Business Law

What Are Negotiable Instruments?

Key Takeaways

  • Negotiable instruments are written documents that promise to pay a specific amount of money.
  • Types of negotiable instruments include checks, money orders, and promissory notes.
  • The Uniform Commercial Code (UCC) provides the rules for use of negotiable instruments.

Have you ever wondered what laws apply when you write a check or purchase a certificate of deposit (CD) from a bank? This process involves state law and the Uniform Commercial Code (UCC). Financial transactions under the UCC have many terms of art. One of them is negotiable instruments, which are signed documents promising payment.

Negotiable instrument laws can vary by state. For more information about your legal rights when paying or receiving a negotiable instrument, talk to a local business law attorney.

The Uniform Commercial Code

Cashier’s checks, promissory notes, and CDs are types of negotiable instruments. Every state has adopted Articles 3 and 4 of the Uniform Commercial Code (UCC), which gives the rules for negotiable instruments. The UCC isn’t a federal law. However, states adopt these proposed uniform laws for consistency across jurisdictions.

Types of Negotiable Instruments

Negotiable instruments are written documents that promise to pay a specific amount of money. Notes and drafts are two common types of negotiable instruments. A draft is a written order for payment and includes items such as personal, business, and cashier’s checks. A note is a promise of payment, such as a CD or promissory note. Other types of negotiable instruments include traveler’s checks, bills of exchange, and money orders.

Generally, a written instrument must meet the following conditions to become a negotiable instrument:

  • There is an unconditional promise or order to pay
  • It is for a certain sum of money
  • Payment is on demand or at a certain future date
  • Nothing else is required of the parties other than the transfer of money

Many types of common financial documents aren’t negotiable instruments. These are not subject to the same laws and regulations. For example, physical paper and coin money, fund transfers, and investment securities are non-negotiable instruments. Different parts of the UCC and different laws govern these instruments.

The Importance of Negotiable Instruments

Negotiable instruments are critical to our economy. They allow you to do business with the certainty that you’ll receive a fixed amount of money for services or goods without transferring any cash. For example, your business can mail a check for payment rather than sending a large amount of money. On a smaller scale, you can also pay your electric bill with a check instead of mailing cash.

Negotiable instruments are also fully transferrable. The specified person can transfer the check, and the new assignee will have full legal title to the check.

Without the laws protecting both the payor and payee of negotiable instruments, our economy would not function as it does.

How To Enforce a Negotiable Instrument

Given the importance of negotiable instruments, you should understand how to enforce negotiable instrument laws. Article 3, Part 3 of the UCC explains the law regarding the enforceability of negotiable instruments. Article 3, Part 4 explains the parties’ (transferee and transferor) liability.

Anyone with an interest in a specific negotiable instrument can enforce payment when it’s due. This can be, for example, a bank or other financial institution. If you don’t honor the responsibilities of the negotiable instrument in good faith, you may have breached the agreement, and you can be sued.

How a Business Lawyer Can Help You

While you may not always consider the legal implications, you should be aware that the Uniform Commercial Code applies each time you sign a check. Certain legal obligations and rights also apply.

For more information about your legal rights and obligations for negotiable instruments, talk to a local business lawyer.

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