negotiable instrument

DEFINITION: The term “negotiable instrument” refers to a writing or document that is a species of contract issued by a payor, such as a bank, which contains a promise to pay a determinate sum of money to a named payee (or else to order), either on demand or at a future date, specified or unspecified, and makes no other condition upon the payor except payment of the named sum.

ETYMOLOGY: The term “negotiable” derives from the Latin word negotium, meaning “business.” Interestingly, negotium itself may be analyzed into the prefix nec- (“not”) and the noun otium (“leisure”).

The term “instrument” derives from the Latin word instrumentum, meaning “tool” or, in the plural (instrumenta), “equipment.”

USAGE: In law, a writing or document must meet several specific requirements to be deemed a valid negotiable instrument.

  • It must promise to make the payment to the payee named in the instrument, or else to order, meaning according to the named payee’s instructions.
  • It must promise to pay a determinate sum of money, although accrued interest may be added to the sum named in the instrument.
  • It must promise to make the payment either upon demand by the payee or at a definite time.
  • It must state that the payment is unconditional, meaning the payor may not be required to perform any act other than to make the payment.

There are many different kinds of negotiable instruments meeting these basic requirements. Most of them may be grouped together under the heading “unconditional promissory notes.”

Another category of negotiable instrument is known as “bills of exchange.”

Specific negotiable instruments we are familiar with in everyday life include bank notes, checks, certificates of deposit, stocks, and bonds.

Note that all these instruments can be traded, either with other individuals or on open markets, by assigning them to the purchaser.

Also, notice that bank notes fail to meet one of the principal formal requirements of negotiable instruments: they do not name the payee. Nevertheless, in colloquial speech they are usually included in that category.