Drawee

A drawee is a financial and legal term referring to the party that is directed to pay a specified sum of money in a negotiable instrument, such as a check, draft, or bill of exchange. The drawee is typically a bank or financial institution that holds the funds of the drawer (the party who writes the check or draft).

Key Concepts

Parties Involved in a Negotiable Instrument

1. Drawer: The party who creates and signs the negotiable instrument, ordering the drawee to pay a specified amount.
2. Drawee: The party directed to make the payment. In the case of a check, this is typically the bank where the drawer has an account.
3. Payee: The party designated to receive the payment.

The Role of the Drawee

The drawee’s primary responsibility is to honor the payment request made by the drawer, provided that:

• The drawer has sufficient funds in the account
• The instrument is properly executed and presented
• There are no legal restrictions preventing payment

When a check is presented to the drawee bank, the bank verifies the authenticity of the instrument and the availability of funds before processing the payment.

Types of Instruments Involving Drawees

Checks

A check is the most common negotiable instrument involving a drawee. The drawee is the bank on which the check is drawn. When the payee deposits or cashes the check, their bank presents it to the drawee bank for payment.

Bills of Exchange

In international trade, a bill of exchange is commonly used. The drawee in this context may be a bank or the buyer of goods, depending on the terms of the transaction.

Bank Drafts

A bank draft is a payment instrument where the bank itself acts as both the drawer and the guarantor. The drawee is typically another bank or branch of the same bank.

Legal Framework

Uniform Commercial Code (UCC)

In the United States, the rights and obligations of drawees are governed by Article 3 of the Uniform Commercial Code (UCC), which covers negotiable instruments.

Bills of Exchange Act

In the United Kingdom and Commonwealth countries, similar principles are codified in the Bills of Exchange Act 1882, which defines the relationship between drawers, drawees, and payees.

Drawee’s Liability

The drawee is not automatically liable on a negotiable instrument until they accept it. Acceptance occurs when the drawee signs the instrument, indicating agreement to pay the specified amount. Once accepted:

• The drawee becomes the acceptor
• The acceptor is primarily liable for payment
• The acceptor must pay the instrument according to its terms at the time of acceptance

Dishonor by Drawee

If the drawee refuses to pay or accept the instrument, it is said to be dishonored. Common reasons for dishonor include:

• Insufficient funds in the drawer’s account
• Account closed or frozen
• Signature irregularities
• Stop payment orders
• Expired or stale-dated instruments

When an instrument is dishonored, the holder may pursue legal remedies against the drawer and any endorsers.

Practical Applications

Banking Operations

Banks serving as drawees process millions of checks and drafts daily through automated clearing systems such as:

• ACH (Automated Clearing House) in the United States
• BACS in the United Kingdom
• SEPA in the European Union

Trade Finance

In international trade, drawees play a crucial role in documentary collections and letters of credit, where banks act as intermediaries to ensure secure payment between importers and exporters.

Conclusion

The drawee is a fundamental concept in commercial and banking law, representing the party responsible for making payment on negotiable instruments. Understanding the role and responsibilities of drawees is essential for anyone involved in banking, trade finance, or commercial transactions.