A Levels Academy Islamabad
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00:00You've probably wondered about all this talk about drafts and notes.
00:04No, not those kinds of drafts and notes.
00:06I'm talking about instruments.
00:08No, not those kinds of instruments.
00:11An instrument is a legal document that defines rights and duties.
00:15Ah, there, those types of drafts and notes.
00:19But you might know them better as checks and IOUs.
00:22Drafts and notes are what lawyers call negotiable instruments.
00:26So, what's a negotiable instrument?
00:29It's basically an unconditional promise.
00:32We know, we know, you've heard that before.
00:34But the negotiable instrument promise really is unconditional,
00:38at least according to a court of law.
00:41It unconditionally promises to pay a certain amount of money on the spot,
00:45or at a later set time.
00:47The checks that we use every day are drafts.
00:50It's ordering a payment to be made when presented,
00:53which is what is happening when you cash a check.
00:55A payment is being made to you.
00:58Notes, also called promissory notes, are just that,
01:01a promise to pay later or over time.
01:04For example, when you borrow money from a bank to buy a house,
01:07the bank will ask you to sign a promissory note
01:10in which you promise to pay the bank back over a period of time,
01:13often as long as 30 years.
01:16These documents, or instruments, are called negotiable
01:19because they can be negotiated or traded from one person to another,
01:23just like cash.
01:25In fact, cash in the form of paper money
01:27is a special type of negotiable instrument,
01:29and you might have noticed that a dollar bill
01:31is sometimes called a banknote or federal reserve note.
01:35The most basic requirement for a document to be a negotiable instrument
01:38is that it must contain somewhere within it
01:40either the words pay to the order of
01:43or some equivalent obvious indication that payment is to be made to someone.
01:48Then there should be an endorsement or signature.
01:52What follows the pay to the order language,
01:54which is also considered part of the endorsement,
01:57can change how the negotiable instrument works.
02:00For example, if a name of a person follows pay to the order of,
02:03it means the money must be paid only to that person.
02:07This is called a special endorsement.
02:09If pay to the order is not followed by a name,
02:12it means it is a blank endorsement.
02:14For example, a check made out to no one
02:16means that anyone who has the check can receive the payment.
02:20The same is true if you make the check out to cash.
02:23Unless, of course, your name is cash.
02:26But using a blank endorsement could be risky, though,
02:29because if you lose the check, it means anyone, even a thief, can cash it.
02:34A restrictive endorsement allows for the transfer of the document
02:37or the money it represents for specific purposes,
02:40like stating something is for deposit only.
02:43LegalYou can guide you through the ins and outs of negotiable instruments
02:47and any other legal matters.
02:49LegalYou. You can do this.