Tuesday, August 25, 2020

Requirements for Negotiability: Unconditionality of promise or order

Requirements for Negotiability: Unconditionality of promise or order 

A negotiable instrument’s vitality as a substitute for money or as a credit device would be dramatically reduced if it had conditional promises attached to it. It would be expensive and time consuming to investigate conditional promises or orders and therefore the transferability of the negotiable instrument would be greatly restricted. Substantial administrative costs also would be required to process conditional promises. Furthermore, the payee or the holder of the instrument would risk the possibility that the condition will not occur. 


“I promise to pay X Birr 3000 deducting there out any money which he may owe me” 

“Pay to Y Birr 1745 on D’s Death provided D leaves you enough money to pay him.”

“I promise to pay Z Birr 400, seven days after K’s marriage”

All the above instruments are not negotiable because the promise and order is coupled with a condition. No one could safely purchase the instrument without investigating whether the conditions have materialized. Even then, the facts disclosed by the investigation might be incorrect. To avoid such problems Arts 735 (b), 823(b) and 827(a) of the commercial code provide that only unconditional promises or orders can be negotiable. However when it comes to what constitutes an unconditional instrument the code is silent.

According to Indian law promise to pay at a specified time or at a specified place or after the occurrence of an event which is certain to occur, or payment after calculating interest at a certain rate is regarded as negotiable.


“I promise to pay Birr 1,000 on January 1st , 1980.”

“I promise to pay X Birr 125 on demand at Dire Dawa.”

“ I promise to pay Z Birr 500 seven days after the death of C”

Question 13

Read Art 735 (d & e) , 823 (c & d), 827 (c ), Art 769 & 825 (1) (b), can a commercial paper indicating specified time or specified place for payment and or making the payment conditional upon an event certain to occur (like the example given in iii above) be regarded as a valid instrument? State your reason(s).


The uniform commercial code specifying what constitutes an unconditional instrument states

“ A promise or order is unconditional (and negotiable) unless it states (i) an express condition to payment, (ii) that the promise or order is subject to or governed by another writing or (iii) that rights and obligations with respect to the promise or order are stated in another writing. A reference to another writing does not of itself make the promise or order conditional.”

Although the UCC provides a  broader definition of what is ‘unconditional’ it  recognizes certain conditions which do not make the instrument conditional to prevent certain necessary conditions commonly used in business transactions. One such condition is statements of consideration. The instrument may state the terms of the underlying agreement or refer to the condition paid for.

For instance, the words “as per contract “ or “this debt arises from the sale of goods X and Y”

Question 14

Read Arts 800

Do you think stating the underlying contract giving rise to the issuance or negotiation of the bill, makes the Bill of exchange conditional, hence non negotiable? Why?


The UCC also provides that mere reference to another agreement does not affect negotiability, if, however the instrument is made subject to the other agreement it is rendered non negotiable. A statement that an instrument’s payment is secured by collateral will not render an otherwise negotiable instrument non negotiable.

The UCC  states that if the terms of an instrument provide that payment can be made only out of particular fund or source, such terms will not render the instrument conditional, it remains negotiable. It allows market forces to determine whether the instrument will be marketable. A note dated march 3, 1995, for example, reads. “Gilbert corporation promises to pay to the order of the Miami Herald Br, 500 on demand, payment of said obligation is restricted to payment from accounts receivable,” In this case, payment is restricted to one particular source i.e. account receivable.


Lastly, a simple statement in an otherwise negotiable note indicating that the note is secured by mortgage does not destroy its negotiability. However, it should be noted that the statement that a note is secured by mortgage must not stipulate that the maker’s promise to pay is subject to the terms and conditions of the mortgage. Art 729 of the com. Code in a similar fashion, states that an instrument may contain an endorsement in pledge indicating to the effect that the instrument is secured by a pledge. Although the title of Art 729 refers to cases of pledge, the sub article clearly shows that it is similarly applicable to pledge. However, article seems applicable only at the time of endorsement which does not cover inserting similar statements at the time of issuance by the drawer or maker. The wording of Art 729 is not intended to govern the case of condition at all. The message conveyed by the article is about one form of endorsement called restrictive endorsement.

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