Drawee

Drawee refers to a party, whether a person or organization, on whom a negotiable instrument such as a cheque, bill of exchange, or draft is drawn. Such an individual is directed or ordered by the drawer to pay the specified amount to the payee (person who presents that instrument).

The primary objective of such a party is to initiate the payment in a financial transaction from the drawer or payer to the holder or payee in exchange for modest fees. They are responsible for verifying whether the presented instrument is authentic and follows the financial and legal guidelines for initiating the payment.

A drawee is a party (a person or firm) that accepts the direction of the drawer to honor the payment instrument when presented by the payee. There are basically three parties involved in any financial transaction facilitated through the exchange of negotiable instruments like cheques, bills of exchange, drafts, letters of credit, etc., including a drawee, drawer, and payee. A drawer is someone who is liable to pay a certain sum to the creditor and writes a negotiable instrument for the same. A payee is the individual or organization that is the beneficiary of that instrument, i.e., the party who presents that payment instrument to the drawee for consideration. Thus, a drawee acts as an intermediary offering cheque-cashing, money order, or wire transfer services to its clients, such as a bank. However, it can be an independent organization or other financial institution. 

Primarily, a drawer holds an account with the respective bank or other such intermediary to initiate the financial transactions. When a payee presents a negotiable instrument to the drawee for receipt, the drawee verifies the instrument for any material errors or fraud, authenticates the drawer's signature, and also checks whether the drawer has the required account balance. If any of these financial or legal conditions are not met, then the drawee can reject the payment request. Also, if the drawer has placed a stop payment order for the respective instrument, then the drawee has the right to dishonor the instrument. At the same time, they need to inform the drawer of the related issue. If everything is correct, then the drawee initiates or processes the payment to the payee.

A drawee is a party that facilitates the encashing of a payment instrument by the payee. They are usually banks or financial institutions which play the following roles in such transactions:

1. They serve as an intermediary between the payer and the payee.
2. Such a party accepts directions from the drawer or payer regarding the disbursement of the mentioned amount.
3. They are also obligated to examine the presented payment instrument with due diligence, I.e., crosschecking it for authenticity, including its proper endorsement and verification of the drawer's signature.
4. Moreover, they need to ensure that the drawer has sufficient funds in their account before processing the payment.
5. They are responsible for honoring the cheque, draft, or bill of exchange presented by the payee or holder and making the respective payment (as stated on the instrument) if the instrument fulfills the stated requirements.
6. They have the right to reject the payment request against the instrument or even dishonor the instrument in case of any material discrepancies, drawer releases, a stop-payment order, or non-fulfillment of the specified conditions.
7. A bank needs to contact and communicate any issues regarding the payment to the drawer to avoid disputes and maintain cordial customer relationships.
8. A drawee should act in good faith and execute their responsibilities being confined within the legal framework.

Let's understand the concept with the help of some hypothetical and real-world examples.

Example #1

Suppose Mr. Freddy writes a cheque worth $1200 as monthly rent in favor of Mrs. Mavis, his landlady. Thus, Mr. Freddy, who is a drawer, directs his bank to pay $1200 to the payee, Mrs. Mavis, when she presents the cheque at the bank for encashing it. Now, say Mr. Freddy holds the account in ABC Bank; therefore, this bank becomes a "drawee" bank in this transaction.

Example #2

Suppose Mr. Andy works at ABC Pvt. Ltd. The company holds a business account, and Mr. Andy holds a salary account at XYZ Bank. On the 2nd of every month, the company issues a salary check of $6000 to Mr. Andy, who presents it and encashes it on the same day. Thus, in this case, the drawee of the cheque is the XYZ bank. Now, XYZ bank manager discovered that the signature on the check, which was issued by the manager of ABC Pvt. Ltd., did not match that of the records. Then, in such a situation, she can dishonor this negotiable instrument and inform the company's manager of the same.

Drawee, drawer, and payee are the prominent parties to any financial transaction that involves a negotiable instrument. However, they play different roles in such transactions, let us see how: