Negotiable instruments are financial securities that may be transferred by endorsement or by the holder’s simple delivery. The primary example of a negotiable instrument is a check. The UNIFORM COMMERCIAL CODE, which has been adopted by all states, specifies the laws that govern negotiable instruments. A FINANCIAL INSTRUMENT must contain the following characteristics in order to be negotiable.
1. The instrument must be in writing.
2. It must contain an unconditional promise to pay a specific sum of money.
3. It must either be payable “upon demand” of the holder or at a specific point in time.
4. It must be made payable to bearer or to the order of someone.
5. It must be signed. There are two types of negotiable instruments.
The first is called a draft, which orders a payment to be made. A check is a good example of the “draft” type of negotiable instrument involving three players: a drawer, a payee, and drawee. The drawer is the party that creates the draft (i.e., writes the check), telling the drawee to pay the payee on behalf of the drawer. The payee receives the check from the drawer and presents it to the drawer’s bank, which is the drawee. The drawee then pays the payee on behalf of the drawer. The other type of negotiable instrument is a CONTRACT that promises a payment will be made. There are two parties to this type of negotiable instrument. The first is the maker of the note—that is, the one who signs the note promising to pay. The payee is the person whom the maker promises to pay. With both types of negotiable instruments, the payee can be listed as “bearer.” This basically says that whoever is holding the note on the due date is entitled to be paid by the drawee or maker. If a draft or note is made to a specific payee instead of to bearer, the payee can “negotiate” the note by signing it. This endorsement transfers the note or draft to a subsequent holder. Whoever holds it on the due date can collect on the note or draft from the maker or drawee.
Mack Tennyson