Let the Payor Beware: Dishonoring Documentary Drafts
| Publication year | 1991 |
| Pages | 2263 |
| Citation | Vol. 11 No. 1991 Pg. 2263 |
1991, November, Pg. 2263. Let the Payor Beware: Dishonoring Documentary Drafts
Under the Uniform Commercial Code(fn1)("UCC"), a payor bank's liability for failing to dishonor drafts timely is well defined, with one exception: documentary drafts. Documentary drafts are drafts accompanied by documents to be delivered to the buyer prior to payment of the drafts. The documents are normally documents of title transferring ownership. Documentary drafts are widely used among dealers for the purchase and sale of automobiles and airplanes, and among ranchers and farmers for the purchase and sale of livestock.
This article discusses documentary drafts and the problems that may arise when payment is not made on such a draft. When that happens, the payor bank may have to face the issue of timely notice for dishonoring the draft.
Unlike typical drafts, a documentary draft often is prepared and signed by the seller on the account of the buyer. The seller deposits the drafts with its bank, where the seller may receive instant credit for the deposit. The seller's bank forwards these to the buyer's bank for payment. If all goes well, the buyer's bank presents the documentary drafts to the buyer, who authorizes payment.
However, problems arise when the buyer either refuses to authorize pay-
There are no reported decisions in Colorado concerning this issue. However, when these circumstances have arisen in other jurisdictions, the seller's bank often has asserted that the buyer's bank is strictly liable for the full amount of the drafts.(fn2) The seller's bank has been successful when it has established that the buyer's bank was a payor bank and failed to dishonor the drafts timely.
Unlike other types of drafts, there are no clear legal guidelines for documentary drafts establishing which of several deadlines under the UCC must be followed by the buyer's bank in honoring or dishonoring the drafts. To add to the perplexity, courts often have used conflicting and confusing reasoning when applying these deadlines (as discussed below). However, there are practical guidelines that can be distilled from the UCC and case law. These guidelines require an examination of the nature of the drafts and the role of the buyer's bank in the collection process.
To understand the nature of documentary drafts, a practitioner first must understand the definitional labels applied to the instruments and the parties. Courts generally have held that documentary drafts are demand items payable on sight.(fn3) To reach this determination, courts examine the drafts and any collection letters forwarded by the seller's bank with the drafts. Language in the draft or collection letter stating that they are "sight" drafts or are "payable on sight" is indicative of a demand item payable on sight. Language such as "outgoing cash collection" and "cash item---do not hold," found in a collection letter, also is relevant.(fn4)
Even though the drafts may be signed by the seller, the buyer is the drawer of the check who orders the bank on which the account is drawn ("drawee") to pay the seller ("payee"). Often, the seller will sign the drafts as agent of the buyer. However, even in circumstances where this was not done, courts have recognized that the business practice of allowing the seller to sign on behalf of the buyer necessitates a construction by which the...
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