BA 265 week 6 Assignment negotiable instrument

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Negotiable Instrument






Negotiable Instrument

The instrument is called the promissory note and it is negotiable. Below are the reasons I considered to be able to tell its negotiability. The word “negotiable” is used in many cases to mean that which can be transferred from one person to another. This is always done in return for what is owed. An “instrument” on the other hand would then mean a document in writing containing a contract that creates a right in favor of the recipient of the said document. It therefore is a document which entitles a person to a sum of money which is to be transferred from maker to payee. The two words when put together in their respective definition would then be a writing or record that can be exchanged of money or as money in the transaction effected. These instruments are a form of commercial papers used for purpose of payment or credit or as security. (Dudley, 2009)

A Promissory note is an instrument in writing containing an unconditional undertaking or promise signed by the maker, to pay on demand a sum certain in money only to, or to the order of the specified person. They are promises to pay the object of which is to prevent disputes relating to the amount due to by enabling the holder of the note to enforce payment when it becomes due. The person making the promissory note is the maker whereas the person receiving the note is called the payee. An instrument that may be payable upon a contingency or occurrences in many occasions is not negotiable, and the materializing of the event does not cure the deficiency. (Sealey & Hooley, 2008)

The earliest form of negotiable instrument was the bills of exchange; the next, the simple promissory notes; and the next, the bank note. There are several types of negotiable instruments. The three main are bill of exchange, cheques and promissory notes. The other types of instruments are as follows: bank drafts, bearer’s securities and bank notes. It is different from the bank note and currency note. Bills and cheques are orders to pay whereas the promissory notes are promises to pay. (Lewinson, 1921). A negotiable instrument is therefore the property which is acquired by anyone who takes it bona fide or in good faith and for value notwithstanding any defect of title in the person from whom he took it. (Richardson, 2005).

When the promissory note is transferred to the respective holder, it is said to have been negotiated. There are two methods of negotiation; a) negotiation when delivered. In this case the note becomes billed to bearer by delivery of it. b) Negotiation by endorsement and delivery. It becomes negotiable by the holder after endorsement and its delivery. Considering the above statements, delivery means the actual handing over of the document by way of transfer of actual possession to another person who is entitled to it. Endorsement on the other hand means writing of a person’s name on an instrument for the purpose of negotiation. This also can refer to the signature of transferor on the instrument. Instruments can be classified as negotiable either by statute or custom/usage. (Lewinson, 1921)

Below are the essential requirements that must be met for a document to qualify as a promissory notes; first, they must be written, secondly, should have a promise to make the necessary payment, thirdly, the undertaking must be unconditional, fourth, it must be signed by the maker, fifth, the maker of the note must be certain, sixth, the sum payable must be certain, eighth, the payee as well must be certain and lastly the promise should be to pay money and money only. (UCC Article 3, Negotiable instruments (1990)

The purpose of promissory notes are as follows; To establish official creditor /debtor relationships, to show exchange of money is a loan as opposed to a gift, minimize risks from issues like mismanagement, gift ,tax matters etc., and to facilitate credit and commerce. The following can be used as test of Negotiability. Firstly, when a complete transfer is made by mere delivery i.e. handing over from one person to another; no notice is necessary to the party liable; and secondly, when a full and legal title passes and the title passes free from all equities including defects in title. The negotiability of this note passes title free from any flaw in the title of initial owners. Based on several reasons they are preferred as security for transaction within the nation compared to the other instruments. (Dudley, 2009)


Joseph L. Lewinson, Negotiable Instruments in California, 9 Cal. L. Rev. 374 (1921).

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