What is Negotiable?

by Investing School on December 24, 2009

Often the word negotiable when referring to financial matters will mean a negotiable instrument. This is a unique type of “contract” but it is not really a contract in the true sense of the word. It is an instrument that is used for the payment of money and is unconditional and is capably of transfer by negotiation. The most common examples of these negotiable instruments are checks, banknotes (paper money) and commercial paper.

Negotiable instruments are different from contracts because a contract requires that an offer be made, accepted and then considered. These are all absent in a negotiable instrument. And, the only way for a negotiable instrument is able to perform its duties for the payee is if the payee has the document itself. And, the rights of the payee are better than most ordinary contracts.

For example, the rights to be paid or not subject to set-off and they also do not rely on whether or not the original contract is valid. This would be in the case of someone who wrote a check to pay for goods that were ultimately defective. It is still required that the check be honored.

There is also no notice that needs to be given to any other prior party that might be liable on the instrument for transfer of the rights to another party. In other words, you can write a check and you do not need to let anyone else know about it beforehand in order for that check to perform.

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