Negotiable instruments – Definition and

analysis
on November 15, 2018 in Neg. Instruments 0

Negotiable instruments have been around for centuries. They are still used today in
domestic or international trade all around the world. It is therefore interesting to take a
closer look at them. This article contains in the following topics (Click on the link to go
directly to the subject you are mostly interested in):
o What are negotiable instruments?

o Characteristics of Negotiable Instruments

o Presentment and acceptance of Negotiable Instruments
o Dishonour of Negotiable Instruments
o Endorsement and negotiation of Negotiable Instruments
o Discounting of Negotiable Instruments
o Types of Negotiable Instruments
o Why corporations still use negotiable instruments today
o Negotiable instruments used in trade (Few countries)

What are Negotiable instruments?

“Negotiable instruments” consists of two words: the noun Instruments and the adjective
Negotiable.
Let’s consider the noun first. Instruments refer to payment, credit or financial instruments. In
fact, depending on how they are used, negotiable instruments can be considered as
payment instruments, as financial instruments or as credit instruments.
The concept of payment instruments has been analyzed deeply in a previous article.
Payment instruments facilitate payments and make fund transfers easy between the end
parties involved. The main purpose is paying or getting paid with monetary value. On the
other hand, Financial instruments are assets that can be traded. Financial instruments are
usually paper or electronic documents representing a legal agreement involving a monetary
value. Finally credit instruments are simply documents which make credit transactions
possible. Banks grant credit to people and businesses on the basis of credit instruments
that they possess.
The other word is the adjective negotiable. It originates from the French Word “negoce”
which means “business, trade or management of affairs”. Something that is negotiable is
something that can be traded or exchanged in good faith and for value, so with “full
confidence”. Trust has been qualified as the most powerful currency in business. A Law
 dictionary defines as negotiable something which is legally capable of being transferred by
endorsement or delivery.
So simply put, negotiable instruments can be seen as credit, financial or payment
instruments that can be legally transferred by endorsement or delivery. Negotiable
instruments are also referred to as commercial papers.

Instruments that cannot be legally transferred are non-negotiable. The picture below shows
how instruments are classified in the most of the countries and provide few examples of the
types of instruments.

Classification of Negotiable and Non Negotiable Instruments

Now we will consider key characteristics of negotiable instruments.

Characteristics of Negotiable Instruments
To be valid, a negotiable instrument must meet the following requirements:
 It must be a written document: All negotiable instruments must be in writing. The
document can be printed, handwritten, engraved, typed etc.

 It must be an unconditional promise to pay a stated fixed amount of money: the party
who makes the promise must perform that promise even though the other party has not
performed according to the (commercial) agreement. It is also referred to as independent
promise. The name of the person who is to make payment must be clearly featured on the
document.
 It must be payable to order or to bearer: negotiable instruments may state a payee or
not. When a negotiable instrument features the name of the payee, it is payable only to
order of that payee. Otherwise anyone in its possession (the bearer) can become the
payee.
 It must be payable on demand or at a definite time: It is also said that the time of
payment must be certain. If the order is to pay when convenient then such an order is not a
negotiable instrument. When negotiable instruments are payable on demand, they usualy
contain the statement “payable on demand or at sight” or they do not state any time of
payment at all. When they are payable at a definite time, you usually find mentions like
“payable after x days or months” or “payable x days or months after sight/date”. After
sight/date means after the day on which the instrument is dated, or presented for
acceptance or sight.
 It must be signed by the maker or the drawer: The signature is the formal proof, the
binding force of the instrument. By signing, the maker or the drawer agrees with the content
of the document.
 It must be freely transferable from one party to another party: negotiable instruments
are easily and freely transferable. There are no formalities or much paperwork involved in
such a transfer. The ownership of an instrument can transfer simply by delivery or by a valid
endorsement. And no notice of the transfer needs to be given to the party liable in the
instrument.

Presentment and acceptance of Negotiable

Instruments
Before negotiable instruments are accepted, they must be presented. Presentment is the
demand made by or on behalf of the holder to the payor, requesting him to accept or/and
pay the instrument. If a negotiable instrument is payable after sight, then presentment is
necessary in order to fix its maturity, the date at which it falls due. The person making the
presentment must exhibit the instrument, give reasonable identification and sign a receipt
on the instrument for any payment made or surrender the instrument if full payment is
made. After presentment, the instrument may be either accepted or dishonoured by non-
acceptance or by non-payment. The person that accept the instrument is called the
Acceptor.
A negotiable instrument is said to be accepted when the acceptor (the payer or someone
representing him) writes the word “Accepted” across the document and puts its signature.
But the signature is enough to make the acceptance valid.
There are two types of acceptance:
 General Acceptance: This occurs when the payer accepts the liability on the
instrument without any condition and limitation on the amount. So general acceptance is
unconditional and unqualified.
 Qualified Acceptance: When the acceptor puts some condition while accepting the
instrument, the acceptance is said to be qualified. The acceptor can put only conditions that
 are legally allowed.

Dishonour of Negotiable Instruments

Negotiable instruments can be dishonoured by non-acceptance or by non-payment. The
consequences for the holder are the same: he may not collect the payment due on the
instrument. When a negotiable instrument is dishonoured, the holder may sue the prior
parties i.e. the drawer and the endorsers after he has given a notice of dishonour to them.
There are generally two options available for the notice of dishonour: Noting and Protest.
Noting is a minute recorded by a notary public on the dishonoured instrument or on a paper
attached to such instrument. The holder takes the instrument to a notary public who
presents the dishonoured instrument again to the defaulting party for acceptance or
payment. In case it is not accepted again, the notary records on the instrument the reason
for dishonour. Noting should take place shortly after the non-acceptance. Recommendation
is to do it on the due date itself or on the next business day.
In certain cases, noting might not be enough or suitable. For instance, foreign negotiable
instruments which are dishonoured in certain countries, must be protested in order for
action to be taken on them. For that the holder requests the notary to draw a formal
certificate attesting the dishonour of the negotiable instrument. That certificate is a seperate
document called protest. Contrary to noting, protests are recognised and accepted by
courts for local or foreign transactions.
In certain countries like France, noting does not exist and the holder must establish a
protest.
Endorsement and negotiation of Negotiable
Instruments
The endorsement of negotiable instruments consists of words qualifying that act or not,
followed by the signature of the endorser. An endorsement must be written on the
instrument itself or upon a paper attached thereto, called an ALLONGE.  An endorsement
must be performed for the full amount of the instrument, but if the instrument has been paid
in part, it can be endorsed as to the remainder.  There is no limit to the number of
endorsements that may be made on a negotiable instrument. The only exception is when
negotiability has been destroyed, i.e. there is a defect in the title and it cannot be traded
anymore.
Endorsing negotiable instruments implies legal constraints that the endorser must comply
with:
a. The endorser must be the lawful owner of the instrument,
b. The endorser knows of no defect in it (At least he should not be aware of any
defect),
c. The endorser has received the instrument in good faith for value received, and
d. The endorser is legally capable of transferring it to another party.
Failure to comply with any of the above conditions makes the endorsement invalid.
After the endorsement, the endorser (also called the transferor) delivers the instrument or
title to the future holder (the endorsee or transferee). This completes the negotiation of the
instrument. Negotiation therefore consists of transferring the title to and rights in the
instrument from one person to another so that the transferee becomes the legal holder. 
Negotiable instruments payable to bearer are negotiable by delivery alone (No signature
needed). But if payable to order, the instrument must be negotiated by the endorsement of
the current holder completed by delivery to the future holder.