Question

"Why are there specific legal requirements for an instrument to be negotiable?"

Answer 1

For an instrument to be negotiable, it must be signed, with a mark or signature, by the maker of the instrument—the one issuing the draft. This entity or person is known as the drawer of funds.

These documents provide no other promise on the part of the entity issuing the negotiable instrument. Additionally, no other instructions or conditions can be set upon the bearer to receive the monetary amount listed on the negotiable instrument.

Although possibly non-negotiable, a promissory note may be a negotiable instrument if it is an unconditional promise in writing made by one person to another, signed by the maker, engaging to pay on demand to the payee, or at fixed or determinable future time, a sum certain in money, to order or to bearer.

Eight Requirements for Negotiable Instruments

The concept of negotiability is one of the most important features of commercial paper, a contract for

the payment of money. A negotiable instrument is a written document, signed by the maker or drawer

that contains an unconditional promise to pay a certain sum of money on delivery or at a definite time

to the bearer. It is essentially a piece of paper that can be transferred multiple times from one person or

entity to another without the use of actual cash. A check that can be endorsed multiple times by

different parties is an example of a negotiable instrument. Each time the check is endorsed and given to

another, it represents payment to that party. Because of this feature, negotiable instruments are highly

trusted and are used daily by millions of people.

When dealing with negotiable instruments, below are eight requirements to keep in mind:

1. Must be in writing.

• The writing can be on anything that is readily transferable and that has a degree of

permanence.

2. Must be signed by the maker or drawer.

• The signature can be anyplace on the instrument.

• It can be in any form (such as word, mark or rubber stamp) that purports to be a

signature and authenticates the writing.

• It can be signed in a representative capacity.

3. Must be a definite order or promise to pay.

• A promise must be more than a mere acknowledgement of a debt.

• The words “I/We Promise” or “Pay” meet this criterion.

4. Must be unconditional.

• Payment cannot be expressly conditional upon the occurrence of an event.

• Payment cannot be made subject to or governed by another agreement.

• Payment cannot be paid out of a particular fund (except for a government issued

instrument).

5. Must be an order or promise to pay a sum certain.

• An instrument may state a sum certain even if payable in installments, with interest, at a

stated discount or at an exchange rate.

• Inclusion of cost of collection and attorney’s fees does not disqualify the statement of a

sum certain.

6. Must be payable in money.

• Any medium of exchange recognized as the currency of a government is money.

• The maker or drawer cannot retain the option to pay the instrument in money or

something else.

7. Must be payable on demand or at a definite time.

• Any instrument payable on sight, presentation or issue is a demand instrument.

• An instrument is payable at a definite time even though it is payable on a stated date, or

within a fixed period after sight, or the drawer or maker has an option to extend time

for a definite period.

• Acceleration clauses, even if unenforceable, do not affect the negotiability of the

instrument.

8. Must be payable to order or bearer.

• An order instrument must name the payee with reasonable certainty.

• An instrument whose terms intend payment to no particular person is payable to

bearer.