Understanding Pay to Order or Bearer Negotiable Instruments

The obvious danger of a pay to bearer negotiable instrument is that the bearer will not be the intended payee of the negotiable instrument.

A pay to bearer negotiable instrument might take such a form because the negotiable instrument specifically says so, or because the negotiable instrument does not feature any instructions as to whom the payee should be, or even because the negotiable instrument says that it is payable to cash. Any of these circumstances would define a negotiable instrument as a pay to bearer instrument.

Such pay to bearer instruments likely facilitate a greater ease of payment, but they also are much more likely to be misused or lost, as simply losing the physical documentation of the negotiable instrument would be enough to lose the payee all the money of the negotiable instrument.

Pay to order, on the other hand, is made out specifically to a clear person or party. A pay to order negotiable instrument is very much unlike a pay to bearer negotiable instrument in that a pay to order instrument is non-functional until endorsed. Because a pay to order instrument can only be paid to the person cited on the instrument itself, it must be officially endorsed by that person in order to become payable.

A pay to order check or other instrument which is endorsed can, however, functionally become a pay to bearer instrument. Once the endorsement of the party mentioned on the instrument is added to the instrument, if no other instructions were added with the endorsement then it can be used by whomsoever comes to hold that instrument. This is why it is often dangerous to endorse a check immediately and why it makes a great deal more sense to attempt to endorse the check only when actually using it.

Other options include mentioning instructions on the check, such that even if endorsed and lost, the check will at least be limited in its use. Pay to order checks can also remain pay to order if they are endorsed over to another party, with that party then becoming the new order to whom the check will be paid. The newly endorsed party will also have to add his or her endorsement to the check in order to make it active again.

Order-Based Negotiable Instrument Overview

In an order-based negotiable instrument, called a draft, the drafter orders the draftee to pay a certain amount of money to the payee on a certain predetermined time frame. To describe it in a different way, a draft involves one party ordering a bank, or other intermediary, to pay a third party. These orders do not quite involve the same function as promissory notes' unconditional promise, specifically because business laws interpret orders differently. If you need legal advice and assistance, contact business lawyers.

In an order, the drawer or party issuing the order, is not promising anything to any party. The drawer is instead requiring of the drawee, or intermediary, that the drawee provide payment to the payee. Instead of the unconditional promise coming from the party issuing the draft, as it would in a promissory note, the unconditional promise comes from the intermediary, the drawee, which promises to pay the payee on the behalf of the drawer. This unconditional promise is oftentimes validated by the use of an acceptance, as the payee can bring the draft to the intermediary and have the draft "accepted," thereby codifying the unconditional promise of the intermediary to pay the payee. Such an acceptance can be termed as either a bank acceptance, if it is issued from a bank, or as a trade acceptance, if it is issued from a financial company.

Business law's definition of these two separate types of negotiable instruments is important to understanding the use of negotiable instruments in economic dealings, as drafts, which are used to make payments for transactions, serve an entirely different function than promissory notes, which are used to make validated promises for paying off debts.

What Does a Negotiable Instrument Need?

Negotiable Instruments

Negotiable instruments do not have to come in the simplified forms with which most people are familiar. Checks, for instance, are negotiable instruments that essentially have a common set of terms and understanding applied to each and every one, but in theory those terms could be written out as an actual contract.

Clearly, then, there is a form for such contracts to follow in their writing that would define them as negotiable instruments, and most negotiable instruments effectively imply those fully written contracts by satisfying the requirements for being negotiable instruments under Article 3 of the Uniform Commercial Code.

The requirements are varied, but designed to be specific and rigid, such that negotiable instruments are clearly defined and understood without any confusion. For example, negotiable instruments must, of necessity, be unconditional orders for payment.

A negotiable instrument cannot hinge payment directly upon some other condition or contract, such as in a deal where payment would only be made if the goods being purchased were found to be satisfactory and non-defective. Such a contract would not be a negotiable instrument.

Negotiable instruments can involve the delay of payment until conditions are met, but payment will be made on a negotiable instrument unless the instrument is annulled in other clearly described ways. Negotiable instruments also must be made in written form and cannot be oral contracts. They must also have clearly defined elements of when the payment must be made available. Follow the link for more information on the basic requirements of the implicit negotiable instrument form.

Signature Requirements

In order to function, negotiable instruments must have the appropriate signatures attached. The necessary signatures will vary depending upon whether or not the negotiable instrument is an order or a promise and who the parties involved may be. A check, for instance, as a draft in which the drawee is inherently determined to be a bank will require a different set of signatures than will a promissory note like a loan.

The primary uniform requirement of all negotiable instruments is that they be signed by the issuer. For example, a check must be signed by the person writing the check, the drawer. A promissory note must be signed by the person accepting the debt and promising to pay back the other party. Without such a signature, no negotiable instrument would be viable or enforceable. These signatures also do not necessarily have to be signatures of the most generally understood sort, but instead need only be some sort of stand-in official identifier of endorsement from the issuer.

