A negotiable instrument is a document that includes an order or an undertaking to pay money if it is
a) capable of being transferred from one person to another (either by delivery or by endorsement and delivery) so the holder of the instrument may sue on it in his own name; and
b) it provides the bona fide purchaser for value the complete legal title to the instrument without any encumbrance from title defects or other equities or other prior holders of the instrument (assuming the purchaser did not receive notice of any such defect in title or equity before making the transfer).
Negotiability is the
Characteristic of a document (such as a check, draft, bill of exchange) that allows it to be legally and freely (unconditionally) assignable, saleable, or transferable. It allows the passing of its ownership from one party (transferor) to another (transferee) by endorsement or delivery. The concept of negotiability was developed in response to the need for a substitute for money that would be readily acceptable in trading. Negotiability requires that the party accepting a payment document is assured of its payment, and is protected from the actions or defects of the transferor. Therefore the fact that a document is negotiable insulates the accepting party from the primary party's (the original writer or issuer of the document) attempt to assert any legal defense against any transferee.
This ability of the document (or instrument as it is formally called) to effect a transfer free of legal defense is the very essence of negotiability. Negotiability of a document is affected by (1) the statutory formalities and language (specific terminology) used in its making, (2) proper endorsement or delivery, and (3) the transferee being (or having the rights of) a holder in due course.