Negotiable, << nih GOH shuh buhl, >> instrument refers to a type of legal exchange or document that is either a promise or an order to pay money. Negotiable instruments can be used as evidence of indebtedness or as a substitute for money. A person holding a negotiable instrument is usually in a good legal position to collect from the person who signed it. The signer is called a maker, or drawer. The use of negotiable instruments is regulated by the Uniform Commercial Code, which has been adopted in whole or in part by all 50 states in the United States. The rules for these instruments are similar in Australia, Canada, and the United Kingdom.
Negotiable instruments have six characteristics: (1) they must be in writing; (2) they must be signed by a maker or drawer, who promises to pay money; (3) they must contain an unconditional promise or order to pay; (4) payment must be a fixed amount of money; (5) instruments must be payable on demand or at a specific date; (6) they must be payable to the bearer or to the order of a person.
Forms.
Common forms of negotiable instruments include promissory notes (signed promises to pay a debt in the future), drafts (orders to pay money from a specific bank), and checks (a type of draft).
Many instruments are not strictly negotiable but have some features of negotiable instruments. For example, instruments calling for the delivery of goods or property instead of money may possess many of the legal qualities of negotiability. A bill of lading (receipt given by a carrier, such as a railroad, showing a list of goods delivered to it for transportation) is an example.
Endorsement.
Negotiable instruments are usually transferred or handed over to another person by endorsement. Any writing on the back is, in its broadest sense, an endorsement. The word comes from the Latin in dorso, meaning on the back. The term applies technically to the signature or other writing that indicates or proves that the instrument has been transferred.
An endorsement may be written in different ways. If the holder of the instrument simply signs it, the endorsement is called in blank. Anyone holding that instrument may receive payment. A special endorsement or an endorsement in full names the person to whom payment is to be made. A restrictive endorsement forbids further transfer. A check signed “Pay to First National Bank only” is a restrictive endorsement.
Every endorser of a negotiable instrument is usually liable for its face value, if the maker does not or cannot pay it. The endorser may add the words “without recourse” if he or she wishes to avoid liability. Such an endorsement does not affect the value of the instrument or prevent further endorsement.
