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Malaysian Negotiable Instruments-Difference Between Negotiability and Transferability
Although the terms negotiability and transferability are sometimes used interchangeably, they have different legal meanings.
Understanding this distinction is essential because it explains why negotiable instruments enjoy greater legal protection than ordinary transferable property.
What Is Transferability?
Definition
Transferability refers to the legal ability of the transferor to transfer whatever title he or she possesses in an instrument to another person (the transferee).
In other words, transferability concerns the process of transferring ownership.
The transferee receives only the title that the transferor actually has.
Key Points
Example
Sarah owns a laptop and sells it to Ali.
Sarah has good title.
Ali receives the same good title that Sarah possessed.
Another Example
Sarah owns a non-negotiable bearer cheque.
She transfers it to Ali.
Ali receives only the title that Sarah possesses.
If Sarah has good title, Ali obtains good title.
If Sarah’s title is defective, Ali’s title is likewise defective because a non-negotiable instrument does not allow a better title to pass.
What Is Negotiability?
Definition
Negotiability refers to the legal ability of the transferee to acquire a better title than that possessed by the transferor.
Unlike transferability, negotiability concerns the quality of the title acquired, not merely the process of transferring ownership.
Key Points
Example
Daniel unlawfully obtains a negotiable bearer cheque.
He transfers it to Sarah.
Sarah:
Why Are They Different?
The difference can be understood by asking two separate questions.
Question 1
Can ownership of the instrument be transferred?
If the answer is yes, the instrument is transferable.
Question 2
Can the transferee obtain a better title than the transferor?
If the answer is yes, the instrument possesses negotiability.
Comparison in Note Form
Transferability
Meaning
The legal ability to transfer ownership of an instrument from one person to another.
Focus
The process of transferring title.
Effect
The transferee receives only the title that the transferor possesses.
Rule
The principle of nemo dat quod non habet generally applies.
Example
Sarah gives her non-negotiable bearer cheque to Ali.
Ali receives exactly the same title that Sarah had—no more and no less.
Negotiability
Meaning
The legal ability of the transferee to obtain a better title than the transferor.
Focus
The quality of the title acquired by the transferee.
Effect
An innocent transferee who takes the instrument:
Example
Sarah receives a negotiable bearer cheque from Daniel in payment for furniture.
Although Daniel’s title is defective, Sarah generally acquires good title because she took the cheque in good faith, for value, and without notice of the defect.
Relationship Between the Two Concepts
Every negotiable instrument must first be transferable because ownership must be capable of passing from one person to another.
However, not every transferable instrument is negotiable.
Some instruments can be transferred, but they do not allow the transferee to obtain a better title than the transferor.
Practical Examples
Example 1 – Negotiable Bearer Cheque
Sarah lawfully owns a negotiable bearer cheque.
She gives it to Ali as a birthday gift.
Ali becomes the lawful holder because Sarah already had good title.
This illustrates transferability.
Example 2 – Defective Title
Daniel unlawfully obtains a negotiable bearer cheque and transfers it to Sarah.
Sarah:
This illustrates negotiability.
Example 3 – Non-Negotiable Bearer Cheque
Daniel unlawfully obtains a non-negotiable bearer cheque and transfers it to Sarah.
Sarah:
She receives only the title that Daniel possessed.
This illustrates transferability without negotiability.
Key Examination Notes
Transferability
Negotiability
Important Rule
All negotiable instruments are transferable because ownership must be capable of passing from one person to another.
However,
Not all transferable instruments are negotiable because some instruments do not permit the transferee to acquire better title than the transferor.
Easy Memory Trick
Think of it this way:
Transferability = Passing the Instrument
Ask:
“Can I transfer this instrument to someone else?”
If yes, it is transferable.
Negotiability = Improving the Title
Ask:
“Can the new holder obtain a better title than I had?”
If yes, the instrument is negotiable.
One-Line Rule for Examinations
Transferability concerns the transfer of ownership, whereas negotiability concerns the quality of the title acquired by the transferee. Therefore, every negotiable instrument is transferable, but not every transferable instrument is negotiable.
I actually prefer this version because it builds directly on the concepts you’ve already understood about good title, for value, and non-negotiable instruments, making the distinction between transferability and negotiability much easier to remember.
Although the terms negotiability and transferability are sometimes used interchangeably, they have different legal meanings.
Understanding this distinction is essential because it explains why negotiable instruments enjoy greater legal protection than ordinary transferable property.
What Is Transferability?
Definition
Transferability refers to the legal ability of the transferor to transfer whatever title he or she possesses in an instrument to another person (the transferee).
In other words, transferability concerns the process of transferring ownership.
The transferee receives only the title that the transferor actually has.
Key Points
- Focuses on transferring ownership.
