Introduction
The realm of commercial law often involves complex terminology and legal concepts. This is particularly true when dealing with negotiable instruments, which are essentially written promises or orders to pay a specific sum of money. This article aims to demystify some key terms related to negotiable instruments, focusing on the parties involved and the concept of possession.
Parties to a Negotiable Instrument
There are two primary types of negotiable instruments: notes and drafts. Each involves different parties with distinct roles and responsibilities.
Notes
A note is a written promise by one party, known as the maker, to pay a certain sum of money to another party, known as the payee. A common example of a note is a promissory note.
Example: Let’s say a student borrows money from a lender to cover tuition fees. The student signs a promissory note acknowledging the debt and promising to repay the lender. In this scenario:
- Maker: The student (who promises to pay)
- Payee: The lender (who receives the payment)
Drafts
Unlike a note, which involves a promise to pay, a draft involves an order to pay. At least three parties are involved in a draft transaction:
- Drawer: The party that initiates the order to pay, instructing another party to make the payment.
- Drawee: The party that receives the order to pay from the drawer. This is typically a bank or financial institution.
- Payee: The party entitled to receive the payment.
A common example of a draft is a check.
Example: A student purchases textbooks from a bookstore using a check. In this case:
- Drawer: The student (who orders the payment)
- Drawee: The student’s bank (who is ordered to pay)
- Payee: The bookstore (who receives the payment)
When the bank (drawee) accepts the draft (in this case, the check), it becomes known as the acceptor.
Possession: A Key Concept
The concept of possession plays a crucial role in determining rights and obligations related to negotiable instruments. While Article 3 of the Uniform Commercial Code (UCC), which governs negotiable instruments, does not explicitly define “possession,” legal precedent provides some guidance.
The Second Circuit Court of Appeals has defined possession in the context of Article 3 as “having the power to control an instrument coupled with the intent to exercise that control.” This definition highlights two essential elements:
- Power to Control: The ability to physically control and manipulate the instrument.
- Intent to Control: The clear intention to use the instrument as one’s own and exclude others from doing so.
Simply having physical custody of an instrument does not necessarily equate to possession under Article 3. The intent to control the instrument is paramount.
Example: A student borrows $1,000 from a friend. After failing to repay the debt, the friend threatens legal action. The student then secures a loan from a lender to settle the debt. During a settlement meeting, the lender provides the student with a check for $1,000 made payable to the student. The student immediately endorses the check over to the friend.
In this scenario, even though the student briefly had physical custody of the check, the student did not have possession under Article 3. The student never intended to exercise control over the check for their own benefit; instead, the student acted as a mere conduit, immediately transferring the check to the friend.
Conclusion
Understanding the parties involved in negotiable instruments and the nuances of possession is vital in navigating the legal and financial landscape. These concepts form the bedrock of countless commercial transactions, influencing rights, obligations, and legal remedies.