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Simple English definitions for legal terms
Negotiable instruments
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A quick definition of Negotiable instruments:
Negotiable instruments are written promises or orders to pay a fixed amount of money. They are mainly used in business transactions to finance the movement of goods and to secure and distribute loans. There are two types of negotiable instruments: drafts, which order a payment to be made, and notes, which promise that a payment will be made. To be considered negotiable, an instrument must meet certain requirements. If an instrument is negotiable, a good faith purchaser who does not have any knowledge of defects or claims can take title to the instrument free of any defects or claims.
A more thorough explanation:
Negotiable instruments are written promises or orders to pay a fixed amount of money. They are mainly governed by state statutory law, with every state adopting Article 3 of the Uniform Commercial Code (UCC) as the law governing negotiable instruments.
The UCC defines two categories of negotiable instruments: drafts and notes. A draft is an instrument that orders a payment to be made, such as a check. A note is an instrument that promises that a payment will be made, such as a certificate of deposit (CD). These instruments are commonly used in business transactions to finance the movement of goods and to secure and distribute loans.
To be considered negotiable, an instrument must meet the requirements stated in Article 3. Negotiable instruments do not include money, payment orders governed by article 4A (fund transfers), or securities governed by Article 8 (investment securities).
The rule of derivative title, which is applicable in most areas of the law, does not allow a property owner to transfer rights in a piece of property greater than his own. However, if an instrument is negotiable, this rule is suspended. A good faith purchaser, who does not have any knowledge of a defect in the title or claims against it, takes title to the instrument free of any defects or claims.
For example, if a person sells a car to another person, the buyer only gets the rights to the car that the seller had. However, if a person sells a negotiable instrument to another person, the buyer gets all the rights to the instrument, even if the seller did not have full rights to it.
Checks are negotiable instruments but are mainly covered by Article 4 of the UCC. Secured transactions may contain negotiable instruments but are predominantly covered by Article 9 of the UCC. If there is a conflict between the Articles of the UCC, both Article 4 and 9 govern over Article 3.
Overall, negotiable instruments are important in business transactions and are governed by specific laws to ensure their validity and enforceability.