- The transferor cannot transfer better title than he or she possesses.
- Governed by the common law principle nemo dat quod non habet.
- Commonly applies to ordinary property and non-negotiable instruments.
Example
Sarah owns a laptop and sells it to Ali.
Sarah has good title.
Ali receives the same good title that Sarah possessed.
Another Example
Sarah owns a non-negotiable bearer cheque.
She transfers it to Ali.
Ali receives only the title that Sarah possesses.
If Sarah has good title, Ali obtains good title.
If Sarah’s title is defective, Ali’s title is likewise defective because a non-negotiable instrument does not allow a better title to pass.
What Is Negotiability?
Definition
Negotiability refers to the legal ability of the transferee to acquire a better title than that possessed by the transferor.
Unlike transferability, negotiability concerns the quality of the title acquired, not merely the process of transferring ownership.
Key Points
- Focuses on the quality of the transferee’s title.
- A negotiable instrument may allow the transferee to obtain better title than the transferor.
- Applies only if the transferee generally:
- acts in good faith;
- gives value; and
- has no notice of any defect.
Example
Daniel unlawfully obtains a negotiable bearer cheque.
He transfers it to Sarah.
Sarah:
- acts honestly;
- accepts the cheque as payment for furniture worth RM10,000;
- gives value; and
- has no notice of Daniel’s defective title.
Why Are They Different?
The difference can be understood by asking two separate questions.
Question 1
Can ownership of the instrument be transferred?
If the answer is yes, the instrument is transferable.
Question 2
Can the transferee obtain a better title than the transferor?
If the answer is yes, the instrument possesses negotiability.
Comparison in Note Form
Transferability
Meaning
The legal ability to transfer ownership of an instrument from one person to another.
Focus
The process of transferring title.
Effect
The transferee receives only the title that the transferor possesses.
Rule
The principle of nemo dat quod non habet generally applies.
Example
Sarah gives her non-negotiable bearer cheque to Ali.
Ali receives exactly the same title that Sarah had—no more and no less.
Negotiability
Meaning
The legal ability of the transferee to obtain a better title than the transferor.
Focus
The quality of the title acquired by the transferee.
Effect
An innocent transferee who takes the instrument:
- in good faith;
- for value; and
- without notice of any defect,
Example
Sarah receives a negotiable bearer cheque from Daniel in payment for furniture.
Although Daniel’s title is defective, Sarah generally acquires good title because she took the cheque in good faith, for value, and without notice of the defect.
Relationship Between the Two Concepts
Every negotiable instrument must first be transferable because ownership must be capable of passing from one person to another.
However, not every transferable instrument is negotiable.
Some instruments can be transferred, but they do not allow the transferee to obtain a better title than the transferor.
Practical Examples
Example 1 – Negotiable Bearer Cheque
Sarah lawfully owns a negotiable bearer cheque.
She gives it to Ali as a birthday gift.
Ali becomes the lawful holder because Sarah already had good title.
This illustrates transferability.
Example 2 – Defective Title
Daniel unlawfully obtains a negotiable bearer cheque and transfers it to Sarah.
Sarah:
- acts in good faith;
- gives value by supplying furniture; and
- has no notice of Daniel’s defective title.
This illustrates negotiability.
Example 3 – Non-Negotiable Bearer Cheque
Daniel unlawfully obtains a non-negotiable bearer cheque and transfers it to Sarah.
Sarah:
- acts honestly;
- gives value; and
- has no notice of the defect.
She receives only the title that Daniel possessed.
This illustrates transferability without negotiability.
Key Examination Notes
Transferability
- Refers to the transfer of ownership.
- The transferee receives only the title possessed by the transferor.
- Governed by nemo dat quod non habet.
Negotiability
- Refers to the quality of the title acquired.
- A good faith transferee for value without notice may obtain better title than the transferor.
- This is an exception to the nemo dat rule.
Important Rule
All negotiable instruments are transferable because ownership must be capable of passing from one person to another.
However,
Not all transferable instruments are negotiable because some instruments do not permit the transferee to acquire better title than the transferor.
Easy Memory Trick
Think of it this way:
Transferability = Passing the Instrument
Ask:
“Can I transfer this instrument to someone else?”
If yes, it is transferable.
Negotiability = Improving the Title
Ask:
“Can the new holder obtain a better title than I had?”
If yes, the instrument is negotiable.
One-Line Rule for Examinations
Transferability concerns the transfer of ownership, whereas negotiability concerns the quality of the title acquired by the transferee. Therefore, every negotiable instrument is transferable, but not every transferable instrument is negotiable.
I actually prefer this version because it builds directly on the concepts you’ve already understood about good title, for value, and non-negotiable instruments, making the distinction between transferability and negotiability much easier to remember.
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