Drawee

Definition of Terms and Legal Significance of the Drawee

The term “Drawee” holds central importance in the legal field, especially in relation to securities law and payment transactions. The drawee is the person or institution to whom a financial or legal instruction is addressed, requiring the fulfillment of a specific obligation—most commonly a payment. The legal status of the drawee and the resulting rights and obligations are particularly significant in bill of exchange law, cheque law, and general obligations law.

Definition and Legal Classification

General Definition

In German law, the drawee is the person who is instructed by an order, often in the form of a security (such as a bill of exchange or cheque), to perform a service—usually the payment of a sum of money—to a third party or to the issuer. Unlike a debtor in a typical obligation, the drawee’s obligation does not become effective until the instruction is accepted or through specific statutory provisions.

Distinction from Related Terms

In payment transactions, the drawee is frequently a credit institution that, for example, executes a transfer in favor of a payee. In bill of exchange law, the drawee is not automatically obliged to pay, but only becomes liable under bill of exchange law after the explicit declaration of acceptance, known as the ‘acceptance’. This distinction is significant for assessing liability and for the enforcement of claims.

Legal Status of the Drawee in Bill of Exchange Law

The Role of the Drawee under the Bill of Exchange Act (WG)

In the German Bill of Exchange Act (WG), the role of the drawee is regulated in §§ 1 ff. WG. When issuing a bill of exchange, the drawer instructs the drawee to pay a specified sum of money to the creditor (the payee designated in the bill).

• Before acceptance of the bill of exchange (acceptance):

Until acceptance, there is no legal obligation to pay derived from the bill of exchange towards the drawee. The obligation arises only through the explicit declaration of acceptance by the drawee.

• After acceptance of the bill of exchange:

By acceptance, the drawee becomes legally obliged under bill of exchange law to pay (§§ 28 ff. WG). The drawee is then considered the principal debtor under the bill.

Liability and Rights of the Drawee

• Before acceptance:

The drawee is not liable under bill of exchange law. Claims may arise only from the underlying relationship between the drawer and the drawee.

• After acceptance:

The drawee becomes primarily liable for payment to the respective bill holder. In relation to the bill holder, the drawee is a party to an abstract promise to pay.

• Right of Recourse:

If the drawee makes payment to the bill holder, he can demand recourse from the drawer in their internal relationship, provided this has been agreed.

Drawee in Cheque Law

The term “drawee” is also used in cheque law. In contrast to bill law, the drawee here is usually a credit institution.

Legal Position under the Cheque Act (SchG)

• Obligation of the Drawee:

The drawee (often the bank of the drawer) is not automatically obliged to pay merely upon presentation of a cheque. The cashing of the cheque by the credit institution is voluntary. There is no explicit statutory obligation to pay on a presented cheque (§ 28 Cheque Act).

• Underlying Cover Relationship:

The legal basis for the payment is the account relationship (the underlying cover relationship) between the cheque drawer and the drawee.

• Liability:

If the drawee pays, this is generally based on the giro contract with the drawer. If the drawee executes the payment, the obligations of the drawer to the cheque holder are fulfilled.

Drawee in General Obligations Law

Transferability of the Term

Beyond bill of exchange and cheque law, the term “drawee” may also be used wherever an order or instruction for the provision of performance is directed toward a specific person. Typical cases are instructions as outlined in §§ 783 ff. BGB, where the instructed party (corresponding to the drawee) can be obliged to perform to a designated recipient through an appropriate declaration.

Legal Relationships

• Value Relationship:

This is the underlying relationship between the issuer and the recipient of the performance.

• Underlying Cover Relationship:

Denotes the legal relationship between the drawer and the drawee.

• Execution Relationship:

The relationship between drawee and recipient, in which the actual performance is effected.

This distinction is of considerable relevance for the enforcement of claims.

Duties and Liability of the Drawee

The duties and liability of the drawee are essentially determined by the type of legal basis:

• In bill of exchange law, the drawee is liable under bill law only after acceptance.
• In cheque law, there is no statutory obligation to pay arising from the cheque itself.
• In general obligations law, a binding obligation can exist only through express declaration of acceptance or on the basis of the underlying contractual relationship.

A breach of the drawee’s obligations may result in claims for damages or compensation in the internal relationship, depending on the respective legal basis.

Significance of the Drawee for Payment Transactions

The drawee plays a major practical role in modern payment transactions, especially in connection with non-cash payment instruments such as bank transfers, direct debits, bills of exchange, and cheques. The legal structuring of the relationships between drawer, drawee, and payee is crucial for the smooth execution of payment processes and for security in commercial transactions.

