When it comes to financial and legal transactions, two important terms that often come up are negotiable instruments and contracts. While both serve as legal agreements between two parties, they differ in various ways.
A negotiable instrument is a written document that promises to pay a specific amount of money to the bearer or the person whose name is mentioned on the document. The most common examples of negotiable instruments include checks, promissory notes, and bills of exchange. These instruments are easily transferable and can be used as payment for goods or services. Essentially, negotiable instruments are a type of currency that can be exchanged for goods or services.
A contract, on the other hand, is a legally binding agreement between two or more parties that outlines specific terms and conditions. Contracts can cover a wide range of agreements, from employment contracts to purchase agreements and service contracts. Unlike negotiable instruments, contracts are not considered a form of currency and cannot be used as payment for goods or services.
One key difference between negotiable instruments and contracts is how they are transferred. Negotiable instruments can be transferred by endorsement, which is essentially the act of signing the back of the document to transfer ownership to a new party. Contracts, however, require the consent of all parties involved to be transferred or assigned to another party.
Another major difference is the level of formalities involved. Negotiable instruments are often less formal and require fewer formalities than contracts. For example, a check can be written on a piece of scrap paper and still be considered a valid negotiable instrument. Contracts, on the other hand, typically require more formalities such as signatures, witnesses, and notarization.
In terms of legal remedies, negotiable instruments and contracts also differ. If a negotiable instrument is dishonored or not honored by the issuer, the bearer can sue the issuer for the amount of the instrument, including any interest or fees associated with it. Contracts, on the other hand, can be enforced by a court of law, but the remedies may vary depending on the specific terms of the agreement.
In conclusion, negotiable instruments and contracts serve different purposes and have distinct features. While negotiable instruments function as a form of currency and can be easily transferred, contracts are formal legal agreements that require consent from all parties involved. Understanding the differences between these two terms is important for anyone involved in financial or legal transactions.