At WiseGEEK, we're committed to delivering accurate, trustworthy information. Our expert-authored content is rigorously fact-checked and sourced from credible authorities. Discover how we uphold the highest standards in providing you with reliable knowledge.
A negotiable instrument is a document which includes a promise to pay a set sum of money to the bearer of the document either on demand or on a given date. The instrument can be freely transferred without the need to notify the person from whom it originated. Negotiable instruments are used to enable trade, because without them, people would be obliged to exchange money in person for all sorts of transactions, and this would quickly become unsafe in addition to unwieldy.
One simple example of a negotiable instrument is a check. A check is written out to the bearer for a specific amount. The bearer can take the check to a bank and deposit it, thereby transferring the obligation to the bank. The bearer can also sign the check over to someone else, another example of a transfer. Checks also demonstrate another important property of negotiable instruments, which is that people need to have them in hand to redeem or negotiate them. If the document is lost, it cannot be called upon.
The negotiable instrument is a form of contract. The person who originates the document is indicating a promise to pay, and the person who accepts the document does so in exchange for a product or service. Sometimes the document may take the form of a formal contract, as in the case of a promissory note for a loan which is signed by lender and borrower. In other cases, the contract is implied. Paper money, for example, is a type of negotiable instrument which people freely exchange and transfer with no signatures required, although it can be noted that the paper still bears the commitment of the originator, the government, which declares that the currency is valid and can be used as legal tender.
The advantages of being able to use negotiable instruments for transactions are clear. People can use such documents to do business over long distances, and to make transactions without needing to have the money in hand.
If someone uses a negotiable instrument and reneges, there will be legal consequences. Someone who writes a check against a bank account which does not have enough money to cover the check, for example, will be required to furnish the funds and usually to pay fees for the trouble of processing the check and recovering the insufficient funds. The bearer of the instrument, in other words, can sue to have it fulfilled.