A negotiable instrument is a document that guarantees payment to a specific person. The instrument must name the payee or otherwise indicate his identity. A negotiable instrument is transferable and in essence, it is a signed document with a promise to pay the holder of the document a given fixed amount of money at a specified date or on demand. Upon the transfer of the instrument, the legal title of the instrument is passed to the owner.
Promise and negotiable instruments
A negotiable instrument is a document used in contracts, and which guarantees the payment of a given sum of money unconditionally on demand or at a future date. It is a promise to pay money; the instrument can be used by the holder in due course as a value store (Rabinowitz, 1956). Negotiable instrument constitutes part of a performance contract, even though it is not a must for it to be present in the contract formation.
The promise to catch and paint an alligator is not a negotiable instrument. This is because the promise is not signed anywhere or is not a document. Furthermore, a promise is not a contract, as it does not consist of the basic elements of a contract. Negotiable instruments are documents, which are contemplated by a contract, and warrants the payment of a specified sum of money on demand or at a specified date. Offer, acceptance and consideration conveyance often arise during the formation of negotiable instruments.
Can banks pay money to anyone with a right to receive payment?
In my opinion, banks should not give money to just anyone who has a right to receive payment. This is because; banks act as agents of the account holders. Therefore, a bank is an agent. An agent is an individual who acts in the place of or on behalf of another person, by the authority of that person; who is entrusted with the business of another(Selwyn, 2008).
A bank would be obligated to pay a person who is a third party with the rights of payment, only if instructed by the second party for whom the bank is acting as an agent. The bank should not pay anyone because the it is not an agent of anyone; rather the bank is an agent of the account holders, with whom they have signed a contract to act on the latter’s behalf.
Fraud and negotiable instruments
Fraud is rarely used as a defense when it comes to negotiable instruments. However, it can be used in the cases where non est factum may be brought as a defense. In actual sense, the person signing the negotiate instrument has a duty to take care of all the other parties that or who may receive the instrument(Mann, 1996). Therefore, fraud is the only available defense for someone who signed the instrument if the other individual did not understand the nature of the instrument due to a particular physical weakness, illiteracy or advanced age.
In the case of Colby and Ellen on holder in due course rights, Colby will not be able to acquire Ellen’s HDC rights. Ellen will be protected by the HDC doctrine. As a holder, Ellen had given the value to Colby in good faith without realizing the previous dishonor when she was taking the note, as the document appeared to be a complete and a regular note. In that case, Ellenqualifies as a person who has given in good faith and without notice, that value. Furthermore, Ellen did not sign the note in the first place and, therefore, the court action will trace back the person who signed the note, who in this case is Diana.
A negotiable instruments and an agency are forms of contract. The instrument warrants the bearer of the note or bill payment at specified time or at a demand, while an agency is a contract whereby one person is entrusted by another to perform on their behalf a given specific function.
Rabinowitz J., (1956). The Origin of the Negotiable Promissory Note. University of Pennsylvania Law Review.
Mann R. J., (1996). Searching for Negotiability in Payment and Credit Systems. UCLA Law Review.
Norman Selwyn, (2008).Selwyn's Law of Employment. Oxford University Press