The ‘Nemo Dat Rule’ means no one gives what they do not own. In other words, the purchase from someone who has no right also denies the purchaser any title. This ancient Latin rule stays valid in all transactions.
However, an important exception comes from negotiable instruments.
Legally, a negotiable instrument transferable by delivery to bearer or by delivery coupled by endorsement and a transferee in good faith and for value acquires a good title.
As mentioned, negotiability gives an exception and accordingly gives title.
However, we need to be careful and to distinguish between negotiability and transferability which gives no exception.
A cheque may be crossed ‘not negotiable’ in which case its transferability is lost, and the transferee takes subject to defects on title, but the cheque remains transferable unless made payable to a specific person ‘only’, or is otherwise made non-transferable by the drawer writing the words ‘not transferable’ across the cheque.
Similarly, a bill of lading is a non-negotiable instrument, as it lacks the innate quality of true exception to the Nemo Dat Rule, however it is freely transferable by delivery with endorsement.
The distinction between negotiability and transferability should become apparent but sometimes the terms are confused.
The rule by which negotiability is determined is that, where an instrument is by custom of trade transferable like cash by delivery and also capable of being sued upon by the person holding it ‘pro tempore’, then it is entitled to the name of a negotiable instrument.
If either of these requisites is lacking then it is not a negotiable instrument.
For example, a bill payable to bearer is a negotiable instrument because it complies with both requisites but if the bill is specifically endorsed its negotiability in the full sense of the word ceases until endorsed away again in blank, because if it is specially endorsed then the special endorsee only can claim.
Negotiability arises by statute or by custom. The custom, in most cases, need not have existed for time immemorial, a recent use suffices so long as it is the general custom of the market.
But it is essential that the instrument must be on the face of it transferable without the necessity for registration or notice.
To conclude, eligibility for the exception from the Nemo Dat Rule requires negotiability not transferability, otherwise questionable.