Searching for Negotiability in Payment and Credit Systems

Ronald J. Mann, Columbia Law School


Although academics spend a great deal of time analyzing the fine details of the rules that govern negotiable instruments, they have spent little or no time attempting to ascertain whether those rules play a significant role in the modern economy. This article takes up that question from an empirical perspective, presenting evidence from more than a dozen interviews with professionals in a variety of different financial markets, a survey of actual documents used in various financial transactions, site visits to a number of financial institutions, and a survey of published judicial decisions in the checking area.??Relying on that evidence, the article shows how and why negotiability has faded from significance. Part I shows how the benefits that negotiability offers were designed to aid the simple transactions that were common in preindustrial economies. To show just how rarely negotiability appears in modern commerce, Part II examines current practices in a variety of contexts in which negotiability is not a significant factor: credit cards, letters of credit, consumer-credit notes and home-mortgage notes, private commercial obligations, bonds, and commercial paper. Part III discusses the last significant area in which negotiable instruments still appear, the checking system. Even there, though, the exigencies of modern commerce have rendered irrelevant to actual practices all of the fundamental concepts of negotiability: reliance on the document to represent rights in the instrument, use of signatures to transfer and verify ownership, and even holder-in-due-course status. Finally, Part IV closes with some brief comments about the continuing convergence of payment systems in response to technological pressure.