What Is Sum Certain?
A sum certain describes the predetermined settlement price for a contract or negotiable instrument. It refers to a fixed or specific amount of money, without any room for ambiguity.
A negotiable instrument cannot be negotiated unless it stipulates a sum certain. For example, if a borrower enters into a mortgage contract with a lender for $400,000, and that amount is clearly stated in the mortgage note, then that figure is the sum certain. Sum certain is also known as "sum payable."
- Sum certain refers to a contract or other agreement where the value or amount due is specific and known in advance.
- Having a sum certain removes ambiguity or uncertainty from the value of a contract or security.
- Many financial instruments are sum certain, making them exchangeable and transferrable (negotiable) from one party to another.
Understanding Sum Certain
Sum certain is a legal phrase referring to a specific amount (usually an amount of money) that is directly stated in a contract or negotiable instrument (such as a mortgage or promissory note) at the time the document is written, and which is not open to interpretation or misinterpretation. Sum certain is thus used for all sorts of contracts including financial instruments, but also employment agreements, contracts for purchase, and contracts for lease.
A contract between two parties that spells out a sum certain eliminates any room for misunderstanding or misinterpretation in terms of what amount is owed or due. A sum certain does not require future calculation or the awaiting of future happenings.
Negotiable Securities and Sum Certain
Because a sum certain value is known in advance, actors can better hedge or insure against the stated value than if the amount were open to flexibility, or one which varies based on some contingency (for example the varying price of a call option that moves with its underlying security).
A negotiable instrument is a signed document that promises a sum certain amount of payment to a specified person or the assignee. In other words, it is a formalized type of IOU: A transferable, signed document that promises to pay the bearer a sum of money at a future date or on-demand. The payee, who is the person receiving the payment, must be named or otherwise indicated on the instrument.
Because they are transferable and assignable, many negotiable instruments may trade on a secondary market.
Example of Sum Certain
Take for example a contract that stipulates, "Alice will pay Bob $8,000 for painting her house, including all costs." The amount owed to Bob is a sum certain. Compare this with, "Alice will pay Bob for his time (at the rate of $60 an hour) and costs of materials for the painting of Alice's house." The amount owed to Bob is not specifically stated.
A contract that specifies a sum certain of $8,000 for work carried out is thus clearer than an open-ended contract that specifies payment at a rate of $50 per hour, subject to a maximum of 200 hours. An employee's salary, if spelled out in a contract, would be a sum certain whereas their performance-based bonus would not be.