BUL3350 Law Ch 26 Outline

BUL3350 Law Ch 26 Outline - Chapter 26: Form and Content:...

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Chapter 26: Form and Content: Negotiable instruments, also referred to as instruments, include checks, promissory notes, drafts, and certificates of deposit o These instruments are crucial to the sale of goods and services as well as to the financing of most businesses To accomplish its social and economic objectives, the payment system must be quick, sure, and efficient o The use of cash can never satisfy all of these requirements because It is inconvenient to maintain large quantities of cash The risk of loss or theft is far too great The risk in sending cash is likewise too high, as is the cost of postage and insurance in shipping cash over long distances; and The costs to the Federal government of maintaining an adequate supply of currency would be prohibitive Negotiable instruments provide a convenient receipt as well as a record for accounting and tax purposes, but not exactly equivalent to cash because, for example, negotiable instruments may be forged, drawn on insufficient funds, payment may be stopped, or the instrument may be materially altered o Nevertheless, these risks, are slight compared with the advantages that negotiable instruments provide o Consequently, a major objective of the law of negotiable instruments and the bank collection process is to reduce these risks by increasing the safety, soundness, and operating efficiency of the entire payment system Negotiability: Negotiability is a legal concept that makes written instruments more freely transferable and therefore a readily accepted form of payment in substitution for money Development of Law of Negotiable Instruments Four or five centuries ago in England a contract right to the payment of money was not assignable because a contractual promise ran to the promise so performance could be rendered only to him o This prevented him from selling or disposing of it Eventually, the law permitted recovery upon an assignment by the assignee against the obligor (the party owing a duty to the assignor) o An innocent assignee bringing an action against the obligor was subject to all payment defenses available to the obligor Thus, a contract right became assignable but not very marketable because merchants had little interest in buying paper that may be subject to a defense This remains the law of assignments : the assignee stands in the shoes of his assignor
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With the flourishing of trade and commerce, it became essential to develop a more effective means of exchanging contractual rights for money o For example, a merchant who sold goods for cash might use the cash to buy more goods for resale. If he were to make a sale on credit in exchange for a promise to pay money, why should he not be permitted to sell that promise to someone else for cash with which to carry on his business? One difficulty was that the buyer of the goods gave the seller a
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This note was uploaded on 03/17/2011 for the course BUL 3350 taught by Professor Bailey during the Spring '11 term at FSU.

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BUL3350 Law Ch 26 Outline - Chapter 26: Form and Content:...

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