Negotiable instruments are documents that promise to pay a fixed sum of money to the bearer, enabling trade without the need for in-person transactions. Examples include checks and promissory notes, and legal consequences apply if the instrument is not honored.
A negotiable instrument is a document that includes a promise to pay a fixed sum of money to the bearer of the document, either upon request or on a specified 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 forced to exchange money in person for all sorts of transactions, and this would quickly become unsafe as well as unwieldy.
A simple example of a negotiable instrument is a check. A check is written to the bearer for a specified amount. The holder can take the check to a bank and deposit it, thus transferring the obligation to the bank. The holder can also sign the check to another person, another example of a transfer. Checks also demonstrate another important property of negotiable instruments, which is that people need to have them on hand to redeem or negotiate them. If the document is lost, it cannot be invoked.
The negotiable instrument is a form of contract. The person originating the document indicates a promise to pay, and the person accepting the document does so in exchange for a product or service. Sometimes the document can take the form of a formal contract, such as a promissory note for a loan signed by the lender and the borrower. In other cases, the contract is implied. Paper money, for example, is a type of negotiable instrument that people freely exchange and transfer without the need for signatures, although it can be seen that the paper still has the commitment of the creator, the government, which declares the currency to be valid and It can be used as legal tender.
The advantages of being able to use negotiable instruments for transactions are clear. People can use these documents to do business over long distances and to carry out transactions without having to have the money in hand.
If someone uses a negotiable instrument and reneges, there will be legal consequences. Someone writing a check against a bank account that does not have enough money to cover the check, for example, will need to provide the funds and typically 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 enforce it.
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