The concept of negotiability, or the possibility of a transferee to take a better position than the transferor, has always been the keystone of the law of promissory notes and bills of exchange (hereinafter – notes). This law was developed to ensure that these instruments could circulate as legal undertakings that are free from most defenses and claims inherent to the law of contracts and thus to increase their transferability and liquidity.
Notes until nowadays are used in commercial transactions as undertakings to pay for goods or services provided, or as non-cash instruments warranting other obligations. Physical and legal persons of Lithuania gradually take this practice. However, when entering the market a note that is a monetary security or a negotiable instrument, as it is called in common law countries, often cause confusion, because not all legal norms of a note are clearly regulated.
The thesis analyzes the relation of a note and its underlying transaction. Whether an undertaking to pay money on a note remains if its underlying transaction is invalidated? On one hand, if a transaction which is a basis of a note is invalidated the undertaking to pay on a note should vanish. On the other hand, according to its nature a note means an unconditional undertaking to pay money and in any case a debtor must pay on the underlying transaction.
A note is undoubtedly a very important instrument in the development of contemporary intercourse of economy. Consequently the rights of persons undertaking to pay money on a note must be secured. Therefore it is necessary to determine whether a note can be legally related with other obligations of the parties and accordingly be subject to claims arising out of the underlying transaction. The object of the thesis is a possibility that a note can be invalidated if the underlying transaction is invalidated.
A note and its underlying transaction are certainly connected but the relation is not clearly regulated in Lithuanian legal acts and not determined by courts. The main problem is that the legal nature of a note is not explicitly identified. A note is not unambiguously attributed to a concrete legal branch. In Lithuanian legal acts it is defined as a security which is an instrument affirming the unconditional promise to pay a defined sum of money to its holder. However, judging from the fact how a note influences the rights and obligations of persons legal scholars treat it as a transaction. Because of this ambiguity the legal acts of Lithuania do not clearly spell out what legal defenses and claims can be raised by a person sued on a note. The legal grounds of invalidating a note are also not clearly stated.
The hypothesis was raised that a transaction can be a basis of a note, but a note may not be invalidated if the underlying transaction is invalid.
In order to determine the relation between a note and its underlying transaction in the first part of the thesis the doctrine and legal regulations of Lithuania and the USA were analyzed putting emphasis on the specific features of a note as a security and a transaction.
The analysis of various sources showed that due to the need to be a negotiable instrument and have a high liquidity rate the development of a note determined the necessity of its rigid form and unconditional enforcement. Lithuania’s national law of notes was modeled on the Geneva Convention providing for a Uniform Law for Bills of Exchange and Promissory Notes. The Uniform Commercial Code (UCC) of the USA is based upon other legal act. Despite that, the regulation of notes in both countries does not differ in substance. In general, a note has these special features: it is abstract (has no cause), has formal mandatory requirements are established by laws, means an unconditional promise to pay a sum of money and is transferable (freely assignable to other persons).
Aforementioned features are inherent to a note as a security. In order to establish the relation between a note and its underlying transaction the legal analisys of a note which is also a transaction was provided. It was delineated that when drawing a note a unilateral undertaking is concluded and as a result of this transaction a new note is created. Therefore the law that can be applied to notes comes not only from the law of securities, but also from the law of undertakings to the extent that this does not prejudice laws and the essence of a note as a security.
In the second part of the thesis the main characteristics of a note were analyzed invoking the principles of a note as security and as a unilateral transaction. Considering these special characteristics the independence of a note with regard to any other obligations was determined. Accordingly the grounds for invalidation of a note were concretized.
The deeper analysis indicated that Lithuanian’s civil law theory attributes a note to the group of abstract transactions and this determines the legal independence of a note from its underlying transaction. Therefore a new undertaking in a form of a security is acting in a market as a separate and legally independent one.
The comprehensive analysis of notes has demonstrated that a note is a unilateral undertaking that is abstract and not related to its legal cause. It is also a security that has the features of unconditional enforcement and rigid formality, and based on principles of public credibility and stability. This legal nature of a note presupposes its independence from its underlying transaction and generally limits the possibilities to invalidate it.
The possibility to invalidate a note on the basis of its invalid underlying transaction is not one of legal grounds. In Lithuania a person undertaking on a note can assert claims against the holder of a note only on these grounds: lack of formal requirements; on the basis of previous transactions between a debtor and original holder of a note, when the claim is made by original debtor; and due to dishonesty of a note holder when acquiring a note.
The hypothesis of the thesis was affirmed – invalidation of the underlying transaction has no influence to the validity of a note and does not change the relations between a note holder and its maker.
Raktažodžiai: bill of exchange, promissory note, underlying transaction, security, invalidation grounds