LEGAL GUIDE
Written by attorney Steven A. Harms | Apr 13, 2011

What is a "Negotiable Instrument" that I hear so much about?

The UCC defines a negotiable instrument as an unconditional writing that promises or orders the payment of a fixed amount of money, including all checks, drafts, promissory notes and certificates of deposit. They are supposed to be 'trust worthy" and therefore can be negotiated, assigned and otherwise used for payment of the goods and services we use in business.

There are two types of "three party instruments" (drafts or checks):

Draft - is a three party instrument. It is a written order from the drawer directing the drawee to pay a sum certain in money to the order of a payee or to bearer.

Different types of drafts include the following:

Sight draft - payable on delivery and payment

Time draft - payable at a certain time

Trade Acceptance - this is a draft drawn by the seller-drawer on the buyer-drawee payable to the seller at some future time in the amount of the purchase price of the goods (seller transfers the draft to the buyer for signed acceptance and seller's goods are exchanged for the signed trade acceptance).

Note: this is a strange 3rd party when you consider the 3rd party IS the seller/drawer, Why isn't it a note? Because it technically has three parties, and is an order, not promise to pay to the order.

Banker's Acceptance - This is like a trade acceptance, only N.I. is drawn on buyer's bank instead of buyer personally.

Check - is a three party instrument. It is a special type of draft drawn on a bank and payable on demand. Special rule change with checks. As of 1997, checks need not be payable "to the order of."

There are two types of "two party instruments" (notes and C.D.):

Note - is a two party instrument (a promissory note). It is a written promise by the "maker" to pay a sum certain (in money) to the order of the "payee" or to "bearer." It can be payable on demand or at a certain time. If no time is stated or indicated, it is payable on demand. "IOU $200" is not a promise, therefore is not a note

Certificate of Deposit - is a two party instrument. It is a written acknowledgement by the bank of a receipt of money with an engagement to repay the sum.

All negotiable instruments are governed by state law, notably, the Uniform Commercial Code, which is the state law of sales,and leases adopted by every state in the country.

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