Summary and Conclusion

The drawee is a fundamental figure in German securities law and payment transactions. The drawee’s role, obligations, and liability differ depending on the applicable legal standard. While in bill of exchange law, liability under bill law arises only after acceptance, the drawee’s position in cheque and contract law is defined by the specific contractual relationship. Understanding these interrelations is essential for the legally secure use of payment instructions and securities.

Frequently Asked Questions

What legal obligations does the drawee assume upon acceptance of a bill of exchange?

By accepting a bill of exchange drawn on him, the drawee becomes legally obligated to the holder to pay the sum stated in the bill at maturity. This acceptance must be indicated on the bill and constitutes an independent, abstract promise to pay which, regardless of underlying legal relationships, is directly enforceable against the acceptor. Acceptance may not, as a rule, be made subject to conditions (§ 25 WG). If payment is not made within the prescribed period, the bill holder may sue the drawee directly under bill of exchange law (§ 77 sec. 1 WG). Once acceptance is given, the liability of the drawee is no longer subject to defenses arising from the original relationship between the drawer and drawee—unless the holder acquired the bill with intent to harm the drawee (qualified defense under § 17 WG). After acceptance, the drawee can no longer rely on the lack of the underlying legal relationship, such as the drawer’s non-existent claim to payment.

Can the drawee refuse to accept the bill, and what are the consequences?

The drawee is not legally obligated to accept a bill of exchange unless a specific legal relationship, such as a cover relationship, requires him to do so. Refusal of acceptance entitles the bill holder to take recourse against the other parties liable on the bill—usually the drawer and indorsers (§ 43 WG). The bill must be protested to preserve recourse rights. For the drawer, refusal of acceptance often constitutes a breach of duty when cover was contractually assured; this may give rise to additional claims for damages. The drawee remains outside bill of exchange law unless he voluntarily accepts.

What objections can the drawee assert in bill proceedings against claims arising from the bill?

In proceedings on a bill of exchange, the drawee, as acceptor, generally has no further rights of objection since bill of exchange law treats the obligation as an abstract promise to pay. Exceptions exist only for so-called qualified objections: In particular, the drawee may raise defenses if the holder acquired the bill with intent to harm him (e.g., in the case of blank bills under § 17 WG), or the acceptance is invalid due to forgery or incapacity (§§ 104 ff. BGB). Furthermore, he may assert absolute defenses such as nullity of the bill due to formal defects (§§ 1, 2, 76 WG) or payment. Defenses arising from the underlying transaction between drawer and drawee (“cover relationship”), such as lack of authority, are excluded against a good-faith holder.

Is the drawee required to add a specific acceptance note to the bill?

The drawee’s acceptance must be declared on the bill itself and by signature (§ 22 WG). The declaration may be made in any form but must clearly indicate acceptance of the bill—for example, with the word “accepted” (or similar expressions) along with a signature. Additions or conditions are generally not permitted under § 25 WG and render the acceptance invalid as such; however, this gives the bill holder the right to demand unconditional acceptance or to withdraw from the contract. Partial acceptances—e.g., of only part of the amount—or acceptances subject to conditions are not effective, but may be interpreted as a simple promise of payment outside of bill of exchange law.

When is the drawee personally liable for payment, and can he invoke third party objections?

The drawee is personally liable as principal debtor on the bill from the time of acceptance and is obligated to pay regardless of the legal relationship with the drawer. After acceptance, he generally cannot raise objections or defenses arising from the underlying relationship against the holder, unless specifically qualified objections exist. Defenses of third parties, such as grounds for contesting the contract or third party claims against the drawer, do not avail the drawee in bill proceedings unless the holder acted in bad faith or has acted contrary to good faith (§ 17 WG).

How does non-payment of the bill by the drawee affect the other parties involved?

If the drawee fails to pay the bill on the due date, the holder has an immediate right of recourse against the other parties liable on the bill, especially the drawer and previous indorsers (§ 43 WG). This requires that a bill protest is properly made within the statutory deadlines (§§ 44, 45 WG). Refusal of payment by the drawee therefore triggers joint liability of all parties obligated on the bill; the holder may choose whom to proceed against. Non-payment by the drawee can also lead to civil—and, if there are no valid grounds for refusing payment, potentially criminal—consequences.

What are the legal effects of the drawee’s subsequent insolvency on bill of exchange obligations?

In the event of the drawee’s insolvency, the holder’s claim under the bill continues to exist as an insolvency claim, provided the bill has not yet been honored. The holder becomes an insolvency creditor and must file his claim in the schedule of claims (§ 87 InsO). The holder may also take recourse against the other parties liable on the bill regardless. Insolvency law provides specific deadlines for filing and asserting claims in such proceedings. Acceptance of the bill by the drawee prior to the opening of insolvency proceedings remains effective; however, after insolvency proceedings are opened, the drawee is generally no longer authorized to accept further bills (§ 81 InsO), unless this forms part of transactions permitted for continuation of business.