A 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.

Negotiable 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:

  1. A draft is an instrument that orders a payment to be made. For example, cheques.

  1. A note is an instrument that promises that a payment will be made. For example, certificates of deposit (CD's) are notes.

Cheques 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.

DERIVATIVE 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
defects or claims.


A cheque is a draft, other than a documentary draft, payable on demand and drawn on a bank.

"Draft" 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.


Bills 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:

Because property professional are mainly concerned with cheques, this module will concentrate on this particular negotiable instrument.


Negotiable instruments must have the attribute of negotiability. This attribute has three elements. The negotiable instrument must be:

  1. In writing signed by maker or drawer

  1. A 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.

  1. Must 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.

  1. An order to pay money must be a fixed amount on demand or at a definite time.

  1. Most 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.

  1. Payable to order or to bearer. Payable to bearer or order at time it first comes into possession of a holder.

  1. No 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,"

  1. Negotiability (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.

A statement on a cheque that it is not negotiable (eg, "nonnegotiable") is ineffective to destroy negotiability, if the cheque is otherwise negotiable.


Cheques 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:

PAYABLE 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.

PAYABLE 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.

CROSSING 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.

NOT 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.

ACCOUNT 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.