Online Encyclopedia
Legal tender
Legal Tender is payment that cannot be refused in settlement of a debt.
Legal tender is a concept that is frequently misunderstood: this is often a result of differing legal definitions in different jurisdictions. Cheques, credit cards, debit cards and similar non-currency methods of payment are not generally defined as legal tender. Some jurisdictions may forbid by law, or otherwise restrict, payment other than by legal tender (for example, by outlawing the use of foreign coins and banknotes, or by requiring a licence to perform financial transactions in a foreign currency).
As legal tender can be refused until a person is in debt, vending machines and transport staff do not have to accept the largest denomination of banknote for a single bus fare or bar of chocolate, and even shopkeepers can reject large banknotes. However, restaurants that do not collect money until after a meal is served would have to accept any legal tender, though they would not be obliged to provide change – the restaurant is not in debt, it has been given a gift.
The right of a trader to refuse to do business with any person (short of blatent discrimination on race or other grounds) means a purchaser cannot demand to make a purchase, and so declaring a legal tender other than for debts would be redundant.
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Legal tender in the United Kingdom
In the United Kingdom, only coins valued 1 pound Sterling and 2 pounds Sterling are legal tender in unlimited amounts throughout the territory of the United Kingdom. The United Kingdom legislation that introduced the 1 pound coin left no United Kingdom-wide legal tender banknote.
Currently, 20 pence pieces and 50 pence pieces are legal tender in amounts up to 10 pounds; 5 pence pieces and 10 pence pieces are legal tender in amounts up to 5 pounds; and 1 penny pieces and 2 pence pieces are legal tender in amounts up to 20 pence.
Coins and banknotes do not need to be 'legal tender' in order to be used as money to buy and perform other transactions for which money is intended. For example, British banknotes issued by various institutions circulate in the United Kingdom without being legal tender in all the jurisdictions of the United Kingdom.
History
In the 19th century, gold coins were legal tender to any amount, silver coins were not legal tender for sums over 2 pounds, nor bronze for sums over 1 shilling.
This provision was retained in revised form at the introduction of decimal currency, and the Coinage Act 1971 laid down that coins denominated above 10 pence or became legal tender for payment not exceeding 10 pounds, coins denominated not more than 10 pence became legal tender for payment not exceeding 5 pounds, and bronze coins became legal tender for payment not exceeding 20 pence.
Legal tender in England and Wales
Bank of England notes are the only banknotes that are legal tender in England and Wales. United Kingdom coinage is legal tender, but not in unlimited amounts for coins below £1.
Scottish and Northern Ireland banknotes, and Jersey, Guernsey and Manx coinage and banknotes are not legal tender in England and Wales. However, they are not illegal under English law and creditors and traders may accept them if they so choose.
Legal tender in Scotland
A less restrictive definition of legal tender exists in Scotland. Scottish banks retain their historic right to issue their own banknotes, but no banknotes are legal tender in Scotland (not even Scottish notes).
Scottish case law establishes that a creditor cannot refuse any reasonable offer to settle a debt - thus, in Scotland an offer to pay a debt in any form of sterling, or even foreign currency, cannot unreasonably be refused merely on the technicality of settlement not being offered in legal tender.
Legal tender in the United States
As laid down in the United States Coinage Act of 1965, all coins and currencies of the United States, regardless of when coined or issued, shall be legal-tender for all debts, public and private, public charges, taxes, duties and dues.
However, US federal law does not restrict private businesses, persons or organisations in what methods of payment they choose to accept or refuse. Businesses are therefore free to insist on payment by credit card, for example, or to refuse larger denomination banknotes. Even further though, legal tender laws do not preclude businesses from choosing to reject U.S. dollars for payment altogether. In this regard legal tender laws do not pertain to voluntary transactions.
Legal tender in Canada
Only Canadian dollar banknotes issued by the Bank of Canada are legal tender in Canada. However, commercial transactions may legally be settled in any manner agreed by the parties involved.
A significant amount of business in Canada is transacted in United States dollars, despite United States currency not being legal tender.
Legal tender of Canadian coinage is governed by the Currency Act which sets out limits of:
- 40 dollars if the denomination is 2 dollars or greater but does not exceed 10 dollars;
- 25 dollars if the denomination is 1 dollar;
- 10 dollars if the denomination is 10 cents or greater but less than 1 dollar;
- 5 dollars if the denomination is 5 cents;
- 25 cents if the denomination is 1 cent.
Legal tender in the eurozone
Euro coins and banknotes became legal tender on January 1, 2002. Although coins have different national marks for each State, all coins and all banknotes are legal tender throughout the eurozone. Therefore, it is possible to find Irish euro coins in Greece and Finnish euro coins in Portugal, for instance.
Legal tender in the Republic of Ireland
According to the Economic and Monetary Union Act, 1998 of the Republic of Ireland which replaced the legal tender provisions that had been re-enacted in Irish legislation from previous British enactments, No person, other than the Central Bank of Ireland and such persons as may be designated by the Minister by order, shall be obliged to accept more than 50 coins denominated in euro or in cent in any single transaction.
History
The Decimal Currency Act 1970 governed legal tender prior to the adoption of the euro and laid down the analogous provisions as in United Kingdom legislation (all inherited from previous British law), namely: coins denominated above 10 pence or became legal tender for payment not exceeding 10 pounds, coins denominated not more than 10 pence became legal tender for payment not exceeding 5 pounds, and bronze coins became legal tender for payment not exceeding 20 pence.
Demonetisation
Coins and banknotes may cease to be legal tender if new notes of the same currency substitute them or if a new currency is introduced replacing the former one. Examples of this are:
- The United Kingdom, adopting decimal currency in place of pounds, shillings, and pence in 1971.
- The successor states of the Soviet Union replacing the Soviet ruble in the 1990s.
Individual coins or banknotes may be demonetised and cease to be legal tender, for example, the pre-decimal United Kingdom farthing or the Bank of England 1 pound note.
In the case of the euro, coins and banknotes of former national currencies were considered as legal tender from January 1, 1999, until February 28, 2002 (in some cases), even if their corresponding currencies had ceased to exist. Legally, those coins and banknotes were considered non-decimal sub-divisions of euro.
Withdrawal from circulation
Banknotes and coins may be withdrawn from circulation, but remain legal tender. United States banknotes issued at whatever date remain legal tender even after they are withdrawn from circulation. Canadian 1 dollar bills remain legal tender even though the banknote has been withdrawn and replaced by a coin. However, Bank of England notes that are withdrawn from circulation generally cease to be legal tender although they remain redeemable for current currency at the Bank of England itself.
Miscellaneous
Sometimes currency issues such as commemorative coins or transfer bills may be issued that are not intended for public circulation but are nonetheless legal tender. An example of such currency is Maundy money.