Module 7

Payments, negotiable instruments, letters of credit and guarantees: how money moves, who bears the loss and how to make a promise to pay safe

A sale is complete only when it is paid for, and payment is the part of a deal that carries the most risk of fraud, error and delay. Over centuries, merchants developed ways of making a promise to pay so safe and easy to pass on that it could be used as money: the bill of exchange, the cheque and the letter of credit. These devices work because the law has agreed to treat them in a special way. A person who takes a negotiable instrument in good faith for value takes it free of many defences. A bank that issues a letter of credit pays on documents, whatever the dispute behind them. This module explains how they work, who bears the loss when something goes wrong, and how a guarantee adds a second person’s promise to the first.

General education on commercial law and secured transactions, using invented businesses, people and figures. It states common principles in simplified form and does not describe any one country’s law, which differs and changes; rules on sale, security, registration and priority are strict and local. It is not legal advice. Consult a qualified lawyer in the place that matters.