U.S. Commercial Law: Negotiable Instruments Quiz

Answer: Money

Section 3-102 of the U.C.C. sets the stage by providing a scope of what Article 3 covers. Negotiable instruments are generally classified into two main categories: notes and drafts. Since the whole point of having negotiable instruments is for them to function as cash substitutes, it makes sense that money is explicitly excluded from the scope of this article. Section 3-102 states that Article 3 is not applicable to money, payment orders, or securities.

In the "general definitions" portion of the U.C.C. (section 1-201), "money" is defined as "a medium of exchange currently authorized or adopted by a domestic or foreign government".

Answer: Drafts

We use negotiable instruments every day, perhaps not thinking about the intricacies of the body of law that governs these common tools. Both notes and drafts work as cash substitutes. If you don't have cash on hand, you can instead make a written promise to pay at a later date (a note). Alternatively, instead of paying someone else with paper money, you may sign a written instrument that instructs or orders another party to pay (a draft, most commonly referred to as a check).

The difference between the two is somewhat subtle, but crucially important to identify in recognizing the rights and obligations associated with both instruments. In summary: a note is a promise and a draft is an order.

Answer: Remitter

As you might have noticed, the U.C.C. is filled with complex terminology that can confuse anyone without legal training (as well as those who study or practice law!). This is especially true because the meaning of some words doesn't completely correspond with the day-to-day meaning of those terms. For example, the terms "alteration", "consideration", "negotiation", and "party" all have very specific meanings that are all defined by the U.C.C.

In Article 3, a "remitter" is someone who asks their bank (by purchasing an instrument, or a check, from them) to issue a certain kind of check payable to another party. This scenario most commonly occurs when a bank customer asks for a special type of check, such as a cashier's check or a teller's check, and the bank issues that order to pay.

Answer: An unconditional promise or order to pay

Once again, it is important to remember that negotiable instruments are meant to be a substitute for cash. If you pay for an item with U.S. dollars, you are giving away that paper money without any attached obligations. Similarly, an Article 3 note (promise) or draft (order) tries to replicate this by requiring that an instrument is "unconditional". The definition in section 3-104 also requires a "fixed amount of money" to be stated in the instrument.

Importantly, a negotiable instrument can never be oral. A different rule would essentially defeat the purpose of these special types of commercial paper (if it was an oral promise or order, how would one transfer it to someone else?) This is not to say that oral agreements are completely unenforceable in U.S. law; they are in certain contexts governed by contract law.

Answer: Yes

Article 3 is meant to govern all negotiable instruments defined therein. Because each state, for the most part, has adopted the U.C.C. as state law, the rules stated in this article cover a great percentage of everyday commercial transactions. However, per section 3-104(d), the maker or drawer of "a promise or order other than a check" may insert a clear statement in the instrument that indicates the intent not to be governed by Article 3. If such "conspicuous statement" is added, the note is non-negotiable.

This may also mean that future transferees may be less likely to value that note or draft.

Answer: Anyone

Section 3-109 succinctly explains that a promise or order is payable to bearer when: (1) it says it is "payable to bearer", (2) it does not name a payee at all, or (3) it uses other specific terms (such as "payable to cash"). This is a very important concept to understand, especially for someone writing checks in their daily lives, as many of us do.

A note or draft that is payable to bearer may be cashed by anyone who possesses the instrument. That means that if you write a check "payable to bearer" and you lose it (subject to certain exceptions elsewhere in Article 3 that explain what happens if an instrument is lost or stolen), anyone may be able to cash it without presenting anything else than the instrument itself.

Answer: False

Even though it may seem intuitive to think of a written document with legal force solely in paper form, there is no requirement that a promise or order governed by Article 3 be in such format. As long as the "written undertaking" or "written instruction" is in a tangible medium, it can qualify as a negotiable instrument. To summarize: a promise or order governed by Article 3 must be in writing, but it may or may not be written on paper.

This definition is incorporated from an earlier section of the U.C.C., section 1-201(43).

Answer: The date of issue

According to section 3-113, the actual date written on the instrument is not relevant to its negotiability. It is permissible for the instrument to either be "antedated or postdated". This same section also clarifies that for an undated note or draft, the date of issue is considered its date. If the instrument is unissued, then the date corresponds to when it "first comes into possession of a holder".

Answer: No

Section 3-118 outlines the different statutes of limitations that apply to various kinds of notes and drafts. Generally, a party has six years to enforce the payment of a note that is payable at a definite time, but only three years for most drafts (including certified checks, teller's checks, and cashier's checks). Section 3-118 has lengthy comments that further explain the complexities of the statute of limitations and how it may vary depending on specific circumstances.

Answer: The words

This is one of those things that many of us may not think about when drafting a check: what happens if there is ambiguity between the numbers and the words written on the instrument? According to section 3-114, aptly named "Contradictory terms of instrument", words have more weight than numbers. Therefore, if a check appeared to say "$180.00" and "one hundred dollars", the latter would prevail and the instrument would be worth $100.00.

Section 3-114 also states that handwritten terms have the highest priority when interpreting ambiguity or contradictory language. Typewritten language has second priority, and printed terms have the lowest weight when compared to the former two methods.