Many negotiable instruments require additional signatures, however. Any check or draft which is made as a pay to order negotiable instrument will inherently require an endorsement signature from the payee in order to be made functional, for example. Click the link for more information on the signature requirements of negotiable instruments.

Promise or Order

Any given negotiable instrument will be, of necessity, either a promise to pay or an order to pay. A promise to pay involves two parties, generally, with one party promising to pay the other a specified sum of money at a specified time. An order to pay, on the other hand, involves three parties with the issuer of the order, the drawer, ordering a second party, the drawee, to pay a third party, the payee.

The primary difference between the two is that an order to pay involves not debt, but payment out of the resources of an intermediary party. A promise to pay, on the other hand, is indicative of debt, and not direct, immediate payment. Orders to pay are generally called drafts, and promises to pay are called promissory notes.

Promissory notes are often used for loans and can include terms concerning interest payments on the initial sum of money. The notes’ issuers would be making a promise to pay back the loan on a specific date along with a specific amount of interest accrued over that time period.

Drafts, or orders to pay, are most commonly known in the form of checks, which are drafts in which the drawee is defined as a bank. Drafts are often used in business dealings, however, as payments for an exchange of goods.

This is because specialized terms can be added to drafts in order to make them more useful for such deals, such as specific terms on payment only being made available a certain amount of time after the transfer of goods. For more information on the differences between promises and orders and the importance of both, follow the link.

Established Amount Of Money

All negotiable instruments must be made for a determined amount of money. Any contract of exchange which uses an indeterminate or variable sum of money would not be a negotiable instrument, inherently.

This isn’t to say that negotiable instruments cannot have some form of variation, as would be provided through the practice of interest on a promissory note, because such variation is actually determined through a pre-set formula and is based on the original static amount of money. The primary reason for negotiable instruments to involve such a pre-set established amount of money is to ensure that they are well-defined and clear.

Negotiable instruments are not open to interpretation, as the terms and characteristics of any given negotiable instrument are likely to be determined simply by its nature as a certain type of negotiable instrument. As such, if the negotiable instrument could be made for a variable amount of money, it would detract strongly from the overall definition of the negotiable instrument. To find out more about the use of established amounts of money within negotiable instruments, follow the link.

Time Requirements

One of the defined qualities of negotiable instruments is that they must involve a specific date or time when the negotiable instrument will be made payable. This is in some ways misleading, as the specific date or time when the negotiable instrument must be made payable can be dependent upon other factors.

For example, the specific date or time might simply come after a defined interval from the date upon which the instrument is originally “sighted” or accepted by a bank. It might also come some time period after the goods exchanged within the transaction have arrived at the buyer’s location so as to help secure the overall transaction by preventing the seller from taking the money without sending the goods.

The time requirements of negotiable instruments are primarily focused on preventing the same kind of indeterminacy that might arise from not having an established amount of money. Without a clearly defined date for the transfer of money, it is possible that those who make promissory notes would be able to avoid ever having to pay off their debts.

The time requirements of negotiable instruments are designed to prevent such shirking of debts. For more information on the time requirements inherent to negotiable instruments, click the link.

Pay to Order or Bearer

Every negotiable instrument must be designed to either pay to order or to bearer, without exception. The difference between the two is relatively simple, as an instrument made to pay to bearer is payable to whomsoever holds the physical documentation of the instrument, while an instrument made to pay to order is payable only to the person or party identified in the negotiable instrument.

If the person or party identified on the negotiable instrument is nonexistent, then that instrument would not actually be negotiable. But if, instead, there is no party or person identified on the negotiable instrument, then it is assumed to be payable to bearer. If the instrument is made payable to cash, then it is similarly payable to the bearer.

Any negotiable instrument that is payable to the bearer is more dangerous for the payee than one that is pay to order. This is because a payable to bearer instrument is, essentially, money in and of itself; the document is all that is necessary to receive payment.

Thus, if the document is stolen, then the thief would be able to use it to receive payment without the drawee having any notion that the document was stolen. If the thief were later caught, then one could likely receive some form of restitution from the thief, but the drawee him or herself would not be held liable in such a case.

Pay to order instruments, on the other hand, can only be used for payment when they have the specific endorsement of the party mentioned on the instrument. As such, they are generally safer than pay to bearer instruments. Follow the link for more information on the differences between pay to order instruments and pay to bearer instruments.

Bearer Instruments

Bearer instruments are those negotiable instruments that are payable to the bearer and not to order. There are many ways to establish a bearer instrument, including failing to define the person or party to whom the instrument is payable and making the instrument out to cash.

Bearer instruments have their uses, mostly because they are easy to use and transfer; simply handing over the document of a bearer instrument is enough to transfer the funds involved. This is fortunate for ease of use and also for those situations in which the party to pay is unclear. For instance, a prize check might be made out to cash so that it can be bestowed upon any bearer instead of a specific one.

