What are the types of negotiable instruments? That may be the first question that pops out of a person with little knowledge of financial terms.
However, for so many years, some certain categories of documents have developed in commerce as evidence that a certain amount is to be paid by one person to another, and this document is to be used by the person in transferring money from individual to another. Now this type is referred to the negotiable instruments which have different types.
Definition Of Negotiable Instruments
Negotiable instrument can be defined as a written evidence of debt which can be transferred from one person to another free from equity. One may still wonder what this free from equity means, the term free from equity means that the terms of such transfer are not based on equity but on an understanding that they are not treated as common law position.
Now, even with the types of negotiable instruments there still exist a unifying definition for these negotiable instruments. Odume defined negotiable instrument as a written instrument that is signed by the maker or drawer, it also includes an unconditional promise or order to pay a specified sum of money, and then this written instrument is payable on demand or at a defined time as well as payable to order or bearer.
The above definition showed a unifying factor for all the types of negotiable instruments, bringing forth four basic conditions that a document must met before it can be regarded as a negotiable instrument.
However, owing to the characteristics of negotiable instrument as well as those classification of negotiable instruments, the definition didn’t highlight the issue of negotiability and also transferability of such instruments, although it can be implied from the definition. The fact that a negotiable instrument carries a written promise or order to pay money by one person to another, on demand, or at a determinable future date, makes it possible for beneficiaries of such an instrument to equally transfer it to other.
Doyle focused on the issue of negotiability in his own definition. He defined a negotiable instrument as certain chose in action, which have been recognized by either status or mercantile usage as negotiable instruments and as such are outside the common law ruling, the full implication of negotiability is discussed in the next section of this post.
Many types of negotiable instruments come into the hands of bankers on daily basis. Since the way they are to be treated differ from the common law position, it is necessary for a banker to have a good understanding of how to handle them.
Features Of Negotiable Instruments
All the types of negotiable instruments have the same features, once a monetary instrument possesses the attribute of negotiability, it is conferred with the following characteristics;
- Title to it passes either by mere delivery of the instrument, or by endorsement and delivery. While title to bearer bills passes by mere delivery, that of order bills can only pass by endorsement and delivery.
- Transfer of the instrument is valid even the person who is liable on it is not notified of the transfer.
- The transferee of the instrument can get a better title to the instrument than the person who transferred it to the transferor, provided he take such instrument in good faith and without knowledge of any defect in the title of previous parties.
- The bona fide transferee can sue in his own name if necessary, without having to pass through previous.
The monetary instruments that posses the attributes described above are bills of exchange, cheques, promissory notes, draft, bonds, and other types of negotiable instruments which also include debt instruments. Detailed discussions of the specific features of each of these instruments are presented in subsequent sections of this post.
The Types Of Negotiable Instruments
These are the few common types of negotiable instruments that are available in the financial market;
- Promissory notes – A promissory note is a document written by one person by which he promises to pay money to another person unconditionally. It is technically defined by the bill of exchange act of 1882. Except for those used in international trade, promissory notes issued by individuals are not popular in modern times. When used in business, promissory notes serve as an evidence of debt. The person to whom the promise is made can negotiate the value of the money contained in the promise to another person by mere delivery or by endorsement and delivery. For this reason, a promissory note is treated under the Bill of Exchange Act of 1882 and similar Acts as a negotiable instrument.
- Bill of exchange – The most important type of negotiable instrument to bankers is a bill of exchange. It is very important to bankers not only because it is a means of payment but because banks also finance commercial credit and international trade by discounting of bills. Cheques which is a major instrument used by banks in repaying customers money is also a bill of exchange. A bill of exchange is a trade document used by evidence debt. It is an unconditional order to pay money sent by one person to another, which serves as an evidence of debt when the person to whom the order is addressed accepts it.
- Cheques – Another popular negotiable instrument is a cheque. It appears to be more popular than bill of exchange because, while you may not have seen a bill of exchange, it is very likely that you have seen a cheque. A cheque, however, is still a bill of exchange, but not all bills of exchange are cheques. A cheque is an unconditional order in writing addressed by a bank customer to a bank signed by customer requiring the bank to pay on demand a sum certain in money to or to the order of a specified person or to bearer.
Above are a few types of negotiable instruments that are available in the financial market, however, there are a lot more negotiable instrument out there.