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Wednesday, February 12, 2020

Business Law (part 23)

Promissory Notes and Drafts (part B)
 by
 Charles Lamson

Drafts

The drawer draws or executes a draft in favor of the payee, who has the drawer's authority to collect the amount indicated on the instrument. It must be clear that the signature is intended to be that of a drawer; otherwise the signature will be construed to be that of an indorser. A draft is addressed to the drawee, who is the person ordered by the drawer to pay the amount of the instrument. The drawee pays the amount to the payee or some other party to whom the payee has transferred the instrument by indorsement.

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Forms of Draft

Two kinds of drafts exist to meet the different needs of business:

  1. Sight drafts
  2. Time drafts
Sight Drafts. A sight draft is a draft payable at sight or upon presentation by the payee or holder. By it the drawer demands payment at once. Special types of sight drafts include money orders and checks.

Time Drafts. A time draft has the same form as the sight draft except with respect to the date of payment. The drawer orders the drawee to pay the money a certain number of days or months after the date on the instrument or a certain number of days or months after presenting it for acceptance. Acceptance is the drawee's signed agreement to pay a draft, delivered to the holder.

In the case of a time draft, the holder cannot require payment of the paper until it has matured. The holder normally presents the draft to the drawee for acceptance. However, whether or not the draft has been accepted does not affect the time when it matures if it is payable a certain length of time after its date.

A time draft payable a specified number of days after sight must be presented for acceptance. The due date is calculated from the date of the acceptance, not from the date of the draft.

Trade Acceptance

A trade acceptance is a type of draft used in the sale of goods. It is a draft drawn by the seller on the purchaser of goods sold and accepted by such purchaser. The drawer draws a trade acceptance at the time goods are sold. The seller is the drawer, and the purchaser is the drawee. A trade acceptance orders the purchaser to pay the face of the bill to the order of the named payee, who is frequently the sellar. 

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Presentment for Acceptance

All trade acceptances and all time drafts payable a specified time after sight must be presented for acceptance by the payee to the drawee. In case of other kinds of drafts, presentment for acceptance is optional and is made merely to determine the intention of the drawee and to give the paper the additional credit strength of the acceptance. A qualified acceptance destroys the negotiability of the instrument. An acceptance could be qualified by adding additional terms such as "if presented for payment within 24 hours" or "in 10 days from date." The drawee, after accepting the instrument, that is, after agreeing to pay it, becomes the acceptor.

Place. The holder should present the instrument at the drawers place of business. If there is no place of business, it may be presented at the drawers home or wherever the drawee may be found.

Party. A draft must be presented to the drawee or to someone authorized either by law or by contract to accept it. If there are two or more drawees, the draft must be presented to all of them unless one has authority to act for them all.

Form of Acceptance

The usual method of accepting a draft is to write on the face:
Accepted  
Jane Roe.
The drawee's signature alone on the draft is sufficient to constitute a valid acceptance; however, adding the word accepted is advisable to make clear that an acceptance is intended. If an acceptance on a sight draft does not include a date, the holder may supply the date. The drawee may use other words of acceptance, but the words used must indicate an intention to be bound by the terms of the instrument and must be written on the instrument. The instrument or notification of the acceptance must then be delivered to the holder for the purpose of giving rights on the acceptance to the holder. 

If the drawee refuses to accept the draft or to accept it in a proper way, the holder of the draft has no claim against the drawee but can return the draft to the drawer. Any credit given the drawer by the delivery of the draft is thereby canceled. If the draft is a trade acceptance, the refusal of the drawee to accept means that the buyer refuses to go through with the financing terms of the transaction unless some other means of financing or payment is agreed upon, the transaction falls through.


Admissions of the Acceptor

A draft presented to a drawee for acceptance must be either accepted or returned. If the draft is not returned, the drawee is treated as having stolen the paper from the holder. By accepting the instrument, the drawee assumes liability for the payment of the paper. This liability of the acceptor runs from the due date of the paper until the statute of limitations bars the claim.

When the drawee accepts a draft, two admissions concerning the drawer are made:

  1. That the signature of the drawer is genuine
  2. That the drawer has the capacity and the authority to draw the draft
The drawee, by accepting a draft, also admits the payee's capacity to endorse, but not the genuineness of the payees indorsement.

Having made these admissions, the acceptor cannot later deny them against a holder of the instrument.

Money Orders

A money order is an instrument issued by a bank, post office, or express company indicating that the payee may request and receive the amount indicated on the instrument. When paid for, issued, and delivery to the payee, the issuer has made a contract to pay. 

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*SOURCE: LAW FOR BUSINESS, 15TH ED., 2005, JANET E. ASHCROFT, J.D., PGS. 261-263*

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