What Are Negotiable Instruments?

Have you ever wondered what law applies when you write a check or purchase a certificate of deposit (CD) from a bank? It involves state law and the Uniform Commercial Code.

The Uniform Commercial Code

Checks and certificates of deposit are types of negotiable instruments. Articles 3 and 4 of the Uniform Commercial Code (UCC) have been enacted into law by every state and provides the rules for negotiable instruments. The UCC is not a federal law; it is a set of proposed uniform laws that states adopt for consistency across jurisdictions.

Types of Negotiable Instruments

Negotiable instruments are written documents that promise to pay an exact amount of money. Notes and drafts are two types of common negotiable instruments. A draft is a written order for payment and includes items such as personal, business, and cashier checks. A note is a promise of payment such as a certificate of deposit or promissory note.

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

• The promise or order to pay is unconditional.
• It is for a certain sum of money.
• Payment is made on demand or at a certain time.
• Nothing else is required of the parties other than the transfer of money.

There are several types of common financial documents that are not negotiable instruments and, therefore, not subject to the same laws and regulations. For example, physical paper and coin money, fund transfers, and investment securities are not negotiable instruments. Different parts of the U.C.C. or different laws govern the use of these instruments.

The Importance of Negotiable Instruments

Negotiable instruments are critical to our economy because they allow you to do business and to be certain you’ll receive money for services or goods without actually transferring any cash. For example, a 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 company bill with a check instead of mailing cash.

Without the laws in place that protect both the payor and payee of negotiable instruments, our economy would not be able to function the way that it currently does.

How to Enforce a Negotiable Instrument

Given the importance of negotiable instruments, all parties should understand how to enforce a negotiable instrument and make sure your rights are protected. Article 3, Part 3 of the Uniform Commercial Code explains the law regarding the enforceability of negotiable instruments and Article 3 part 4 explains the liability of the parties.

Anyone with an interest in the negotiable instrument, such as a bank, can enforce its payment when payment becomes due. If you do not honor the responsibilities of the negotiable instrument, you may have breached the agreement and may be liable for damages the other party incurs.

Negotiable instruments are easy to execute and are commonly used by both consumers and businesses in the United States. You may not think of the legal implications every time you sign a check. However, you should be aware that the Uniform Commercial Code applies each time you sign a check and that certain legal obligations and rights apply.