UCC 3-104 (Negotiable Instrument) Explained

Picture of Yasmin K. Brinkley, MBA, LLM

Yasmin K. Brinkley, MBA, LLM

What Constitutes A Negotiable Instrument Under UCC Article 3-104?

A negotiable instrument under UCC Article 3-104 is an unconditional promise or order to pay a fixed amount of money, with or without interest or other charges, that meets specific criteria (see UCC 3-104, a 1-3).

It must be payable to bearer or to order at the time it is issued or first comes into possession of a holder, be payable on demand or at a definite time, and not state any other undertaking or instruction beyond the payment of money.

Additionally, it may contain certain powers or waivers related to collateral or laws benefiting the obligor.

This definition encompasses checks, notes, drafts, cashier’s checks, teller’s checks, traveler’s checks, and certificates of deposit.

How Does UCC 3-104 Differentiate Between Instruments Payable To Bearer And Those Payable To Order?

UCC Article 3-104 differentiates between instruments payable to bearer and those payable to order based on their transferability (see UCC 3-104, a 3).

An instrument payable to bearer is transferable by delivery and does not require endorsement, while an instrument payable to order requires endorsement for transfer.

Additionally, an instrument payable to order specifies a particular person or entity to whom payment is to be made, whereas an instrument payable to bearer is payable to anyone who possesses it.

UCC Article 3-104 (Negotiable Instrument) - UCC 3-104 - non-negotiable instruments - what is a negotiable instruments under the uniform commercial code
UCC 3-104 (Negotiable Instrument)

What Are The Conditions That Make An Instrument Payable On Demand Or At A Definite Time Under UCC Article 3-104?

Under UCC Article 3-104, an instrument is payable on demand if it is payable immediately upon demand by the holder (see UCC 3-104, a 2 and 3).

An instrument is payable at a definite time if it specifies a particular date or is payable at a fixed period after sight or acceptance.

Additionally, an instrument can be payable at a definite time if it is payable upon a specified event, such as a stated number of days after the occurrence of a particular event.

Can A Negotiable Instrument Include Instructions Or Undertakings Other Than The Payment Of Money?

Under UCC Article 3-104, a negotiable instrument cannot include instructions or undertakings other than the payment of money, except for specific provisions related to collateral, waivers of legal protections for the obligor, or powers granted to the holder regarding collateral or judgment.

These provisions are limited and must not impose additional obligations on the person promising or ordering payment beyond the payment of money.

Therefore, while certain limited powers or waivers related to collateral or laws benefiting the obligor may be included, any other instructions or undertakings beyond the payment of money would render the instrument non-negotiable.

What Does UCC Article 3-104 Say About The Authorization Or Power To Confess Judgment?

UCC Article 3-104 allows negotiable instruments to contain an authorization or power to confess judgment, which means the instrument may grant the holder the authority to confess judgment or realise on or dispose of collateral.

This provision is part of the criteria for a negotiable instrument and is outlined in subsection (a)(3) of UCC Article 3-104.

However, it is important to note that this authorization or power must not impose additional obligations on the person promising or ordering payment beyond the payment of money, as stated in the same subsection.

How Does Subsection (c) Of UCC Article 3-104 Affect The Classification Of Checks As Negotiable Instruments?

Subsection (c) of UCC Article 3-104 impacts the classification of checks as negotiable instruments by providing specific criteria for checks to be considered negotiable instruments.

It states that an order that meets all the requirements of subsection (a), except paragraph (1), and otherwise falls within the definition of “check” in subsection (f), is a negotiable instrument and a check.

This means that as long as a check meets the criteria outlined in subsection (a) and falls within the definition of a check as per subsection (f), it is classified as a negotiable instrument.

Therefore, subsection (c) clarifies the conditions under which checks are considered negotiable instruments.

How Is A “Note” Distinguished From A “Draft”?

Under UCC Article 3-104, a “note” is distinguished from a “draft” based on their nature (see UCC 3-104, b-g)

A note is a promise to pay e.g., a promissory note, while a draft is an order to pay.

Specifically, an instrument is classified as a note if it represents a promise to pay, and it is classified as a draft if it represents an order to pay.

Additionally, if an instrument falls within the definition of both note and draft, the person entitled to enforce the instrument may treat it as either. 

What Specific Criteria Define A Check In The Context Of UCC Article 3-104?

In the context of UCC Article 3-104, a check is defined based on specific criteria.

According to subsection (f), a check is (i) a draft, other than a documentary draft, payable on demand and drawn on a bank, or (ii) a cashier’s check or teller’s check.

Additionally, it is noted that an instrument may be a check even if it is described on its face by another term, such as money order.

Therefore, the criteria for defining a check under UCC Article 3-104 include its nature as a payable draft drawn on a bank, as well as specific types of checks such as cashier’s checks and teller’s checks (see UCC 3-104, h-i).

How Are Cashier’s Checks And Teller’s Checks Defined And Differentiated?

Cashier’s checks and teller’s checks are defined and differentiated within the context of UCC Article 3-104.

A cashier’s check is a draft where the drawer and drawee are the same bank or branches of the same bank, while a “teller’s check” is a draft drawn by a bank on another bank or payable at or through a bank.

Both types of checks are defined as negotiable instruments under UCC Article 3-104 and are differentiated based on the specific criteria related to the drawing and payment processes involving the banks.

What Constitutes A Traveler’s Check Under UCC Article 3-104?

Under UCC Article 3-104, a traveler’s check is defined as an instrument that is (i) payable on demand, (ii) drawn on or payable at or through a bank, (iii) designated by the term “traveler’s check” or by a substantially similar term, and (iv) requires, as a condition to payment, a countersignature by a person whose specimen signature appears on the instrument (see UCC 3-104, i).

These specific criteria distinguish traveler’s checks from other types of negotiable instruments.

How Is A Certificate Of Deposit Defined And Treated As A Negotiable Instrument?

A certificate of deposit under UCC Article 3-104 is treated as a negotiable instrument, essentially a written promise by a bank to return a depositor’s money with interest after a specified term.

It embodies a bank’s commitment to pay the holder a certain amount at a future date or upon demand, making it a secure, interest-bearing investment.

Its negotiability allows it to be transferred, enabling the holder to sell or transfer the right to receive the funds, underpinning its utility and flexibility as a financial instrument within the broader context of commercial transactions.

What Legal Protections Are Offered To Holders Of Negotiable Instruments Under UCC Article 3-104?

Under UCC Article 3-104, holders of negotiable instruments enjoy legal protections that streamline and safeguard financial transactions.

These protections include the ability to enforce payment in accordance with the terms of the instrument, assurance against unauthorised alterations, and defences against certain claims and demands by third parties.

This framework ensures that the rights and obligations associated with negotiable instruments are clear, providing holders with a reliable method of payment and investment, and reinforcing the instruments’ utility and integrity within the commercial and banking sectors.

What Are The Implications For Instruments That Fail To Meet The Criteria Of UCC Article 3-104?

Instruments failing to meet UCC Article 3-104’s criteria are not considered negotiable, impacting their legal enforceability and transferability.

Such instruments lack the special legal protections accorded to negotiable instruments, making them subject to ordinary contract and property laws.

This can complicate the enforcement of rights against transferees and limit the instrument’s liquidity.

Consequently, parties may face increased risks and challenges in asserting claims, transferring interests, or using the instrument as intended in commercial transactions, emphasising the importance of compliance with UCC criteria for negotiability.


Picture of Yasmin K. Brinkley, MBA, LLM

Yasmin K. Brinkley, MBA, LLM

Yasmin is an expert in Commercial Contracts, Securities Regulation, Corporate Governance, Intellectual Property and Media Law. Yasmin completed her LLB Degree and MBA in Toronto. She is a dual-qualified lawyer in Canada, and England & Wales, and an Adjunct Professor of Business Law. Yasmin helps small businesses and charitable bodies to navigate financial legalities.

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