 3. Common Problems in Negotiability    Conditional Promises: A note referencing another agreement ("subject to terms of sale") affects negotiability if the terms influence the payment obligation directly. Ambiguous Payment Dates: Instruments payable "when you can" or "upon graduation" lack definite payment terms and are non-negotiable. Postdated Checks: Postdating does not prevent a check from being negotiable but may impact its enforceability for forgery claims (as seen in Young v. Lynnwood Check-X-Change). Practical Implications for Businesses and Consumers   Negotiability Confers Benefits: Instruments that qualify can be transferred more freely, providing greater security and liquidity. Understanding Ambiguities: Parties must ensure instruments are clear and meet UCC requirements to avoid disputes over payment or enforcement.