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Payment Systems
South Texas College of Law Houston
Rochvarg, Arnold

Payment Systems


Fall 2016

Unit 1 The UCC and Negotiable instruments

Methods of Payment

Credit Cards
Electronic Payments
Negotiable instruments

Benefits and disadvantages of Payment Options

Anonymity – is there a record of the transaction? Can the transaction be traced?

Electronic payments yes, checks, yes. Is it good or bad? It depends. Illegal deals you don’t want anything traceable.

Unauthorized use – what happens if someone uses the payment method without authority?
Speed – compare cash or credit payment at the food store with payment by check.
Expense – credit card fees, checking account fees
Convenience – carrying around cash, credit card and checks.

History of Negotiable instruments

Model Negotiable Instrument Laws

1896 – National Conference of Commissioners on Uniform State Laws adopted “negotiable instruments law” which was eventually enacted in all states.
1940 – National Conference and ALI joined together to create new version of NIL. In 192, Articles 3 and 4 and a Uniform Commercial Code were approved. Adopted as the model negotiable instrument law
Latest revisions to Article 3 and 4 were in 2002. Texas adopted the 2002 revisions which are reflected in the UCC statue book. Most revisions were minor

UCC Article 3

UCC 3-101 – short title of Title 3 is “negotiable instruments”
UCC 3-102 Subject matter- applies to negotiable instruments, but not money
UCC 3-103 – definitions. Many important definitions are set forth in (a). Example – 3-103(a)(6) defines “good faith” to mean “honesty in fact and the observance of reasonable commercial standards of fair dealing.” But not all definitions are in 3-103. 3-103(b) and (c) list where other definition can be found.
Also, UCC 1-201 sets forth many important definitions.

UCC Article 4

Short title of Article 4 is “Bank Deposits and Collections.”
If there is a conflict between Article 3 and Article 4, Article 4 controls. See 3-102(b) and 4-102(a)

Negotiable Instruments

UCC only applies to negotiable instruments as defined in UCC 3-104.
UCC provides for different types of negotiable instruments.
As starting point, there are two basic types of negotiable instruments:


A “note” is a promise. UCC 3-104(e). “promise” is defined in UCC 3-103(a)(12) as “a written undertaking to pay money signed by the person undertaking to pay.”
An “acknowledgment” of a debt is not a promise to pay. 3-103(a)(12). Therefore, an “IOU” is not a note.
A note involves two persons: Maker and Payee

Maker – the person who promises to pay the money UCC 3-103(a)(7).
Payee – the person who is entitled to get the money.
UCC 3-104(J) – If the maker of the note is a bank, the note of the bank is called a CD – Certificate of Deposits

A note where a bank promises to pay someone and therefore the bank is the maker of the note.


A draft involves three persons.
The first person ORDERS a second person to pay a third person some money.
UCC 3-103(a)(5) – The first person who is ordering the payment is known as the Drawer

Drawer -means a person who signs or is identified in a draft as a person ordering payment

The Third person, the person who is going to get the money Is called the payee (like a note)
The second person, the person being ordered by the drawer to pay money to the payee is called the drawee. UCC 3-103(a)(4)
UCC 3-104(f)—when a bank is the drawee, the draft is called a check

Check – a draft where the drawee is a bank. The drawer is the customer of the bank where the customer/drawer has opened a checking account. The payee is the person who gets the check from the drawer.

Types of Checks

Ordinary check – written by customer as drawer ordering her bank to pay the payee when the payee tries to “cash” the check.
UCC 3-409 – if before the drawer gives the check to the payee, the drawee bank has agreed to pay the check, we say that the bank has “accepted” the check and bank is called “acceptor.” [UCC 3-103(a)(1).] A check which has been accepted by the drawee bank before the drawer has issued the check to the payee is called certified check

When would a certified check be useful?

When people don’t believe you don’t have money. Bank certifies your check, so bank would be liable for check.

UCC 3-104(g) – Example: Customer goes to bank and gives the bank cash. The bank then writes a check for that amount payable to the payee requested by the customer. The bank’s check is written from the bank’s own checking account. The bank is the drawer and the drawee of check.
UCC 3-103(a)(15)—the customer is called the “remitter.”
The check is called a cashier’s check

Drawer and Drawee are same financial institution.
Although there are only two different persons involved, this is still a drat and because a bank is the drawee, it is a check.
When would a cashier’s check be useful? Same as certified, when you are not trusting anyone

UCC 3-104(h) – customer takes cash to bank. Bank writes check to person identified by customer as the payee. Bank writes check as drawer on a checking account that the drawer bank (customer’s bank) has with a different bank. In other words, unlike cashier’s check where bank writes a check on an account that the bank has with its own bank, here, the drawer bank has a checking account with another bank.
Customer is again called remitter.
This type of check is called a Teller’s Check

One financial institution is the drawer and another financial institution is the

ting must be an unconditional promise or order to pay. Any conditions destroy negotiability.
Policy of this rule: the reason for negotiable instruments is to facilitate commerce by permitting writings to circulate as payment. If the writing has conditions for payment on it, persons “down the line” from the original issuance would feel safe taking the writing as payment without having to investigate whether the condition had occurred. To avoid this, UCC requires the promise to order to pay not have any conditions.

Conditional Promises – Not negotiable

UCC 3-106
Express condition of payment: “I promise to pay Fifi $10 if the Astros win the World Series next season” Not Negotiable.
Subject to or governed by another writing: “I promise to pay Fifi $10 if the provisions of a contract signed by Fifi and Gigi on April 1, 2015 are satisfied. Payment shall be made pursuant to clause 3 of the contract.” Not negotiable.

Not negotiable

Rights or obligations with respect to the promise or order are stated in another writing make the writing not negotiable
“I promise to pay Fifi as set forth in a contract signed by Fifi and Gifi on April 1, 2012.” Not negotiable.

Unconditional and Negotiable

A promise or order that references another writing is still unconditional as long as it is not subject to the other writing.
Language in the instrument such as “as per” would not defeat the negotiability of the instrument.
“as per” is IN the negotiability column:

Implied Conditions

An implied condition does not make the promise or order unconditional. “I promise to pay Fifi on May 1, 2017, $10,000 for her Ford Mustang, VIN # WDTR 213.” The fact that the car could be destroyed before May 1, 2017 does not destroy negotiability. The car’s continued existence is seen as an implied condition of payment.

Payment is not conditioned on that vehicle, its merely a reference.

Compare: I promise to pay Fifi $10,000 for her Ford Mustang, VIN #WDTR213, only if it is not destroyed by May 1, 2017,” is an express condition destroying negotiability.

This has a condition of payment express condition which destroys negotiability

It is often difficult to draw the line between express and implied conditions, and thus whether the instrument is negotiable.