3/4/2017 NegotiableinstrumentWikipedia

Negotiableinstrument
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Anegotiableinstrumentisadocumentguaranteeingthepaymentofa
specificamountofmoney,eitherondemand,oratasettime,withthepayer
namedonthedocument.Morespecifically,itisadocumentcontemplated
byorconsistingofacontract,whichpromisesthepaymentofmoney
withoutcondition,whichmaybepaideitherondemandoratafuturedate.
Thetermcanhavedifferentmeanings,dependingonwhatlawisbeing
appliedandwhatcountryitisusedinandwhatcontextitisusedin.

Examplesofnegotiableinstrumentsincludepromissorynotes,billsof
exchange,banknotes,demanddraftandcheques.
A1939billofexchange,Rangoon,
Becausemoneyispromisedtobepaid,theinstrumentitselfcanbeusedby Burma.
theholderinduecourseasastoreofvalue.Theinstrumentmaybe
transferredtoathirdpartyitistheholderoftheinstrumentwhowill
ultimatelygetpaidbythepayerontheinstrument.Transferscanhappenatlessthanthefacevalueofthe
instrumentandthisisknownasdiscountinge.g.,thismayhappenifthereisdoubtaboutthepayer'sabilitytopay.

Contents
1 Definition
2 History
3 Negotiableinstrumentsdistinguishedfromothertypesofcontracts
3.1 Theholderinduecourse
4 Classes
4.1 Promissorynote
4.2 Introductionofbillofexchange
5 IntheUnitedStates
5.1 Negotiationandendorsement
5.2 Usage
5.3 Exceptions
6 Modernrelevance
7 Seealso
8 References
9 Externallinks

Definition
IntheCommonwealthofNationsalmostalljurisdictionshavecodifiedthelawrelatingtonegotiableinstruments
inaBillsofExchangeAct,e.g.BillsofExchangeAct1882intheUK,BillsofExchangeAct1908inNew
Zealand,BillsofExchangeAct1909inAustralia,[1]theNegotiableInstrumentsAct,1881inIndiaandtheBillsof
ExchangeAct1914inMauritius.TheBillsofExchangeAct:

1.definesabillofexchangeas:'anunconditionalorderinwriting,addressedbyonepersontoanother,signed
bythepersongivingit,requiringthepersontowhomitisaddressedtopayondemand,oratafixedor
determinablefuturetime,asumcertaininmoneytoortotheorderofaspecifiedperson,ortobearer.
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2.definesachequeas:'abillofexchangedrawnon(behalfof)abanker,whichispayableondemand(by
banker)'
3.definesapromissorynoteas:'anunconditionalpromiseinwritingmadebyonepersontoanother,signedby
themaker,engagingtopayondemand,oratafixedordeterminablefuturetime,asumcertaininmoneyto
ortotheorderofaspecifiedpersonortobearer.'

AdditionallymostCommonwealthjurisdictionshaveseparateChequesActsprovidingforadditionalprotections
forbankerscollectingunendorsedorirregularlyendorsedcheques,providingthatchequesthatarecrossedand
marked'notnegotiable'orsimilararenottransferable,andprovidingforelectronicpresentationofchequesininter
bankchequeclearingsystems.

History
CommonprototypesofbillsofexchangesandpromissorynotesoriginatedinChina,wherespecialinstruments
calledfeitsyanwereusedtosafelytransfermoneyoverlongdistancesduringthereignoftheTangDynastyinthe
8thcentury.[2]

Inthemid13thcentury,theIlkhanidrulersofPersiaprintedthe"cha"or"chap"whichwasusedaspapermoney
forlimitedusagefortransactionsbetweenthecourtandthemerchantsforaboutthreeyearsbeforeitcollapsed.
Thecollapsewascausedbythecourtacceptingthe"cha"onlyatprogressivediscount.

LatersuchdocumentformoneytransferusedbyMiddleEasternmerchants,whohadusedtheprototypesofbills
ofexchangesuftadja/softafromthe8thcenturytopresent.SuchprototypescametobeusedlaterbytheIberian
andItalianmerchantsinthe12thcentury.InItalyinthe1315thcenturies,billsofexchangeandpromissorynotes
obtaintheirmainfeatures,whilefurtherphasesoftheirdevelopmenthavebeenassociatedwithFrance(1618th
centuries,wheretheendorsementhadappeared)andGermany(19thcentury,formalizationofExchangeLaw).The
firstmentionoftheuseofbillsofexchangeinEnglishstatutesdatesfrom1381,underRichardIIthestatute
mandatestheuseofsuchinstrumentsinEngland,andprohibitsthefutureexportofgoldandsilverspecie,inany
form,tosettleforeigncommercialtransactions.[3]EnglishexchangelawwasdifferentthancontinentalEuropean
lawbecauseofdifferentlegalsystemstheEnglishsystemwasadoptedlaterintheUnitedStates.[4]

