Negotiable Instrument Definition and Legal Meaning
On this page, you'll find the legal definition and meaning of Negotiable Instrument, written in plain English, along with examples of how it is used.
What is Negotiable Instrument?
It is a legal contract in form of document, where one party promises the other party a payment of specific sum of money in a definate time unconditionally on the presentation of this document or by endorsing the same. These documents are promissiory notes, cheques, demand drafts, bills of exchanges.
History and Meaning of Negotiable Instrument
A negotiable instrument is a written document that represents a promise or order to pay a specific amount of money. It is a valuable tool for commerce since it simplifies transactions and makes it easier to transfer funds between parties. The concept of negotiable instruments dates back to ancient times when merchants would transfer goods by issuing trade bills or deeds. These documents allowed merchants to bypass the need for physical delivery of goods and facilitated smoother trade.
In modern times, negotiable instruments are regulated by laws and financial institutions worldwide, and they are mainly used to move money or secure credit in financial transactions. The most common types of negotiable instruments include checks, promissory notes, and bills of exchange.
Examples of Negotiable Instrument
Here are a few examples of negotiable instruments:
A traveler's check: This type of negotiable instrument used to be common before the widespread use of debit and credit cards. Traveler's checks function similarly to regular checks except that they are prepaid and guaranteed by a financial institution.
A bill of exchange: In international trade, a bill of exchange may be used to facilitate payment between a seller and a buyer. The seller draws up the bill and presents it to the buyer, who accepts the obligation to pay at a later date.
A promissory note: This document functions like a loan agreement between two parties. The borrower promises to repay a certain sum of money to the lender within a specified time.
A check: This is a common form of negotiable instrument that most people use in their day-to-day lives. It is a written order to a bank to pay a specific sum to the person named on the check.
Legal Terms Similar to Negotiable Instrument
Here are a few terms related to negotiable instruments:
Endorsement: When someone signs the back of a negotiable instrument to transfer it to someone else, it is called an endorsement.
Holder in due course: A holder in due course is someone who takes possession of a negotiable instrument and is entitled to enforce it.
Payee: The person to whom a negotiable instrument is payable is called the payee.
Drawer: This is the person who writes and signs a negotiable instrument.