What Is Drawer?
In the context of negotiable instruments, a drawer is the party who creates and signs an order to pay money, such as a check or a bill of exchange. This individual or entity issues the instrument, directing another party, typically a bank (known as the drawee), to pay a specified sum of funds to a third party (the payee). The drawer essentially initiates the financial transaction by creating the payment instruction.
History and Origin
The concept of a drawer originates from the historical development of commercial paper and negotiable instruments. Early forms, like bills of exchange, emerged in medieval trade to facilitate commerce over long distances, reducing the need to transport physical money. Merchants would issue an order to their agent in another city to pay a sum to a third party. As banking evolved, particularly with the rise of goldsmiths in England who held bullion for safekeeping, these orders transformed into what we recognize today as checks. The Federal Reserve System in the United States, established in 1913, later created a formal check-clearing system to enhance the safety and efficiency of payments across the nation.,5 The legal framework governing the drawer and other parties to negotiable instruments is codified in laws such as the Uniform Commercial Code (UCC) in the United States, specifically Article 3, which defines the roles and responsibilities of the parties involved.4
Key Takeaways
- The drawer is the party who signs and issues a negotiable instrument, ordering a drawee to pay a payee.
- For a check, the drawer is the account holder who writes the check.
- The drawer generally has secondary liability for payment if the primary party (the drawee) dishonors the instrument.
- Understanding the drawer's role is fundamental in comprehending the flow of funds within the payment system.
Interpreting the Drawer
The drawer's existence on a negotiable instrument signifies the origin of the payment order. When a drawer issues a check, they are instructing their bank to release a specific amount of money from their bank account. The presence of the drawer's signature authenticates the order. While the primary expectation is that the drawee will honor the instrument, the drawer retains secondary liability. This means if the drawee refuses to pay (e.g., due to insufficient funds), the holder of the instrument can typically seek payment from the drawer, provided proper notice of dishonor is given.
Hypothetical Example
Imagine Sarah needs to pay her landlord, David, for her monthly rent.
- Drawer: Sarah is the drawer. She has a bank account at First National Bank.
- Drawee: First National Bank is the drawee, as it is the bank on which Sarah's check is drawn.
- Payee: David is the payee, the person to whom the payment is to be made.
Sarah writes a check for $1,500, signs it, and hands it to David. By signing the check, Sarah, as the drawer, is ordering First National Bank to pay $1,500 from her account to David. When David deposits the check, the bank processes this instruction, ideally transferring the funds as directed.
Practical Applications
The role of the drawer is central to everyday financial transactions involving paper-based [payment system](https://diversification.com/term/payment system).
- Personal Finance: Individuals act as drawers when they write personal checks to pay bills or transfer funds.
- Business Operations: Businesses frequently issue checks as drawers for vendor payments, payroll, or other operational expenses.
- Banking and Regulation: Banks, as drawees, rely on the drawer's signature and instructions to process payments. Regulations like the Uniform Commercial Code define the legal obligations and rights of the drawer, drawee, and payee. The Federal Reserve facilitates the national [payment system](https://diversification.com/term/payment system), including the clearing and settlement of checks, ensuring the instructions from drawers are efficiently executed.3
Limitations and Criticisms
While the concept of the drawer is fundamental to negotiable instruments, certain limitations and criticisms exist, primarily concerning the risks associated with the issuance and processing of paper instruments. One significant concern is fraud. A drawer's signature can be forged, or the check itself can be altered, leading to unauthorized debits from a bank account. While banks employ various security measures, check fraud remains a persistent threat, with consumers reportedly losing millions of dollars annually to scams involving fake checks.2,1
Furthermore, the process of check clearing, while modernized by initiatives like Check 21, still involves several steps that can introduce delays compared to electronic payment methods. Issues such as insufficient funds in the drawer's account or stop payment orders can complicate transactions and lead to dishonored instruments, creating disputes between the drawer and the payee.
Drawer vs. Drawee
The terms "drawer" and "drawee" are often confused but refer to distinct parties in a negotiable instrument, particularly a check or bill of exchange. The drawer is the party who issues the instrument, providing the order to pay. This is the person or entity who writes the check and signs it. In contrast, the drawee is the party ordered to pay the funds. For a standard check, the drawee is always the bank on which the check is drawn. The drawer instructs the drawee to pay the payee.
FAQs
Q: What is the primary responsibility of a drawer?
A: The primary responsibility of a drawer is to ensure that sufficient funds are available in their bank account for the drawee (their bank) to honor the check or other negotiable instrument when it is presented for payment.
Q: Can a drawer be held liable if a check bounces?
A: Yes, if a check is dishonored due to insufficient funds or a stop payment order, the drawer can be held liable to the payee for the amount of the check, and may also incur fees from their bank.
Q: Is a drawer involved in electronic payments?
A: While the term "drawer" traditionally applies to paper-based negotiable instruments like checks, the underlying concept of initiating a payment order from an account holder (the drawer) to a financial institution (the drawee) to pay a recipient (the payee) is analogous to various electronic payment systems.