ThemodernemphasisonnegotiabilitymayalsobetracedtoLordMansfield.[5]GermanicLombardsdocuments
mayalsohavesomeelementsofnegotiability.[6]

Negotiableinstrumentsdistinguishedfromothertypesofcontracts
Anegotiableinstrumentcanservetoconveyvalueconstitutingatleastpart
oftheperformanceofacontract,albeitperhapsnotobviousincontract
formation,intermsinherentinandarisingfromtherequisiteofferand
acceptanceandconveyanceofconsideration.Theunderlyingcontract
contemplatestherighttoholdtheinstrumentas,andtonegotiatethe
instrumentto,aholderinduecourse,thepaymentonwhichisatleastpart
An1870BillofExchangepayablein
oftheperformanceofthecontracttowhichthenegotiableinstrumentis
LondonwithBritishForeignBill
linked.Theinstrument,memorializing:(1)thepowertodemandpayment
revenuestampsattached.
and,(2)therighttobepaid,canmove,forexample,intheinstanceofa
"bearerinstrument",whereinthepossessionofthedocumentitself
attributesandascribestherighttopayment.Certainexceptionsexist,suchasinstancesoflossortheftofthe
instrument,whereinthepossessorofthenotemaybeaholder,butnotnecessarilyaholderinduecourse.
Negotiationrequiresavalidendorsementofthenegotiableinstrument.

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Theconsiderationconstitutedbyanegotiableinstrumentiscognizableasthevaluegivenuptoacquireit(benefit)
andtheconsequentlossofvalue(detriment)tothepriorholderthus,noseparateconsiderationisrequiredto
supportanaccompanyingcontractassignment.Theinstrumentitselfisunderstoodasmemorializingtherightfor,
andpowertodemand,payment,andanobligationforpaymentevidencedbytheinstrumentitselfwithpossession
asaholderinduecoursebeingthetouchstonefortherightto,andpowertodemand,payment.Insomeinstances,
thenegotiableinstrumentcanserveasthewritingmemorializingacontract,thussatisfyinganyapplicableStatute
ofFraudsastothatcontract.

Theholderinduecourse

Therightsofaholderinduecourseofanegotiableinstrumentarequalitatively,asmattersoflaw,superiortothose
providedbyordinaryspeciesofcontracts:

Therightstopaymentarenotsubjecttosetoff,anddonotrelyonthevalidityoftheunderlyingcontract
givingrisetothedebt(forexampleifachequewasdrawnforpaymentforgoodsdeliveredbutdefective,the
drawerisstillliableonthecheque)
Nonoticeneedbegiventoanypartyliableontheinstrumentfortransferoftherightsundertheinstrument
bynegotiation.However,paymentbythepartyliabletothepersonpreviouslyentitledtoenforcethe
instrument"counts"aspaymentonthenoteuntiladequatenoticehasbeenreceivedbytheliablepartythata
differentpartyistoreceivepaymentsfromthenon.[U.C.C.3602(b)]
Transferfreeofequitiestheholderinduecoursecanholdbettertitlethanthepartyheobtainsitfrom(as
intheinstanceofnegotiationoftheinstrumentfromamereholdertoaholderinduecourse)

Negotiationoftenenablesthetransfereetobecomethepartytothecontractthroughacontractassignment
(providedforexplicitlyorbyoperationoflaw)andtoenforcethecontractinthetransfereeassigneesownname.
Negotiationcanbeeffectedbyendorsementanddelivery(orderinstruments),orbydeliveryalone(bearer
instruments).

Classes
Promissorynotesandbillsofexchangearetwoprimarytypesofnegotiableinstruments.

Promissorynote

Althoughpossiblynonnegotiable,apromissorynotemaybeanegotiableinstrumentifitisanunconditional
promiseinwritingmadebyonepersontoanother,signedbythemaker,engagingtopayondemandtothepayee,
oratfixedordeterminablefuturetime,certaininmoney,toorderortobearer.(seeSec.194)Thelawapplicableto
thespecificinstrumentwilldeterminewhetheritisanegotiableinstrumentoranonnegotiableinstrument.

