Instruments such as cheques are considered as a type of negotiable instrument. Why is it called “negotiable” and what can be negotiated about it ?
In: Other
Negotiation (in the context of bills and money; obviously “to negotiate” means something else for wars and politics) is a special kind of transfer of ownership of something. Only very specific things can be negotiated. They are made negotiable by law, and they are called “negotiable instruments”.
You can get most of the meaning of “negotiable” when you think of “like cash” or “cash-like”. Physical money – banknotes and coins – are negotiable instruments as well, though they are rarely called that.
The special quality of negotiability, and the process of negotiation, is that when a thing is successfully negotiated (its ownership is transferred) the new owner has full ***legal*** ownership (called the “title”) of the thing _even if the previous “owner” didn’t._ They can become the true owner even if the person they got it from wasn’t the true owner.
As an example: Let’s say someone asks to borrow your phone, but doesn’t return it. They steal it. Then they sell it on Ebay or Craigslist or Facebook. The new “owner” doesn’t have legal title to the phone, because they bought it from someone who didn’t have legal title. This is because “you can’t sell what you don’t own”, as the law says in most cases. The person now has your phone, but they aren’t the true owner. You are still the true owner, because you have the title to it.
But let’s say you have en envelope full of money. Let’s even say you scribbled a tiny smiley face on every bill just for fun. Now someone steals the envelope of cash, and uses that cash at the local store to buy a lot of things. The store (or the store owner) now has that cash. In fact, they are the _true owner_ of that money now. That’s because cash is negotiable, and it was _negotiated for value_ to the store owner. The owner took it according to the rules of negotiation, so the store owner now has the title.
If you find the person holding your stolen phone, even though they are innocent and paid for it, you can take back the phone because you are still the true owner. It never stopped being legally yours. If you find your cash – with the little smiley faces still on the bills – at the same store the thief went to, you _cannot_ take it back. You don’t own it anymore, even though it was stolen from you, and even if you can prove those smiley-face bills were yours.
(Of course, the thief is always responsible for the damage, and in any case the person who “loses out” can pursue the thief to be paid back.)
Negotiable instruments have this special quality. They _can_ be sold or traded even by someone who doesn’t own them. This is a feature, not a bug. The ability to negotiate bills, cheques, and promissory notes was very useful in past times, with the way traders and merchants ran their businesses. The unfairness of the original owner wrongly losing title was seen as less important than the ability to pay with negotiable instruments, and accept negotiable instruments as payment, with the same confidence as cash.
As a last detail: Negotiation isn’t always as simple as just handing something over. In the case of banknotes or “bearer instruments” (such as cheques made out to “cash” or “bearer”) simply delivering them is enough to negotiate them. However for some instruments, like cheques made out to specific payees, negotiation also requires _endorsement_, or signing over the instrument by the current person holding it. Negotiation must be done the right way, according to the rules, which are specified in the law. If it is not done correctly, it doesn’t work to transfer the title.
A negotiable instrument is a signed document that promises a payment to a specified person or assignee. Negotiable instruments are transferable, which allows the recipient to take the funds as cash, then use them as preferred. Examples of negotiable instruments include checks, money orders, and promissory notes.
Latest Answers