TYPES OF NEGOTIABLE INSTRUMENTS
Sec. 6. Definition. Negotiable instruments are of two types
negotiable promissory notes and bills of exchange. Their classi-
fication depends upon the particular language used and the number
of parties necessary for the creation of the instruments. A negoti-
able promissory note, as defined by the Uniform Negotiable In-
struments Act, is "an unconditional promise in writing made by
one person to another, signed by the maker, engaging to pay on de-
mand or at a fixed or determinable future time a sum certain in
money to order, or to bearer." l This type of instrument has two
parties, the one making the promise, called the maker, and the per-
son to whom the promise is made, called the payee.
Sec. 7. Classification of promissory notes. Promissory notes
may be classified with respect to the kind of security given by the
maker to support his promise to pay money. A simple promissory
note carries only the personal security of the maker. Business
convenience often requires a high degree of certainty that the
money will be paid by the maker on the day it is due. Conse-
quently the personal promise of the maker to pay money is often
supported by another contract, appearing sometimes upon the face
of the instrument and sometimes in separate agreement. This
contract may be called a security contract.
This additional source from which the payee or holder of the
note may secure his money may be security, or another person,
called a comaker, or an accommodation party.
Sec. 8. Collateral note. A note may be secured by personal
property in the nature of other notes, bonds, or stock temporarily
placed within the control of the payee, or holder. The property
transferred is called collateral and such note is a collateral security
Sec. 9. Judgment note. The maker may sign a contract as
additional security, which permits a judgment to be taken against
him without a trial in case he fails to pay on the due date. This
form of note is called a judgment note.
Sec. 10. Conditional sale note. In order to secure payment
for the sale of merchandise, the contract of sale may be set forth
upon the face of the instrument. The contract usually provides
that title to the chattel sold shall remain with the payee-vendor
until the note given is paid in full, and, further, that in case of de-
fault in payments as shown upon the note, the vendor may repos-
sess the chattel. A note in this form is called a conditional sale
Sec. 11. Mortgage notes, chattel and real. A security con-
tract separate from the simple promise to pay money is illustrated
by the mortgage. There are two kinds of mortgages, depending
upon the character of the property used as security. When the
maker conveys to the payee as security a right in the title of chat-
tels, the note so secured is called a chattel mortgage note. When
the right in the title conveyed is in real property, the note so se-
cured is called a real estate mortgage note.
Sec. 12. Certificate of deposit. The classification of different
types of promissory notes is sometimes controlled by the character
of the maker. This is true of the certificate of deposit and of the
bond. A certificate of deposit is a promissory note given by a bank
to a depositor, as a receipt for the deposit, promising to pay the
amount to the order of the depositor. Care must be taken to dis-
tinguish this type of certificate of deposit from the usual receipt
given by the bank when a depositor deposits sums to his checking
account. There is no uniformity in the former type of paper. The
language used in many instances does not satisfy the requirements
for negotiable paper; consequently, many such certificates are not
Sec. 13. Bond. A bond may be said to be a promissory note
under seal, issued by a corporation, public or private. Bonds are
formal instruments and in general are so worded as to satisfy the
requirements for negotiability, but, owing to additional language
referring to the separate security contract supporting the promise
in the bond or owing to requirements for registration, their nego-
tiability is impaired. Bonds are either coupon bonds or registered
bonds. Coupon bonds have attached coupons which are promis-
sory notes, payable either to order or to bearer, in amounts repre-
senting the interest due from time to time upon the bond. In gen-
eral, coupons are negotiable. Registered bonds are bonds payable
to a payee whose name is registered upon the books of the maker
corporation, and are transferable only by the registration of the
party's name to whom transferred. Bonds are secured by a mort-
gage given to a trustee who holds the mortgage in trust for the
4 See form #6.
TYPES OF NEGOTIABLE INSTRUMENTS 147
benefit of the bondholders. Otherwise, a separate security contract
or mortgage would have to be created for each bondholder.
