What Constitutes a Negotiable Instrument: A Case Study
A “Negotiable Instrument” is a commercial paper, which facilitates issue and receipt of consideration, but is not legal tender itself. A Negotiable Instrument is easily transferable from one person to another. These instruments are called ‘negotiable’ due to this easy transferability from one individual to another. Article 3.0 and 4.0 of the United Commercial Code (UCC) governs the Negotiable Instruments Act, in the United States.
What is a Negotiable Instrument
An instrument must satisfy the following criteria to be termed as a “negotiable instrument”
1. It has to be in writing and endorsed by the issuer.
2. It has to be unconditional. For example, say party A, issues a NI to party B for $1,800 with the understanding that party B will invest the money in stocks approved by party A in the first year and repay the money to party A in the second year at a certain date and time, on demand. This is a pre-condition between party A and party B. Therefore, there is a condition associated with it, which disqualifies it from being a negotiable instrument on the grounds of conditionality
3. There has to be clear mentions of a promise or an order vide which, the instrument, can be negotiated. Just acknowledging the presence of a debt will not suffice.
(Negotiable Instruments Amendment Act 2002,n.d.)
Types of Negotiable Instruments
There are only three commercial papers, which are considered as “negotiable instruments”. These are (a) Promissory Note (b) Bill of exchange and (c) the Cheque.
A. Promissory Note: A promise made in writing for paying a particular amount of money to a second party at a fixed time, duly endorsed by the issuer.
B. Bill of exchange: A party invests a fixed sum of money with a financial organization, which returns the money along with accumulated interest, adding to a certain sum, on a particular date in the future, on demand of the holder or bearer of the BOE.
C. A written order by an individual to a second party (generally, a bank).The order asks the party to release a particular sum...