But bearer instruments then have the inherent flaw of being easily stolen, as any party holding the bearer instrument can use it to receive funds without the drawee being able to tell if the instrument is stolen or not. Whether or not this flaw outweighs the benefits is a decision to be made by any given issuer of a negotiable instrument.

Even pay to order negotiable instruments are not entirely safe from the flaws of bearer instruments, as a pay to order negotiable instrument with an endorsement can be stolen in the same fashion as a bearer instrument. To find out more about the advantages and flaws of bearer instruments, click the link.

Know the Signature Requirements for Negotiable Instruments

Under negotiable instruments law, a negotiable instrument with a signature affixed to it from each involved party becomes active. At that point it may be turned in to the drawee, the bank issuing the check, in exchange for cash. The person cashing the check need not be the same person as the one who signed the check.

This is because the authentication provided by the signature of the payee is enough to validate the check under negotiable instruments law (assuming that the signature of the drawer is also on the check). In this case, the signature of the payee would be referred to as payable to the bearer.

A signature of another individual can be affixed to a negotiable instrument to become a party to that instrument. A negotiable instrument such as a check can be transferred over to a new party with the appropriate signature or signatures; this is referred to as a special endorsement.

Special endorsements involve both the signature of the payee and a short statement indicating the new party to whom the negotiable instrument is to be paid. The special endorsement will also require the signature of the new party to be completely payable, but once that additional signature is affixed to the negotiable instrument it acts as a blank endorsement again allowing for the check to be payable to the bearer under negotiable instruments law.

The final way in which signatures can affect the negotiable instrument is if they are made with a small statement that defines the manner in which the negotiable instrument can be used. For example, writing “for deposit only” on the back of a check along with a signature ensures that the check can only be used for deposits and cannot simply be cashed.

This is a restrictive endorsement under negotiable instruments law and helps to prevent the misuse of lost checks. Unfortunately, however, such a restrictive endorsement would not prevent an individual finding an endorsed check from depositing the check in his or her own account.

Regardless of exactly what kind of endorsement one may be planning on using with a given negotiable instrument, it is a good idea not to affix a signature to that negotiable instrument until the moment of use, as affixing a signature at any earlier time leaves open the potential for the instrument to be lost and misused by another party.

Know the Time Requirements for Negotiable Instruments!

Sometimes negotiable instruments actually only become payable after certain acts or events have occurred. However, this is not a specific time; it still fits the definition of specific time under commercial business law. As long as there is one specific, clearly defined point at which the negotiable instrument becomes payable, it can fall under the purview of negotiable instruments. If a given monetary contract does not have such a specifically defined time for the money to be made payable, then it cannot be a negotiable instrument.

Know the Writing Form of Negotiable Instruments

The writing form of negotiable instruments is fairly well defined under business law, specifically the Uniform Commercial Code. There are specific requirements that must be present for any given financial contract to be considered a negotiable instrument. Some negotiable instruments are uniformly considered and understood to be negotiable instruments, meaning that despite these elements' direct absence from the financial object, the terms of negotiable instruments still apply. If you need legal advice and assistance, contact business lawyers.

The first key element that must be included in any negotiable instruments writing is that the payment ordered in the writing must be made unconditional. In terms of writing form, then, this means that negotiable instruments cannot resemble some fuller, more specific forms of contracts under business law. For instance, if a given contract provided for the fact that payment might not be rendered if the products exchanged were found to be defective, while that might be perfectly legal under business law, such a contract would not fall under the domain of negotiable instruments.

In order for a writing to be considered a negotiable instrument, it must not have any conditions that might negate the requirement of payment. This is different, however, from having conditions that must be met prior to payment being made; in those cases, payment will still be made, but only when conditions are met.

The next key element of negotiable instruments in America is that they must involve a specific amount of money in the exchange. This does not necessarily mean that the negotiable instrument must have an exact amount of money filled in from the initial creation of the writing. It is possible that instead, the amount of money that must be paid is determined by a formula.

As an example, transactions involving interest can still be written into the form of a negotiable instrument because at any given point the exact sum of money being exchanged under the negotiable instrument's terms will be defined. But if the writing form does not contain some clearly defined determination for the amount of money exchanged, then it does not fall into the purview of negotiable instruments.

The third key element of the writing form for negotiable instruments is that the payment described by negotiable instruments must be payable either on demand or at a specified time. This means that loans written in the form of negotiable instruments must actually have a defined maturation date at which point the loan must be fully paid off. Either way, the loan cannot be indefinitely extended for the writing form to be considered a negotiable instrument under business law.

Fourth, negotiable instruments cannot involve any sort of provision that would require the promissory party or the ordering party to supply any other type of payment aside from the money mentioned in the writing. In other words, negotiable instruments cannot require the paying individual to offer up either a service or physical object as payment; they must instead provide for monetary payment only under business law.

The final key characteristic of negotiable instruments is that they must be payable at the time at which they are written. This means that the writing form for negotiable instruments requires that there be a clearly defined payee in any such transaction and the negotiable instrument must be payable to that party