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Negotiating Order and Bearer Instruments

Negotiating Order And Bearer Instruments

For negotiable instruments which are payable to order, any form of negotiation requires the payee to endorse the instrument to the new holder. This would involve the payee with signature liability.

There are many different types of endorsement which can be used when transferring a payable to order negotiable instrument. Sometimes, one will endorse such an instrument while also adding instructions on how that instrument must be used. This type of endorsement would still act as a transfer of holder, but would require the new holder to act in compliance with these instructions.

Those negotiable instruments which are payable to bearer have a significantly simpler mechanism for negotiation. Instead of needing to endorse such instruments through written annotations on the instrument, one can simply hand another individual an instrument which is payable to bearer in order to endorse it.

The holder of a payable to bearer instrument is always the bearer of that instrument, so simply changing the bearer is enough to change the holder and negotiate the instrument to another. No other form of endorsement is needed. This is simultaneously the strength and flaw of the payable to bearer instrument, as such an instrument can effectively be "negotiated" through theft or misappropriation of a purely physical nature, while payable to order instruments need endorsements to negotiate transfer, and therefore, are significantly safer forms of payment.

NEXT: Protect Yourself With Liability Defenses!

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