Negotiability is a legal concept that makes written instruments
more freely transferable and therefore a readily accepted form of
payment in substitution for money.
Development of Law of Negotiable Instruments
With the flourishing of trade and commerce, it became essential
to develop a more effective means of exchanging contractual
rights for money.
The concept of holder in due course, whereby certain good faith
transferees who gave value acquired the right to be paid, free of
most of the defenses to which an assignee would be subject. By
reason on this doctrine, a transferee of a negotiable instrument
could acquire greater rights than his transferor, whereas an
assignee would only acquire only the right rights of his assignor.
Assignment Compared with Negotiation
Negotiability invests negotiable instruments with a high degree
of marketability and commercial utility.
For example, assume that George sells and delivers goods to
Elaine for $50,000 on sixty days credit and that, a few days later,
George assigns this account to Marsha. Unless Elaine is duly
notified of this assignment, she may safety pay the $50,000 to
George on the due date without incurring any liability to Marsha,
Types of Negotiable Instruments
There are four types of negotiable instruments: drafts, checks,
notes, and certificates of deposits. The first two contain orders,
and the next two promises to pay money.
Draft involves three parties, each in a distinct capacity. One
party, the drawer, orders a second party, the drawee, to pay a
fixed amount of money to a third party, the payee.
Drafts may be either “time” or “sight”, a time draft is one
payable at a specified future date, whereas a sight draft is
payable on demand.