Negotiable Instruments

Practically every written contract or agreement involving the payment of money is negotiable in the sense that the owner can sell it to another and that the purchaser can enforce it to the same extent that the original owner could if he had not assigned it. Bonds and mortgages, contracts for sales, leases, etc., would be negotiable, but in the strictest sense there are but three forms of negotiable commercial paper in common use checks, promissory notes, and bills of exchange or drafts.


While there is no regular prescribed form for these instruments, there are certain orderly forms which are usually followed and there are certain prerequisites without which they are non-negotiable instruments: (1) They must be in writing (ink, pencil, or type impressions), and signed by the maker or drawer; (2) they usually state the place and date of making; (3) they must be payable on demand, at a fixed time, a determinable future time or at a time certain to occur; (4) the promise to pay must be unconditional and "to order" or "to bearer," and in money; (5) a place of payment is usual, if not stated, the place or business or residence of the maker or the acceptor or drawee is assumed; (6) they must not show any alterations- erasures or additions- on their face; (7) they must not carry on their face any information that would lead a prudent man to inquire further as to their validity; (8) the time of payment expressed in the instrument must not have passed.


It is not positively necessary to express consideration in negotiable papers, but it is best to do so. In the hands of an innocent holder the law assumes that there was a valuable consideration.

Promissory Notes

A promissory note is a written promise to pay a certain sum of money at a specified time. There are three kinds, individual promissory notes, or those made by one party to pay another a certain sum of money at a specified time; joint promissory notes, the same as the foregoing, only signed by two or more parties, in which case all are liable jointly but not severally; joint and several promissory notes, in which two or more parties severally and separately agree to pay a certain sum at a specified time. Each signer of such note is responsible for the whole pay ment.


A paper is made negotiable by the words "or bearer," or "or order." In the former case endorsement is not necessary or customary except in the case of forwarding banks; in the latter case it is negotiable only by the endorsement of the payee.

Holder For Value

Negotiable paper passing into the hands of an innocent holder for fair and full consideration and in good faith carries with it a good title, providing (1) The instrument is negotiable; (2) was obtained in good faith and for a valuable consideration before maturity; (3) the purchaser must not be aware of any legal or equitable defense.

Parties To Negotiable Instruments

The rule governing the capacity of a party to incur liability on commercial paper is the same as that holding good regarding contracts.


A protest of a note is a formal statement by a notary that the paper was presented for payment and payment refused. When a note is not duly paid on presentation, it is said to be "dishonored" and is taken to a notary public, who again presents it, and, if not paid, he notes its non-payment, and afterwards draws up a formal protest, that legal proceedings may be taken for recovering the amount due. Should there be indorsers and no protest is made, the indorsers in some states are released.

The holder of a note may give notice of protest either to all the previous indorsers or only to one of them; in the latter case he must select the last in-dorser, and the last must give notice to the last before him, and so on.

Where notice of protest is duly addressed and deposited in the postoffice, the sender is deemed to have given due notice, notwithstanding any miscarriage in the mails.

Where days of grace are allowed by statute on notes, they are not considered due until the expiration of the days of grace. If a note is presented and payment demanded on the last day of grace, and payment refused, the maker is in default, and notice of dishonor may forthwith be given to the indorser. For days of grace allowed by the statutes of different states, see Interest Laws and Statutes of Limitation.

A note made payable at a bank and held there for payment until the usual hour for closing, need not be presented to the maker in person to bind the indorser. It may be protested, as in the case of drafts, immediately on the close of bank hours. Payment must be immediately demanded of the indorser if he resides in the same place; if he is a non-resident he must be notified at once by letter.

Presentment Not Necessary To Render Maker Liable

Presentment for payment is not required in order to charge the maker of a note.

Sundays And Holidays

When the day of maturity falls upon Sunday or a legal holiday the note is payable on the next succeeding business day.

By Whom Demand May Be Made

The holder of a note or any one acting for him may make the demand for payment and send notice of dishonor to the in-dorsers. Usually the holder or his agent notifies all the parties on the note. This is the most business-like, as well as the most prudent way, as it renders all parties responsible to him, and each responsible to each other in their order. Extending time of payment by the holder releases the indorsers of the note, unless consent to such extension has been given by the indorsers.

The finder of a note, as of all other property, must make reasonable efforts to find the owner, before he is entitled to appropriate it for his own purposes. If the finder conceal it, he is liable to the charge of larcency or theft.


A note which does not state on its face that it bears interest, will bear interest only from maturity. If the words "with interest" are included in a note it draws the legal rate of interest from the date of making, but if the note is to draw a rate of interest higher than the legal, but not higher than the statute of the state allows, the rate of interest must be specified.

Death Of A Holder

After the death of a holder of a negotiable note, his executor or administrator may transfer it by his indorsement.

When Right Of Action Expires

The statute of limitations begins to run from the day the right of action accrues. See Interest Laws and Statutes of Limitation.


A written order on a bank directing a certain amount of money to be paid to a person named, or to his order, or to him "or bearer," or simply to "bearer," is called a check. This is the simplest form of negotiable paper and requires no set form of wording; any intelligibly written demand, dated, made by a depositor, correctly signed, is a check and will draw the money.

Forged Checks

A bank pays every check at its own risk, and in case of the payment of a forged check, must stand the loss.

Certified Check

A check is said to be "certified" when it bears the signature of the cashier or other competent officer, together with the word "certified," thus signifying that the bank guarantees the check. The amount for which it is drawn is immediately deducted from the drawer's account.

"With Exchange."- Checks drawn with the words "with exchange" after the amount in writing are usually cashed without extra charge by the bank at which presented, the cost of collection being paid by the drawer. Banks usually discourage the use of these checks.

Kinds Of Indorsement

Following are the various kinds of indorsement: An indorsement in blank names no indorser, and is payable to bearer. A special indorsement specifies the party whose indorsement is essential to the negotiability of the instrument. A restrictive indorsement is one designating one party and no other to whom the paper shall be paid, or one use to which it shall be put, as "Pay A only," or "For deposit only in the Citizens' National Bank." A qualified indorsement is one including the words "without recourse," or its equivalent, so limiting the usual liability of the indorser. A conditional indorsement is one directing payment contingent upon a certain occurrence.

Kinds Of Drafts

A sight draft is one drawn by one person on another and payable when presented or at sight. Time drafts are similar to sight drafts, but are drawn payable a certain number of days after presentation and require acceptance by the party against whom they are drawn. Such draft must be accepted by the drawee who signs his name across the face, accompanled by the word "accepted," thus making it the same to all intents and purposes as a promissory note. It matures so many days after acceptance, not after the date on which it is drawn. A bank draft is the order of one bank to pay a certain person a given sum, and is the most convenient method of transferring money.