LEGAL PERSPECTIVE: Negotiability and Transferability Differences by Dr AbdelGadir Warsama, Legal Counsel

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Negotiable instruments are certain commercial papers issued to facilitate commercial activities. Those commercial papers are “negotiable” as they are negotiated between parties mostly as consideration for the subject-matter. However, the most common negotiable instruments are cheques, bills of exchange and promissory notes. Those commercial papers are widely used as negotiable or transferable. However, in practice there is some confusion between “negotiability” and “transferability”, irrespective pf the fact that, negotiability must be distinguished from transferability.

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A cheque may be crossed  to make it ”not negotiable”, in such case its negotiability is lost and the transferee takes subject to defects in title, but the cheque remains transferable unless made payable to a specific person “only” or otherwise made non-transferable by the drawer  writing the words “not transferable” across the cheque. Again, for instance, a bill of lading is not a negotiable instrument, but it is freely transferable by delivery with endorsement.

The distinction between “negotiability” and “transferability” should become apparent, but the terms “transferable” and “negotiable” are sometimes confused in judgment and in some Statutes we see “negotiable” being used as a synonym for “transferable”. The rule by which “negotiability” is determined is where an instrument is by custom of trade transferable like cash by delivery and also capable of being sued upon by persons holding, then it is entitled to the name of a negotiable instrument. If either of these requisites are lacking then it is not a negotiable instrument e.g. a bill payable to bearer is a negotiable instrument because it complies with both requisites, but if the bill is especially endorsed its negotiability in the full sense of the word, ceases until endorsed away again in blank for while it is especially endorsed only the special endorsee can sue upon it.

Negotiability arises either by Statute or by Custom. The custom needs not have existed for time immemorial, a recent use will suffice so long as it is the general custom of the markets, but it is essential that the instrument must be on the face of it transferable without the necessity for registration or notice. As example, share certificates requiring transfer in the company’s books are not negotiable instruments. The concept of negotiability, is very important, as legally it gives the necessary legal title. Holding an endorsed cheque, bill or promissory note gives the right therein.

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