Banknotesarefrequentlyreferredtoaspromissorynotes,apromissorynotemadebyabankandpayabletobearer
ondemand.Accordingtosection4ofIndia'sNegotiableInstrumentsAct,1881,"aPromissoryNoteisanwriting
(notbeingabanknoteorcurrencynote),containinganunconditionalundertaking,signedbythemakertopaya
certainsumofmoneyonlytoortotheorderofacertainpersonorthebeareroftheinstrument".

Introductionofbillofexchange

Anegotiableinstrumentor"draft"isawrittenorderbythedrawertothedraweetopaymoneytothepayee.A
commontypeofbillofexchangeisthecheque(checkinAmericanEnglish),definedasabillofexchangedrawn
onabankerandpayableondemand.Billsofexchangeareusedprimarilyininternationaltrade,andarewritten
ordersbyonepersontohisbanktopaythebeareraspecificsumonaspecificdate.Priortotheadventofpaper
currency,billsofexchangewereacommonmeansofexchange.Theyarenotusedasoftentoday.
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Abillofexchangeisessentiallyanordermadebyonepersonto
anothertopaymoneytoathirdperson.Abillofexchangerequiresin
itsinceptionthreepartiesthedrawer,thedrawee,andthepayee.
Thepersonwhodrawsthebilliscalledthedrawer.Hegivesthe
ordertopaymoneytothethirdparty.Thepartyuponwhomthebill
isdrawniscalledthedrawee.Heisthepersontowhomthebillis
addressedandwhoisorderedtopay.Hebecomesanacceptorwhen
heindicateshiswillingnesstopaythebill.Thepartyinwhosefavor Billofexchange,1933
thebillisdrawnorispayableiscalledthepayee.Thepartiesneed
notallbedistinctpersons.Thus,thedrawermaydrawonhimself
payabletohisownorder.Abillofexchangemaybeendorsedbythepayeeinfavourofathirdparty,whomayin
turnendorseittoafourth,andsoonindefinitely.The"holderinduecourse"mayclaimtheamountofthebill
againstthedraweeandallpreviousendorsers,regardlessofanycounterclaimsthatmayhavedisabledtheprevious
payeeorendorserfromdoingso.Thisiswhatismeantbysayingthatabillisnegotiable.Insomecasesabillis
marked"notnegotiable"seecrossingofcheques.Inthatcaseitcanstillbetransferredtoathirdparty,butthe
thirdpartycanhavenobetterrightthanthetransferor.

IntheUnitedStates
IntheUnitedStates,Articles3and4oftheUniformCommercialCode(UCC)governtheissuanceandtransferof
negotiableinstruments,unlesstheinstrumentsaregovernedbyArticle8oftheUCC.Thevariousstatelaw
enactmentsofUCC3104(a)through(d)setforththelegaldefinitionofwhatisandwhatisnotanegotiable
instrument:

3104.NEGOTIABLEINSTRUMENT.

(a)Exceptasprovidedinsubsections(c)and(d),"negotiableinstrument"meansanunconditional
promiseorordertopayafixedamountofmoney,withorwithoutinterestorotherchargesdescribed
inthepromiseororder,ifit:(1)ispayabletobearerortoorderatthetimeitisissuedorfirstcomes
intopossessionofaholder(2)ispayableondemandoratadefinitetimeand(3)doesnotstateany
otherundertakingorinstructionbythepersonpromisingororderingpaymenttodoanyactinaddition
tothepaymentofmoney,butthepromiseorordermaycontain(i)anundertakingorpowertogive,
maintain,orprotectcollateraltosecurepayment,(ii)anauthorizationorpowertotheholderto
confessjudgmentorrealizeonordisposeofcollateral,or(iii)awaiverofthebenefitofanylaw
intendedfortheadvantageorprotectionofanobligor.(b)"Instrument"meansanegotiableinstrument.
(c)Anorderthatmeetsalloftherequirementsofsubsection(a),exceptparagraph(1),andotherwise
fallswithinthedefinitionof"check"insubsection(f)isanegotiableinstrumentandacheck.(d)A
promiseororderotherthanacheckisnotaninstrumentif,atthetimeitisissuedorfirstcomesinto
possessionofaholder,itcontainsaconspicuousstatement,howeverexpressed,totheeffectthatthe
promiseororderisnotnegotiableorisnotaninstrumentgovernedbythisArticle.

