UCC Article 3

Negotiable instruments are governed mainly by state statutory law. Every state has adopted Article 3 of the Uniform Commercial Code, with some modifications, as the law governing negotiable instruments. The code defines a negotiable instrument as an unconditioned writing that promises or orders the payment of a fixed amount of money.

Drafts and notes are the two categories of instruments. A draft is an instrument that orders a payment to be made (e.g., a check). A note is an instrument that promises a payment will be made (e.g., a certificate of deposit). Drafts and notes 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 or her own. 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. In relation to the suspension of the rule of derivative title, Article 3 provides for warranties to protect the parties in transactions involving negotiable instruments.

Checks are negotiable instruments but are covered mainly by Article 4. Secured transactions may contain negotiable instruments but are predominantly covered by Article 9. If there is a conflict between the articles, Articles 4 and 9 govern over Article 3.

Last updated: Sept. 29, 2008

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