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When 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 note’s negotiability.
• Discussion: 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?