Definition
A negotiable instrument is a signed document which contains an unconditional promise or order to pay a specific sum of money to the bearer or to the order of a person. These instruments are transferable from one person to another, allowing the holder to collect the funds or transfer the right to collect those funds to another party. Common examples include checks, promissory notes, bills of exchange, and drafts.
Examples
- Promissory Note: Abel gave Baker a promissory note containing a promise to pay $1,000 on July 22 of this year. Baker can transfer this note to Collins by endorsing and delivering it. When Collins acquires it in good faith and for value, he becomes the holder in due course.
- Check: A check written by a bank account holder to a third party. The third party can endorse the check and pass it on to a fourth party.
- Bill of Exchange: A document where Seller A draws a bill of exchange against Buyer B, instructing B to pay C an amount of $5,000 after 60 days.
Frequently Asked Questions
1. What is the primary purpose of a negotiable instrument? The main purpose of a negotiable instrument is to allow a written and signed document to be transferred from one party to another, creating a straightforward and efficient method to transfer money or fulfill sum certain monetary obligations.
2. How can a negotiable instrument be transferred? A negotiable instrument is typically transferred through endorsement and delivery. The original payee or holder endorses the instrument by signing it and delivering it physically to the next holder.
3. What types of negotiable instruments are there? There are mainly three types of negotiable instruments: promissory notes, bills of exchange, and checks. Each has its specific use and structure.
4. What is a holder in due course? A holder in due course is a party that has acquired the negotiable instrument for value, in good faith, without notice of any defect or claims against it. This holder has greater protection under the law against certain defenses that could be raised against a regular holder.
5. Are all negotiable instruments tradeable in the same way? While all negotiable instruments are tradeable, the methods of endorsement might differ. For example, a promissory note must be endorsed and delivered, whereas a check can simply be endorsed via a blank or special endorsement.
Related Terms with Definitions
- Holder in Due Course (HDC): A party that has taken possession of a negotiable instrument for value, in good faith, and without notice of any defect or adverse claims.
- Endorsement: The act of signing the back of a negotiable instrument to transfer ownership to another party.
- Promissory Note: A written and signed promise to pay a certain amount of money at a specified future date.
- Bill of Exchange: An order written by one person directing another to pay a certain sum of money to a third party.
Online Resources
- Investopedia: Comprehensive explanations about financial terms including negotiable instruments. Investopedia’s Guide on Negotiable Instruments
- The Balance: Articles about personal finance and handling negotiable instruments. The Balance on Negotiable Instruments
- Lectlaw: Legal resources explaining the implications and uses of negotiable instruments. Lectlaw Negotiable Instruments
References
- Uniform Commercial Code (UCC) Article 3 - Negotiable Instruments
- Revised Articles on International Commercial Contracts (UNIDROIT)
Suggested Books for Further Studies
- “The Law of Negotiable Instruments: Under the Uniform Commercial Code” by Fred Miller, which offers in-depth explanations of the legal framework surrounding negotiable instruments.
- “Negotiable Instruments & Check Collection in a Nutshell” by Richard B. Hagedorn, a concise overview of the topic.
- “Introduction to the Law of Negotiable Instruments” by Ronald A. Anderson, which provides foundational knowledge and case studies about negotiable instruments.
