What is a Negotiable Instrument?

A negotiable instrument is commercial paper that can be transferred or negotiated to another party. 

What is required for commercial paper to be negotiable?

An instrument is negotiable if it meets the following qualifications:

• A writing
• Signed by the Issuer
• Contain an Unconditional Promise to Pay
• A Definite Amount
• Payable on Demand or on Time, and
• Payable to Order or to Bearer

There should be no further requirement for enforcement.

What is a Writing? 

The negotiable instrument must be in writing,

Note: The writing must be permanent in nature and must be moveable.

Example: Drawing the terms of an instrument in the dirt would not be permanent, and spray painting the terms of an instrument on the side of a building would not be moveable.

What is Signed by Issuer? 

The issuer must sign the instrument. A mark may constitute a signature if the issuer intends for the mark to be a signature.

Example: Valid marks constituting signatures may include seals, auto-pen signatures, personal stamps, etc.

What is an Unconditional Promise to Pay? 

The instrument must contain an unconditional promise to pay. A condition is any requirement that a holder must undertake before she has the right to present the paper for payment.

Note: The only acceptable condition is providing a time when the note becomes valid. That is, the note can state that it may only be presented for payment after a certain date. Further, any acceleration or extension clauses are valid and do not destroy negotiability. Reciting that consideration was provided for the instrument does not harm negotiability. Limiting the payment to a specific fund may destroy negotiability, unless it is an order instrument drawn on a specific account.

Example: I promise to pay money to the order of bearer, if the bearer is a US citizen is not an unconditional promise to pay.

What is a Definite Amount?

The instrument must state a specific amount of money that it will pay.

Note: The promise cannot be to pay in anything other than money. If the instrument pays an interest rate, the interest rate may reference a standard rate for calculation.

Example: Promise to pay $3,000 with interest of 3% + prime rate, compounding annually from the date of issuance is a definite amount.

What is Payable on Demand or on Time?

A demand instrument must be paid whenever the holder requests payment, while a payable on time instrument indicates a specific date and time.

Note: An instrument that does not have a specific maturity date or payment time is assumed to be payable on demand.

Example: A note including the language, payable on or before 90 days after October 15, 2017 is a definite time.

What is Payable to Order or To Bearer? 

To be negotiable, an instrument must be either order paper or bearer paper. Order paper is payable to a specific individual. This individuals signature is required if the instrument is transferred to another holder. Bearer paper means that any holder of the paper can present it for payment.

Note: Order paper can be converted to bearer paper with the holders signature (indorsement). A holder can also make bearer paper into order paper by signing and making a restrictive indorsement.

Example: Pay to John or order is order paper. Pay to the order of ______ or Payable to bearer are examples bearer paper.

What does it mean to require No Further Undertaking?

With limited exception, the instrument cannot require the holder to undertake any action other than present the instrument to receive payment.

Note: This is an extension of the requirement that the instrument contain an unconditional promise to pay.

Example: A holder, upon presentment, must post a temporary bond. This is a further undertaking that makes the instrument non-negotiable.

Remember, non-negotiable paper may still be transferred. The transferee of non-negotiable paper may have fewer rights than the holder of negotiable paper through a valid negotiation.

Related Topics

• Commercial Paper (Intro)
• What is Commercial Paper?
• Negotiable Instrument
• What are the common types of commercial paper?
• Promissory Note
• Cashier's Check
• Convenience Check
• Certified Check
• Substitute Check
• Bill of Exchange
• Bank Draft Definition
• Sight Draft Definition
• Bankers Acceptance 
• Who is a Holder of a negotiable instrument?
• Commercial Paper Funding Program
• What is Negotiability and why is it important?
• What is required for commercial paper to be negotiable?
• Sum Certain (Contracts)
• Inflation Adjustment Clause
• When does commercial paper contain an Unconditional promise to pay?
• Backup Line of Credit
• What is Payable on Demand or Payable on Time?
• What is Order Paper and Bearer Paper?
• Bearer Form
• How is a payee identified on the negotiable instrument?
• What rules does the court apply in determining negotiability?
• How is commercial paper negotiated to a holder?
• What is Transfer of a negotiable instrument?
• What is Indorsement of a negotiable instrument?
• What are the various types of indorsement?
• Bank Endorsement
• Blank Endorsement
• Accommodation Endorsement
• How does a holder receive payment on a negotiable instrument?
• Who is potentially liable on (or obligated to pay) a negotiable instrument?
• When is an individual liable for a representative signing a negotiable instrument?
• What rules apply if a holder loses a negotiable instrument?
• When is payment of a negotiable instrument overdue?
• What effect does a negotiable instrument have on the underlying obligation?
• What is a holder in due course?
• What are the requirements for a holder to become a holder in due course?
• Receive an instrument for value?
• Receive an instrument in good faith?
• Receive an instrument without notice of a valid defense?
• How does discharge of the Underlying Obligation affect a holder in due course?
• What is the Shelter Rule?
• Can you limit a transferee from becoming a holder in due course?
• Personal Defenses?
• Real Defenses?
• What is a Claim in Recoupment?
• What are the rights of a holder in due course if the instrument involves a consumer transaction?
• What happens if a negotiable instrument is Forged?
• What happens if a negotiable instrument is Stolen?
• Guaranty or Guarantee
• Letter of Guarantee
• Personal Guarantee
• What is the role of a Guarantor or Surety of a negotiable instrument?
  
• Surety 
  
• Cosign
• Accommodation Paper Definition
• Secondary Liability
• Avalize Definition
• What is an Accord & Satisfaction?
• What is primary and secondary liability on an instrument?
• What is Drawer or Maker Liability for a negotiable instrument?
• What is Transferor Warranty of a negotiable instrument?
• What is Indorser Warranty of a negotiable instrument?
• What is Presentment Warranty of a negotiable instrument?
• What is a warrantors liability for a dishonored note or draft?
• What is the time limitation for warranty of a negotiable instrument?
• When are the warranties of a negotiable instrument discharged?