Negotiable Instrument

A document that contains a guarantee or promise to pay a specific amount of money to a person or entity in possession of the instrument, whether on a specified date or on demand, is known as a “negotiable instrument.” A negotiable instrument features the name of the person who is to make payment. Examples include checks, banknotes, and promissory notes. To explore this concept, consider the following negotiable instrument definition.

Definition of Negotiable


  1. Transferable from one person to another in return for something of equal value.
  2. Able to be transferred from one person to another by delivery, with or without signature or endorsement, so that ownership or title passes to the transferee.


1750-1760 English

The Negotiable Instrument

The instrument itself is a document that contains the specifics of what is promised to be paid. In other words, whoever possesses the instrument will be paid the specified amount of money on the agreed upon date, whether that is immediately, or some time in the future. A negotiable instrument may be transferred to a third party, holding the same value to the new holder. An everyday example of a negotiable instrument is a bank check, which is given to a payee (person to be paid), who then takes it to his bank to be cashed or deposited into his account.

Uniform Commercial Code Governance

Articles 3 and 4 of the U.S. Uniform Commercial Code govern how negotiable instruments may be issued and transferred. Article 3 also specifies what conditions must be met in order for a written document to be considered a negotiable instrument. A negotiable instrument must contain the following:

  1. An unconditional promise or order to pay
  2. A specified amount of money, though interest can be included
  3. A specified date for payment, whether “on demand,” or a certain date
  4. Payment must be payable to the person or entity in possession of the instrument
  5. There can be no requirement for the person promising to pay to perform any act other than paying the money

Negotiable Instrument vs. Contract

While a negotiable instrument seems similar to a contract, it is different in that it simply conveys the value part of the agreement. The contract itself is outlines the obligations of the parties, and may give one party the right to hold the instrument. A negotiable instrument contains no promise to perform any duties under a contract, and makes no consequence if the payer defaults, as would a contract. A negotiable instrument merely gives the holder (1) the authority to demand payment, and (2) the right to be paid.

While many instruments must contain an endorsement, usually in the form of a signature, by both parties involved in the transaction, this is not a requirement for the document to be considered a negotiable instrument. If such an instrument is lost or stolen, it may be deemed void. The most commonly used types of negotiable instruments include promissory notes, and bills of exchange.

Promissory Note

A promissory note is an unconditional promise to pay put into writing by a person or entity and signed by the borrower or person making the promise. Promissory notes are often created between a borrower and a lender in which the borrower promises to pay the lender a specific amount of money by the specified date. A promissory note, similar to a contract, contains all of the details pertaining to the transaction such as the amount borrowed, late fees, interest rates, and so forth, and should contain the term “promissory note” within the body. In terms of enforceability, a promissory notes lies somewhere between an informal IOU and a formal loan contract.

Bills of Exchange

Another commonly used type of negotiable instrument is the bill of exchange. A bill of exchange is a financial document that states an individual or business will pay a certain amount on a specific date. The date may range from the date it is signed, to within six months into the future. A bill of exchange must contain the signature of the individual promising to pay to be considered legally binding. Unlike a promissory note, a bill of exchange may be transferred to a third party, binding the payor to pay the third party who was not involved in the first place.


The person whose name is listed on the front of a check or other negotiable instrument, the “payee,” must endorse the document in order to transfer the instrument, in exchange for the actual face value. This endorsement is done by placing his signature on the back of the check. For example, if John receives a check for payment, he places his signature on the back, transferring it to the bank in exchange for cash.

In some circumstances, more than one person may be listed as payee on the check. How such a check may be endorsed depends on how the names are written. If the check is made payable to “John AND Sally Smith,” both John and Sally must endorse the check. If the check is made payable to “John OR Sally Smith,” only one signature is required. In the event the check is made out to two individuals without specifying “and” or “or,” it is likely the bank will require both signatures.

The person who signs endorses a negotiable instrument, does so for the purpose of obtaining payment by giving up their rights to the instrument itself. According to Article 3 of the UCC, there are five types of endorsement:

  1. Blank Endorsement – The most common, and least restrictive, type of endorsement, a blank endorsement features the signature of the payee exactly how it appears on the front of the check.
  2. Special Endorsement – A special endorsement allows the payee to assign the instrument to another person by writing on the back, “Pay to the order of,” specifying to whom it is to be transferred, then signing the document. This is also known as a “third party check.” Third party checks are rarely honored unless the original payee is present.
  3. Conditional Endorsement – A conditional endorsement specifies certain conditions that must be met before the check can be negotiated. For example, Mary has written a check to contractor Bob for the installation of a new dishwasher. Bob hires Frank to do the job, endorsing the back of Mary’s check as “Payable to Frank Williams upon completion of dishwasher installation,” then signs his name. Frank can only cash or deposit the check after he has finished the job for which he was hired.
  4. Restrictive Endorsement – Restrictive endorsement limits negotiability of the check. A common restrictive endorsement is the phrase “for deposit only,” which specifies that the check may only be deposited into the specified account. This prevents another person from endorsing and further negotiating the check in the case of theft.
  5. Qualified Endorsement – Qualified endorsement limits the responsibility of the holder of the instrument. For example, the payee may write “without recourse” before signing the check, signifying he has no responsibility if the check bounces for any reason. Check cashers will not normally accept items with a qualified endorsement.

Related Legal Terms and Issues

  • Authority – The right or power to make decisions, give orders, or to control something or someone.
  • Contract – An agreement between two or more parties in which a promise is made to do or provide something in return for a valuable benefit.
  • Creditor – A person or entity to which money is owed by another person or entity.
  • Debtor – A person who is in debt, or under a financial obligation to another.
  • Default – Failure to fulfill an obligation, or to appear in a court of law when summoned.
  • Obligation – A promise or contract that is legally binding; the act of binding or obliging oneself, as in a contract.
  • Performance – The act of doing what is required by a contract.
  • Promissory – Containing, implying, or having the nature of a promise.