What is a Negotiable Instrument?

Mary McMahon

A negotiable instrument is a document which includes a promise to pay a set sum of money to the bearer of the document either on demand or on a given date. The instrument can be freely transferred without the need to notify the person from whom it originated. Negotiable instruments are used to enable trade, because without them, people would be obliged to exchange money in person for all sorts of transactions, and this would quickly become unsafe in addition to unwieldy.

Paper money is a type of negotiable instrument.
Paper money is a type of negotiable instrument.

One simple example of a negotiable instrument is a check. A check is written out to the bearer for a specific amount. The bearer can take the check to a bank and deposit it, thereby transferring the obligation to the bank. The bearer can also sign the check over to someone else, another example of a transfer. Checks also demonstrate another important property of negotiable instruments, which is that people need to have them in hand to redeem or negotiate them. If the document is lost, it cannot be called upon.

The negotiable instrument is a form of contract. The person who originates the document is indicating a promise to pay, and the person who accepts the document does so in exchange for a product or service. Sometimes the document may take the form of a formal contract, as in the case of a promissory note for a loan which is signed by lender and borrower. In other cases, the contract is implied. Paper money, for example, is a type of negotiable instrument which people freely exchange and transfer with no signatures required, although it can be noted that the paper still bears the commitment of the originator, the government, which declares that the currency is valid and can be used as legal tender.

The advantages of being able to use negotiable instruments for transactions are clear. People can use such documents to do business over long distances, and to make transactions without needing to have the money in hand.

If someone uses a negotiable instrument and reneges, there will be legal consequences. Someone who writes a check against a bank account which does not have enough money to cover the check, for example, will be required to furnish the funds and usually to pay fees for the trouble of processing the check and recovering the insufficient funds. The bearer of the instrument, in other words, can sue to have it fulfilled.

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Discussion Comments


@anon274494: Nope. UCC 3-104(a) mandates only "documents" as negotiable instruments.


Can gold be used as an exchange in a negotiable instrument?


@SkyWhisperer - I believe that a check is a solid, negotiable instrument representing the good faith of the institution representing the check as well as the person signing the check.

However, a banker’s cashier’s check is as good as gold in my opinion. You can take a cashier’s check from one bank, and it’s like cash, which you can deposit into another bank.

I’m not sure what the difference is between the cashier’s check and a regular check; I always got the impression that the cashier’s check had greater authority behind it, almost like it was notarized or something like that.

I suppose the cashier’s check is guaranteed never to bounce. Maybe that’s the only difference in the end.


@nony - I don’t know; checks are still good for some things. I’m surprised that some merchants can authenticate checks on the spot to make sure you’re good for the funds.

I went to buy a used car once and I wrote a check for $5,000, and the guy was able to authenticate it right on the spot using his machine. It was on a weekend and no banks were open but I guess he was able to determine that we were good for the money.

We drove off in our used car and that was that; the check cleared that week. Of course, as the article points out, he could have sued us if it didn’t clear, so I suppose he still had the upper hand.


I’ve gotten to the place where I rarely write checks anymore. I put my purchases on my credit card and then use a check to pay off the card at the end of the month.

When I was writing checks, I always had to provide driver’s license information to merchants, which was a hassle.

I also find using the card more convenient in cases of potential fraud. It’s easier to stop payment on a credit card transaction than to do it on a check, from my experience. Plus, without having to write checks constantly, I don’t have to constantly keep track of my balances on a moment by moment basis with the risk of incurring an insufficient funds penalty.

I still budget, but if I step over budget one month, I can afford to carry the balance on my card one month more – but no more. I write one or two checks to pay off my balances, and I’m done.

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