Legal Definitions - draft

In a legal and financial context, a draft refers to a written order signed by one party (known as the drawer) instructing another party (the drawee) to pay a specific sum of money to a third party (the payee). This payment can be required either immediately upon presentation (a "sight draft") or at a specified future date (a "time draft"). Drafts are fundamental instruments in commerce and finance, serving as a formal instruction or promise for payment, and are legally binding once accepted or presented.

Here are some examples illustrating the concept of a draft:

• Banker's Draft (or Cashier's Check): Imagine a situation where someone is purchasing a car from a private seller and the seller requires guaranteed funds, not just a personal check that could bounce. The buyer might go to their bank and request a "banker's draft" or "cashier's check." In this scenario, the bank itself acts as both the drawer (issuing the order) and the drawee (the entity obligated to pay). The bank issues a written order directing itself to pay a specific sum to the car seller (the payee). This is a draft because it's a formal, written instruction from one party (the bank) to another (itself) to pay a third party (the seller), with the bank's own funds guaranteeing the payment.

• Trade Acceptance: Consider a manufacturer in one country selling a large shipment of goods to a distributor in another country on credit. To formalize the payment arrangement, the manufacturer (the drawer) might issue a "trade acceptance" – a type of draft – to the distributor (the drawee). This written order instructs the distributor to pay a specific amount for the goods to the manufacturer (the payee) at a future date, perhaps 90 days after the goods are delivered. When the distributor signs and "accepts" this draft, they legally commit to making that payment on the due date. This demonstrates a draft as a tool for managing credit and payment in commercial transactions, where the seller orders the buyer to pay at a future time.

• Sight Draft for Document Release: Suppose an exporter wants to ensure they receive payment for goods before the importer can take possession of them. The exporter (the drawer) ships the goods and sends the crucial shipping documents (like the bill of lading, which allows the importer to claim the goods) to their bank, along with a "sight draft" addressed to the importer (the drawee). This draft orders the importer to pay the specified amount immediately "on sight" (upon presentation of the draft). The importer's bank then presents the draft to the importer. Only once the importer pays the amount specified in the draft will the bank release the shipping documents, allowing the importer to claim the goods. This illustrates a draft as a written order for immediate payment, used as a secure mechanism to control the exchange of goods for money.