Thus,forawritingtobeanegotiableinstrumentunderArticle3,[7]thefollowingrequirementsmustbemet:

1.Thepromiseorordertopaymustbeunconditional
2.Thepaymentmustbeaspecificsumofmoney,althoughinterestmaybeaddedtothesum
3.Thepaymentmustbemadeondemandoratadefinitetime
4.Theinstrumentmustnotrequirethepersonpromisingpaymenttoperformanyactotherthanpayingthe
moneyspecified
5.Theinstrumentmustbepayabletobearerortoorder.

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Thelatterrequirementisreferredtoasthe"wordsofnegotiability":awritingwhichdoesnotcontainthewords"to
theorderof"(withinthefourcornersoftheinstrumentorinendorsementonthenoteorinallonge)orindicatethat
itispayabletotheindividualholdingthecontractdocument(analogoustotheholderinduecourse)isnota
negotiableinstrumentandisnotgovernedbyArticle3,evenifitappearstohavealloftheotherfeaturesof
negotiability.Theonlyexceptionisthatifaninstrumentmeetsthedefinitionofacheque(abillofexchange
payableondemandanddrawnonabank)andisnotpayabletoorder(i.e.ifitjustreads"payJohnDoe")thenitis
treatedasanegotiableinstrument.

UCCArticle3doesnotapplytomoney,topaymentordersgovernedbyArticle4A,ortosecuritiesgovernedby
Article8.[8]

Negotiationandendorsement

Personsotherthantheoriginalobligorandobligeecanbecomepartiestoanegotiableinstrument.Themost
commonmannerinwhichthisisdoneisbyplacingone'ssignatureontheinstrument(endorsement):ifthe
personwhosignsdoessowiththeintentionofobtainingpaymentoftheinstrumentoracquiringortransferring
rightstotheinstrument,thesignatureiscalledanendorsement.Therearefivetypesofendorsementscontemplated
bytheCode,coveredinUCCArticle3,Sections204206(http://www.law.cornell.edu/ucc/3/article3.htm#s3204):

Anendorsementwhichpurportstotransfertheinstrumenttoaspecifiedpersonisaspecialendorsement
forexample,"PaytotheorderofAmy"
Anendorsementbythepayeeorholderwhichdoesnotcontainanyadditionalnotation(thuspurportingto
maketheinstrumentpayabletobearer)isanendorsementinblankorblankendorsement
Anendorsementwhichpurportstorequirethatthefundsbeappliedinacertainmanner(e.g."fordeposit
only","forcollection")isarestrictiveendorsementand,
Anendorsementpurportingtodisclaimretroactiveliabilityiscalledaqualifiedendorsement(throughthe
inscriptionofthewords"withoutrecourse"aspartoftheendorsementontheinstrumentorinallongetothe
instrument).
Anendorsementpurportingtoaddtermsandconditionsiscalledaconditionalendorsementforexample,
"PaytotheorderofAmy,ifsherakesmylawnnextThursdayNovember15th,2007".TheUCCstatesthat
theseconditionsmaybedisregarded.[9]

Ifanoteordraftisnegotiatedtoapersonwhoacquirestheinstrument

1.ingoodfaith
2.forvalue
3.withoutnoticeofanydefensestopayment,

thetransfereeisaholderinduecourseandcanenforcetheinstrumentwithoutbeingsubjecttodefenseswhichthe
makeroftheinstrumentwouldbeabletoassertagainsttheoriginalpayee,exceptforcertainrealdefenses.These
realdefensesinclude(1)forgeryoftheinstrument(2)fraudastothenatureoftheinstrumentbeingsigned(3)
alterationoftheinstrument(4)incapacityofthesignertocontract(5)infancyofthesigner(6)duress(7)
dischargeinbankruptcyand,(8)therunningofastatuteoflimitationsastothevalidityoftheinstrument.The
holderinduecourseruleisarebuttablepresumptionthatmakesthefreetransferofnegotiableinstruments
feasibleinthemoderneconomy.Apersonorentitypurchasinganinstrumentintheordinarycourseofbusiness
canreasonablyexpectthatitwillbepaidwhenpresentedto,andnotsubjecttodishonorby,themaker,without
involvingitselfinadisputebetweenthemakerandthepersontowhomtheinstrumentwasfirstissued(thiscanbe
contrastedtothelesserrightsandobligationsaccruingtomereholders).Article3oftheUniformCommercial
CodeasenactedinaparticularState'slawcontemplaterealdefensesavailabletopurportedholdersinduecourse.
Theforegoingisthetheoryandapplicationpresumingcompliancewiththerelevantlaw.Practically,theobligor

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payoronaninstrumentwhofeelshehasbeendefraudedorotherwiseunfairlydealtwithbythepayeemay
nonethelessrefusetopayevenaholderinduecourse,requiringthelattertoresorttolitigationtorecoveronthe
instrument.

