negotiable instrument is a document that carries a legal right to
receive payment in the future. It is legal right that is transferable
by delivery or by delivery and indorsement (or endorsement). Examples
are cheques and bills of exchange.
instruments are mainly governed by state statutory law and this is
generally, the common law. Drafts (cheques) and notes (eg bills of
exchange) are the two categories of instruments:
draft is an instrument that orders a payment to be made. For
note is an instrument that promises that a payment will be made. For
example, certificates of deposit (CD's) are notes.
are the negotiable instrument most commonly used in business
transactions to finance the movement of goods and to secure and
distribute loans. Negotiable instruments do not include money and
certain payment orders.
TITLE: The rule of derivative title,
which is applicable in most areas of the law, does not allow a
property owner to transfer rights in a piece of property greater than
his/her own. However, if an instrument is negotiable this rule is
suspended. A purchaser in good faith (who has no knowledge of a
defect in the title or claims against it) takes title to the
instrument free of any
cheque is a draft, other than a documentary draft, payable on demand
and drawn on a bank.
is defined as an "order," which is a "written
instruction to pay money signed by the person giving the
instruction." A cheque, therefore, contains an order rather
than a promise to pay money. In most cases, a cheque is a negotiable
instrument. A preprinted form of a cheque invariably satisfies both
the essentials of a draft and the requirements for negotiability.
of exchange have fallen into disfavour with the rise of banks and
cheques drawn on a bank account. They come under the Bills of
Exchange Act 1909 (Cth). A bill of exchange is:
unconditional order in writing
by the person giving the bill
the addressee to pay on demand or at a fixed or determinable future
certain sum of money to or to the order of a specified person or to
property professional are mainly concerned with cheques, this module
will concentrate on this particular negotiable instrument.
instruments must have the attribute of negotiability. This attribute
has three elements. The negotiable instrument must be:
writing signed by maker or drawer
promise or order. In an ordinary draft, this requirement is usually
satisfied by inserting the drawee’s name immediately following the
word "To" on the printed form in the lower left hand
corner of the instrument. A cheque usually meets the requirement
because the drawee’s bank’s name is printed and encoded on the
face of the instrument.
be unconditional. Generally, a promise or order is unconditional
unless the writing states an express condition of payment, that the
promise or order is subject to or governed by another writing, or
that rights or obligations with respect to the promise or order are
stated in another writing. In other words, if the writing contains
none of these provisions, the order or promise is unconditional.
order to pay money must be a fixed amount on demand or at a definite
instruments that are payable on demand, including virtually all
cheques, are so payable for the last reason: they make no express
provision for time of payment.
to order or to bearer. Payable to bearer or order at time it first
comes into possession of a holder.
other undertaking or instruction. Beyond the maker's order or
promise money, the instrument itself must not contain "any
other undertaking or instruction" by the maker or drawer "to
do any act in addition to the payment of money,"
(or Not) By Declaration. The opposite issue is whether or not the
parties can use a form that is a negotiable instrument and avoid
negotiability by declaring, on the instrument, that it is not
negotiable. The answer is yes, except for a cheque.
statement on a cheque that it is not negotiable (eg, "nonnegotiable")
is ineffective to destroy negotiability, if the cheque is otherwise
are commonly noted or endorsed in some way. These are messages to
parties who may come into contact with the cheque. The following is a
summary of typical endorsements:
TO BEARER: This endorsement authorises
the paying bank to pay the cheque to the bearer at the time. The
bank does not have to confirm that the bearer is the owner of the
cheque. A bearer cheque also informs intending holders of the cheque
that it is negotiable by delivery.
TO ORDER: This endorsement is an instruction to the bank to only pay
the cheque to the drawee or an indorsee. The cheque is only
negotiable by delivery and endorsement. The bank should must take
care to collect the cheque only on behalf of the payee or a lawful
indorsee. However, there are a number of defences available to the
bank under the relevant legislation.
A CHEQUE: Instructs the bank to only pay the cheque into a bank
account or to another bank. That is, the bank must not pay cash.
The crossing must be two parallel transverse lines.
NEGOTIABLE CROSSING: If the words “not negotiable” are
added to a crossed cheque, it is no
longer a negotiable instrument. It warns all parties who deal with
the cheque that they cannot get a better title than the transferor
and therefore, they take the cheque subject to all defects in title.
A cheque cannot be "not negotiable" unless it is crossed.
PAYEE ONLY: Does not impose any contractual duty on the bank because
there is no contract between the drawer and the bank. However a bank
that ignores the endorsement may be guilty of negligence toward the
true owner of the cheque.