Exposure to Drafts

Question: Can you shed light on the exposures associated with drafts? I telephoned one of our competitors and asked if they would cash a draft for one of our customers that they were the drawee on and they said that they did not cash drafts. I could not get a reason why from the person I talked to and hoped that you could help.

Answer: My best guess is that your competitor needs to check out the Principles of Operations textbook! It used to be, back in the good old days, 30 or 40 years ago, that if you marked "Draft" on the negotiable instrument you were giving to someone, it bought you an extra day's float. We had to return checks by midnight of the day following receipt, but a draft could still be a timely return if it was sent back by midnight two days after receipt. Many times these were items on insurance accounts, or other claim accounts, on which endorsements had to be approved by the maker before they would "OK" paying the draft.

The coming of the new UCC did away with that, recognizing bulk filing which had become standard of the industry. There are no more "drafts" except in the commercial business world. As far as a negotiable instrument is concerned, a draft is a check. If you check out the definitions at the beginning of the UCC (Go on BankersOnline.com, click on the Launch Pad, pull up UCC) you'll find in Section 3-104(e), Section 3-103(a)(6) the definitions you need. Mary Beth Guard explained them in layman's terms as follows:

A draft is an instrument (negotiable instrument) that is an order. An order is a written instruction to pay money signed by the person giving the instruction. A check is a form of draft. To be a check, it must be 1) payable on demand and 2) drawn on a bank. (Section 3-104(e), Section 3-103(a)(6).)

A cashier's check is a draft with respect to which the drawer and the drawee are the same.

A payee is a person to whom a draft is made payable. It must be an identified person. Otherwise, the check will deemed payable to bearer.

Copyright © 2002 Bankers' Hotline. Originally appeared in Bankers' Hotline, Vol. 12, No. 1, 1/02