Usage

Whilebearerinstrumentsarerarelycreatedassuch,aholderofcommercialpaperwiththeholderdesignatedas
payeecanchangetheinstrumenttoabearerinstrumentbyanendorsement.Theproperholdersimplysignsthe
backoftheinstrumentandtheinstrumentbecomesbearerpaper,althoughinrecentyears,thirdpartychecksare
notbeinghonoredbymostbanksunlesstheoriginalpayeehassignedanotarizeddocumentstatingsuch.

Alternatively,anindividualorcompanymaywriteacheckpayableto"cash"or"bearer"andcreateabearer
instrument.Greatcareshouldbetakenwiththesecurityoftheinstrument,asitislegallyalmostasgoodascash.

Exceptions

UndertheCode,thefollowingarenotnegotiableinstruments,althoughthelawgoverningobligationswithrespect
tosuchitemsmaybesimilartoorderivedfromthelawapplicabletonegotiableinstruments:

Billsofladingandotherdocumentsoftitle,whicharegovernedbyArticle7oftheCode.However,under
admiraltylaw,abillofladingmayeitherbeanegotiableor'order'billofladingoranonnegotiableor
'straight'billoflading.
Deedsandotherdocumentsconveyinginterestsinrealestate,althoughamortgagemaysecureapromissory
notewhichisgovernedbyArticle3
IOUs
Lettersofcredit,whicharegovernedbyArticle5oftheCode

Modernrelevance
Althoughoftenconsideredfoundationalinbusinesslaw,themodernrelevanceofnegotiabilityhasbeen
questioned.[10]Negotiabilitycanbetracedbacktothe1700sandLordMansfield,whenmoneyandliquiditywas
relativelyscarce.[5]Theholderinduecourserulehasbeenlimitedbyvariousstatutes.[5]Concernshavealsobeen
raisedthattheholderinduecourseruledoesnotaligntheincentivesofthemortgageoriginatorsandtheassignees
efficiently.[5]

Seealso
Aval
Bearerinstrument
Hundi
Negotiablecow

References
1.http://www.austlii.edu.au/au/legis/cth/consol_act/boea1909148/
2.Moshenskyi,Sergii(2008).HistoryoftheWeksel.XlibrisCorporation.ISBN9781436306935.
3.AdamAnderson,Anhistoricalandchronologicaldeductionoftheoriginofcommerce:fromtheearliestaccountstothe
presenttime.Containing,anhistoryofthegreatcommercialinterestsoftheBritishempire...(https://archive.org/stream/h
istoricalchrono01ande#page/208/mode/2up),Vol.I,p.209210(1764)

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3/4/2017 NegotiableinstrumentWikipedia

4. Chisholm,Hugh,ed.(1911)."BillofExchange".EncyclopdiaBritannica.3(11thed.).CambridgeUniversityPress.
pp.940943.
5.GreenleeMB,FitzpatrckIVTJ.(2008).ReconsideringtheApplicationoftheHolderinDueCourseRuletoHome
MortgageNotes(http://www.clevelandfed.org/research/workpaper/2008/wp0808.pdf?WT.oss=Comparing%20the%20Eco
nomic%20and%20Conventional%20Approaches%20to%20Financial%20Planning&WT.oss_r=187).FederalReserve
BankofCleveland.
6.JacobJ.Rabinowitz(May1956)."TheOriginoftheNegotiablePromissoryNote".UniversityofPennsylvaniaLaw
Review.104(7):927939.
7."UniformCommercialCodeArticle3".Law.cornell.edu.Retrieved20140623.
8."ArticlesoftheUniformCommercialCode".Uniformcommercialcode.uslegal.com.Retrieved20140623.
9."Article3,Sections206(b)".Law.cornell.edu.Retrieved20140623.
10.MannRJ(1996).SearchingforNegotiabilityinPaymentandCreditSystems(http://www.columbia.edu/~mr2651/Data/Se
archforNegotiability.pdf).UCLALawReview.

Externallinks
BillofExchangeFAQonTheBenche.com(https://www.thebenche.c
WikimediaCommonshas
om/faq.php?faq=exchang1#faq_bill1) mediarelatedtoBillsof
NegotiableInstrumentsAct,1881,India(http://devgan.in/negotiable Exchange.
_instruments_act/)

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