Have you ever wondered what law applies when you write a check or purchase a certificate of deposit (CD)? 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 provide the rules for negotiable instruments.
Negotiable Instruments Defined
Negotiable instruments are written documents that promise or order the payment of an exact amount of money. There are two types of negotiable instruments: notes and drafts. A draft is a written order to make a payment and includes things such as personal, business and cashier checks. A note is a promise that payment will be made and includes certificates of deposit and promissory notes.
Generally, in order for a written instrument to be considered a negotiable instrument the promise, or order, to pay must be unconditional, must be for a sum certain, payment must be made on demand or at a time certain, and nothing else may be required of the parties other than the transfer of money.
In order to fully understand what a negotiable instrument is, it is important to recognize common financial documents that are not negotiable instruments and, therefore, not subject to the same laws and regulations as negotiable instruments. For example, physical paper and coin money, fund transfers and investment securities are not negotiable instruments and their use is governed by different parts of the Uniform Commercial Code or different laws.
The Importance of Negotiable Instruments
Negotiable instruments are critical to our economy. They allow people to do business and to be certain that they will receive money for their services or goods without the actual transfer of cash. For example, a business can mail a check to a supplier instead of delivering large amounts of cash. On a smaller scale, the same thing happens when you pay a bill to your electric company with a check rather than mailing cash.
Without the predictable laws in place that protect both the payor and payee of a negotiable instrument, 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, it is important for all parties to understand how to enforce a negotiable instrument and to make sure that their rights are protected. Article 3, Part 3 of the Uniform Commercial Code explains the law regarding enforceability of negotiable instruments and Article 3 part 4 explains the liability of the parties. Generally, anyone with an interest in the negotiable instrument can enforce its payment when payment becomes due. Parties who do not honor their responsibilities with regard to a negotiable instrument may have breached their agreement and may be liable for damages incurred by the other party.
Negotiable instruments are easy to execute and commonly used 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.