Negotiable Instrument

The Promissory Note , which is a written promise by the ''maker'' to pay money to the ''payee''; and

The draft, which is a written order by the ''drawer'' to the ''drawee'' to pay money to the ''payee''. The most common type of draft is the Cheque . A draft is known as a "bill of exchange" in the UK and in other Commonwealth countries. It is used primarily in international trade, and is a written order by one person to pay another a specific sum on a specific date sometime in the future. If the bill of exchange is drawn on a bank, it is called a bank draft.

In the United States , Article 3 of the Uniform Commercial Code governs the issuance, transfer and enforcement of negotiable instruments.

For a writing to be a negotiable instrument under Article 3, the following requirements must be met
#The promise or order to pay must be unconditional;
#The payment must be in a specific sum of money, although Interest may be added to the sum;
#The payment must be made on demand or at a definite time;
#The instrument must be payable to bearer or to order.

The latter requirement is referred to as the "words of negotiability": a writing which does not contain the words "to the order of" or indicate that it is payable to the person in possession, is not a negotiable instrument and is not governed by Article 3, even if it has all of the other features of negotiability. The only exception is that if an instrument meets the definition of a check (an order payable on demand and drawn on a Bank ) and is not payable to order (i.e. if it just reads "pay John Doe") then it is treated as a negotiable instrument.

Persons other than the original obligor and obligee can become parties to a negotiable instrument. The most common manner in which this is done is by placing one's ) is a ''blank indorsement''. An endorsement which requires that the funds be applied in a certain manner (i.e. "for deposit only", "for collection") is a ''restrictive indorsement''.

The most remarkable feature of a negotiable instrument is that if it is transferred to a person who acquires the instrument i) in Good Faith ii) for Value iii) without notice of any Defense s to payment, then the transferee is a ''holder in due course'' and can enforce the instrument without being subject to defenses which the maker of the instrument would be able to assert against the original payee, except for certain ''real defenses'' which are rarely applicable.

The holder in due course rule is what makes the free transfer of negotiable instruments feasible in the modern industrial economy: a person or company who purchases such an instrument in the ordinary course of business can reasonably expect that it will be paid when presented to the maker, without involving itself in a dispute between the maker and the person to whom the instrument was first issued.

The foregoing is the theory and the letter of the law: of course, in reality the issuer of an instrument who feels he has been defrauded or otherwise rawly dealt with by the payee may nonetheless refuse to pay the holder in due course, requiring the latter to resort to Litigation to recover on the instrument.

Under the Code, the following are not negotiable instruments, although the law governing obligations with respect to such items may be similar to or derived from the law applicable to negotiable instruments:

Letters Of Credit , which are governed by Article 5 of the Code

Bills Of Lading and other documents of title, which are governed by Article 7 of the Code

Securities , such as Stock s and Bond s, which are governed by Article 8 of the Code

Deed s and other documents conveying interests in real estate, although a Mortgage may secure a promissory note which is governed by Article 3

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Negotiable Instrument