Legal Definitions - documentary draft

A documentary draft is a type of payment order, similar to a check, but with a crucial difference: it is accompanied by other documents, typically related to a commercial transaction. These accompanying documents are often essential for the recipient to gain control over goods or their legal title. The purpose of a documentary draft is to ensure that payment is made or accepted before the buyer can take possession of the goods or the documents representing ownership.

Here are some examples illustrating how a documentary draft works:

• International Trade of Goods: An electronics manufacturer in South Korea ships a container of smartphones to a distributor in the United States. To ensure payment, the manufacturer's bank sends a documentary draft to the distributor's bank. This draft is accompanied by the bill of lading, which is the document of title for the shipped goods. The distributor's bank will only release the bill of lading to the distributor once the distributor either pays the draft or formally accepts it (promising to pay by a certain date). This mechanism guarantees that the South Korean manufacturer receives payment or a firm commitment to pay before the U.S. distributor can claim the smartphones from the shipping company.

• Sale of Heavy Machinery: A construction equipment company in Germany sells a specialized excavator to a mining operation in Australia. The German company ships the excavator and sends a documentary draft through its bank to the Australian company's bank. Attached to this draft is the certificate of origin and other shipping documents necessary for customs clearance and registration of the machinery in Australia. The Australian mining operation must pay the draft to their bank to receive these crucial documents, allowing them to take legal possession and use of the excavator.

• Agricultural Commodity Transaction: A large grain cooperative sells a significant volume of soybeans to a food processing plant. The soybeans are stored in a third-party warehouse, and the cooperative holds a warehouse receipt, which is a document of title for the stored goods. The cooperative draws a documentary draft on the food processing plant, attaching the warehouse receipt. The food processing plant must pay the draft to their bank to obtain the warehouse receipt, which they then present to the warehouse to claim the soybeans. This ensures the cooperative is paid before the plant can access the commodity.