Sec. 14. Nature of bills of exchange. A bill of exchange as
defined by the Uniform Negotiable Instruments Act is "an uncon-
ditional order in writing addressed by one person to another, signed
by the person giving it, requiring the person to whom it is addressed
to pay on demand, of at a fixed or determinate future time, a sum
certain in money to order or to bearer." 5 This type of instrument
has three parties: the party drawing the paper, the drawer; the
party to whom the instrument is addressed, the drawee; and the
party to whom payable, the payee. When the paper is accepted
by the drawee, he then becomes the acceptor. The acceptor's lia-
bilities are similar to the liabilities of a maker of a promissory note.
A bill of exchange differs from a promissory note in that it is a
three-party paper and contains an order instead of a promise. A
further difference lies in the actual situation which gives rise to the
instrument. A bill of exchange presupposes the existence of a
debtor-creditor relationship between the drawer and the drawee.
This being true, the drawer-creditor merely orders the drawee-
debtor to pay the money to a third party, the payee.
Sec. 15. Classification of bills of exchange. Bills of exchange
may be classified with respect to situations in which they are used.
The bill of exchange in most general use is the check. It is an
order addressed to the bank-drawee by the depositor-drawer to pay
the payee the sum indicated. It is a demand bill of exchange.
Sec. 16. Bank draft. A bank draft is a banker's check; that
is, it is a check drawn by one bank on another bank, payable on
Sec. 17. Trade acceptance. Another type of bill of exchange,
used largely by manufacturers and merchants, is the trade accept-
ance. A trade acceptance is taken by the seller as payment for
goods purchased at the time of the sale. The seller draws on the
purchaser to his own order for the goods sold. When the draft is
accepted by the purchaser, it becomes his primary obligation. The
seller usually discounts trade acceptances at the bank, or uses them
as collateral for loans. The buyer, having acknowledged the debt
by his acceptance, cannot later dispute the debt as against a holder
of the trade acceptance.
Sec. 18. Banker's acceptance. A banker's acceptance is a draft
accepted by a bank according to a previous arrangement made with
the bank by a buyer of goods. The seller of goods often refuses
to deliver goods to the buyer upon the buyer's credit alone ; or the
seller of the goods may wish to secure in payment for his goods a
6 See form #7. %
148 NEGOTIABLE INSTRUMENTS
negotiable instrument which has a ready sale. A draft accepted by
a bank would have stronger credit than a trade acceptance accepted
only by the buyer. For example, B informs his banker that he ex-
pects to purchase goods from A and requests the bank to accept a
draft on it drawn by A. B usually deposits collateral with the
bank or agrees to keep a certain amount on deposit in order that the
bank will be assured of funds at the time of payment. The col-
lateral often consists of shipping documents, warehouse receipts,
and bills of lading carrying the title to the goods from A to B. By
this means the bank is not making a loan, but merely lends its credit
to the buyer, thus giving selling capacity to the negotiable paper
that A receives in payment for his goods. A can dispose of his
paper more readily and on better terms than if the negotiable
instrument were a trade acceptance accepted only by the original
This type of instrument is not new, but its use is relatively new
in the United States. Prior to the Federal Reserve Act, national
banks could not accept drafts of this nature. Under this Act, how-
ever, national banks may now accept such drafts, and many state
banks by their charters are given the same authority. The Fed-
eral Reserve Act regulates in detail the issuance of such drafts.
Sec. 19. Sight and time drafts. Bills of exchange called drafts
are also classified as to time. Sight drafts are bills of exchange
payable at sight. This type of paper is termed call paper. Time
drafts are drafts payable at a future time, as thirty or sixty days
after date or acceptance.
Review Questions and Problems
1. How many parties are there to a negotiable note? Name them.
2. Name four kinds of negotiable notes. What is a conditional sale
note? What is a bond? When is it used?
3. Define a bill of exchange. Name the parties to such a bill.
4. What is a trade acceptance? What is the difference between a trade
acceptance and a banker's acceptance?
5. What is the difference between a sight draft and a time draft?