How a Negotiable Instrument Works

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A negotiable instrument involves the unconditional payment of funds under a contract which is in a position of being reassigned through negotiation. In its various forms (check, bill of exchange, promissory note or even a note), the instrument is a basic tool of modern financial systems.

The uniqueness of the instrument is its capacity to transfer the ownership without soliciting the permission to do so. The receivable note is a document, which means that it physically exists in a printed form that must be filled in (place and date of issue, loan amount, payment date, etc).

The document incorporates the right to credit, meaning that the material possession of the document entails the right to ownership of credit and therefore the right of the owner to obtain payment.

The debt instruments are common, both among entrepreneurs (eg, payment of suppliers by the issuance of promissory notes) and among non-entrepreneurs (eg, use of checks).

There are three types of securities: Debt securities in the strict sense, incorporating the right to require repayment of credit (for example, bills and checks).

Equity securities such as shares; The title to goods, such as the bill of lading or received for shipment, which allow the owner of goods delivered or loaded onto ships for transport, to sell or pledge the goods themselves. Through turn affixed to these documents, the same way it does with the bills or checks.

Depreciation is a process that begins when a title is lost or stolen to the rightful owner. Through this procedure, the beneficiary can obtain the separation between the exercise of securities law and possession of the certificate.

This allows a judicial declaration that the original title is no longer an instrument of legitimacy. The depreciation may require payment through presentation of the decree issued by the court of jurisdiction, and if the license has not expired, it can be issued a duplicate issuer.

The most important trait is the negotiability of the bill of exchange, the ability to turn it even several times – a third party can accept it because it is free of all base defects.

Abstract securities are those titles that can be emitted by different types of relationships; the content of law is determined solely by the wording of the document (the principle of complete literalism).

Causal securities (eg bonds) are those titles that may be issued only under a specific legal relationship. The content of law is given in the title but also the rules governing the relationship that did create such a document (the principle of  incomplete literalism).

Although trading is the most important trait of the negotiable intstruments, in some jurisdictions the law recognizes that you can limit the negotiability. By writing the words “only beneficiary” on a note, and deleting the word “payable” alongside the name of the beneficiary.

 

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