What is Legal Tender?

You often hear of someone declaring their money legal tender.

A bus driver going “Sorry, can’t take twenties” to which the person responds “but it’s legal tender!”

A person trying to pay in ASDA in England with a Scottish £20 note, the shopkeeper going “what’s this then?” “That’s legal tender that is, you gotta take it, it’s Sterling and everything”.

But Legal Tender has a very very specific meaning.

Firstly: None of the situations above were concerned in any way with legal tender. The following situation however is:

Someone at the end of a cab ride, trying to pay a £15 fare with a £20 note.

So, what’s the difference between that situation, and the bus fare situation presented above?

Debt. In the first three situations, you were paying for a service or goods in advance of receiving the service or goods. In the cab ride example however, you were paying for the service after having received it. In essence you were attempting to discharge the debt you had incurred.

This brings us to our first conclusion:

Legal Tender applies only when attempting to discharge a debt.

Now, To refine this a bit, Credit Cards are not legal tender. Vouchers are not legal tender. A Bank Transfer is not legal tender. If it was then cabs would have to accept a bank transfer. They (usually) don’t. In fact, Legal Tender applies only to cash – notes and coins.

Picking apart the term itself: To tender is “to offer or present formally”. A legal tender is a legal offer. Thus, Legal Tender is strictly:

An offer (of cash) to discharge a debt that cannot be refused.

Strictly this applies onto to paying money to a court to discharge a debt – it prevents you being sued for non-payment, but the end result is that effectively cash becomes a required way of accepting payment for a debt. There is an important caveat: There is no obligation for change under a Legal Tender situation, so you’d better pay with exact money!

Now, there’s a few restrictions here. So don’t try and pay off a £100 restaurant meal with 5 pence pieces. Because that offer wouldn’t actually be legal tender.

Why? Because there are restrictions on how much each denomination of currency is valid legal tender for.
50p – up to £10
20p – up to £10
10p – up to £5
5p – up to £5
2p – up to 20p
1p – up to 20p

Coins and notes higher than 50p are valid legal tender for any amount.

So far everything I’ve said has been true… For England.

When you consider Scotland (in particular) things get funky.

Firstly no Scottish Notes are legal tender in England. Only notes from the Bank of England are. Similarly no English notes are legal tender in Scotland – although this is for a different reason – Scotland has no concept of Legal Tender! Instead the creditor must accept any reasonable offer to discharge the debt, so if, for some reason, meters of bubble-wrap became a standard way to pay for things, then it could be construed as a reasonable offer, and thus the creditor would be obliged to accept it to pay off the debt!

There’s one aside I’m going to make here – technically, when I talk about “Scottish Notes” I’m conflating several different notes, because in Scotland  seven retail banks can print notes, that are backed by Bank of England funds. The system for this is that the Bank of England essentially says to the banks “You can print this much money”, with the amount carefully chosen to keep the values between Scottish notes and BoE notes on par.

And now, as a final aside, to that aside. I said that the Scottish Notes are “backed” by the Bank of England. This probably conjured up images of a huge gold vault somewhere underneath central London. Well….. I’m sorry to burst that bubble, but the BoE only has a fraction of gold to “back” the amount of money in circulation. Technically there is no currency on Earth that is backed by anything – all the money on Earth is “backed” by is the value that other people believe it has.  But the loopy idea of fiat money – money without any physical backing to its value, is something for another time. And that, reader, is a nice, comforting note to end the article on…. right?

This entry was posted in Law.

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