Unconditional Promise to Pay - Commercial Paper
What is an Unconditional Promise to Pay?
Written by Jason Gordon
Updated at July 6th, 2021
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Table of Contents
When does commercial paper contain an unconditional promise to pay?Discussion QuestionPractice QuestionAcademic ResearchWhen does commercial paper contain an unconditional promise to pay?
Any condition placed on the payment makes the instrument non-negotiable. A condition is any requirement that a circumstance come to fruition or that the holder undertake any additional actions in order to receive payment upon presentation of the instrument.
Example: I create a note that says, I promise to pay to bearer or order the amount of $5,000. This amount will become payable if the NASDAQ drops below 4500 points. This would be a condition to payment and would destroy the notes negotiability.
Next Article: Negotiable Instruments - Pay on Demand or Pay on Time Back to: COMMERCIAL PAPER
Discussion Question
Why do you think the requirement that an instrument be free of conditions in its promise to pay the holder a stated sum of money? Should it matter the nature or extent of the condition? Why or why not?
Practice Question
Thomas and Carter are involved in a business deal. Carter sells Thomas a piece of equipment in exchange for a promissory note. In the note, Thomas agrees to pay Carter $25,000. He wants to add a clause stating that the note is invalid if the equipment malfunctions within the 1st year of operation. Does this clause affect negotiability and why?