Legal Definitions - Negotiable instrument

A negotiable instrument is a special type of written financial document that contains an unconditional promise or order to pay a specific sum of money. It is designed to be easily transferable from one person or entity to another, much like cash, and the person who legitimately holds it (the "holder") has certain legal rights to enforce payment.

For a document to be considered a negotiable instrument, it must meet several key criteria:

• It must be in writing.
• It must be signed by the maker (the person promising to pay) or the drawer (the person ordering payment).
• It must contain an unconditional promise or order to pay a definite sum of money.
• It must be payable on demand (meaning immediately) or at a definite future time.
• It must be payable to order (meaning to a specific person or anyone they designate) or to bearer (meaning to whoever possesses the document).

Because negotiable instruments are designed for easy transfer and carry specific legal protections, they play a crucial role in commerce and finance, facilitating transactions without the need for physical cash or complex contracts for every transfer.

• Bearer Bond Coupon

  Imagine an investor holds a physical bond issued by a large corporation. Attached to this bond are several small, detachable coupons. Each coupon is a written document stating, "Pay to Bearer $75 on July 15, 2025," and is signed by an authorized representative of the issuing corporation. On or after the specified date, the investor can detach one of these coupons and present it to the corporation's designated paying agent to receive $75. Alternatively, the investor could give or sell the coupon to another person, who would then have the right to collect the payment.

  How it illustrates the term: This coupon is a negotiable instrument because it is written, signed by the maker (the corporation), contains an unconditional promise to pay a definite sum of money ($75), is payable at a definite future time (July 15, 2025), and is payable to bearer (meaning whoever holds it).

• Postal Money Order

  A person needs to send $500 securely to a relative who lives in another state and does not have a bank account. They go to the post office and purchase a postal money order for $500, specifying their relative as the payee. The money order is a pre-printed, written document, signed by the postal agent, that instructs the U.S. Postal Service to pay $500 to the named recipient. The sender mails the money order to their relative, who can then present it at any post office to receive the cash. If the relative chooses, they could endorse the money order and transfer it to someone else as payment for a debt.

  How it illustrates the term: This money order is a negotiable instrument because it is written, signed by the drawer (the postal agent on behalf of the Postal Service), contains an unconditional order to pay a definite sum of money ($500), is payable on demand (when presented), and is payable to order (to the named relative or anyone they endorse it to).

• Traveler's Check

  Before embarking on an international trip, a traveler purchases several traveler's checks from a financial institution, each for $100. Each check is a pre-printed, written document stating, "Pay to the order of [Holder's Name] $100," and is signed by the issuing institution. The traveler signs each check once upon purchase. When they wish to use a check, they counter-sign it in front of a merchant or bank. The merchant or bank accepts it as payment, knowing they can present it to the issuing institution for reimbursement.

  How it illustrates the term: A traveler's check is a negotiable instrument because it is written, signed by the drawer (the issuing institution), contains an unconditional order to pay a definite sum of money ($100), is payable on demand (upon counter-signature and presentation), and is payable to order (to the named holder or anyone they endorse it to).