A drawee is the party directed by a depositor, or drawer, via a check or bill of exchange to pay a certain sum of money to the person presenting the check. The drawee is commonly a financial institution such as a bank.
Role and Responsibilities of the Drawee
Banking Sector
In banking, the drawee is typically the bank on which a check is drawn. The bank holds the depositor’s funds and is obligated to release them to the payee when the check or bill of exchange is presented for payment.
Example:
If John writes a check to Mary, John’s bank is the drawee, John is the drawer, and Mary is the payee. The drawee (bank) must pay the specified amount to the payee (Mary) upon demand.
Legal Implications
Legally, the drawee’s primary obligation is to honor the financial instrument when it is presented, assuming sufficient funds are available in the drawer’s account. Failure to do so without valid reason can lead to legal repercussions, including claims of non-payment.
Types of Financial Instruments Involving a Drawee
Checks
A check is a written, dated, and signed instrument that directs a bank to pay a specific sum of money to the bearer. The drawee is customarily the bank.
Bills of Exchange
A bill of exchange is a written order used in international trade that binds one party to pay a fixed sum of money to another party on demand or at a predetermined date. Here, the drawee could be a bank or any other financial institution.
Special Considerations
Acceptance of Drafts
When a drawee accepts a bill of exchange by signing it, they are legally committing themselves to pay upon its maturity. This acceptance converts the bill into an unconditional order to pay.
Dishonor of Financial Instruments
If a drawee refuses to honor the financial instrument due to insufficient funds or any other valid reason, the instrument is said to be dishonored. This can lead to legal actions from the payee or the drawer.
Historical Context
The concept of a drawee dates back to the use of bills of exchange in medieval European trade. These instruments facilitated commerce by assuring payment and alleviating the risks associated with transporting funds.
Applicability in Modern Finance
The role of the drawee remains integral in modern financial transactions, particularly with the prevalence of checks and bills of exchange as standard forms of payment and credit.
Comparisons and Related Terms
Drawer
The person or entity that writes and signs a check or bill of exchange, directing the drawee to pay a certain amount.
Payee
The recipient of the funds specified in a check or bill of exchange.
Endorser
A person who signs the back of a financial instrument, thus endorsing it to another party.
FAQs
What if the drawee refuses payment?
Are all drawees banks?
References
- “The Law of Banking and Financial Institutions,” Richard Scott Carnell, Jonathan R. Macey, Geoffrey P. Miller.
- “Banking Regulation: Its Purposes, Implementation, and Effects,” Kenneth Spong.
Summary
The drawee plays a crucial role in both legal and banking arenas, operating as the entity responsible for transferring funds as directed by the drawer. Whether in the context of a simple check or a complex bill of exchange, understanding the drawee’s obligations and implications is fundamental to grasping modern financial operations.
