Meaning and Definition of Bank Draft

A bank draft is an order from one branch to another branch of the same bank to pay a specified sum of money to a person named therein or to his order. A draft is always payable on demand. Banks issue drafts at the request of the customers on their branches at the place of destination for remitting money from one place to another place. Any person who wants to remit money has to purchase a draft from the bank by paying the amount in advance to the bank. The purchaser of the draft then sends the draft to the payee’s place of residence by post or courier for the purpose of encashment at the drawee branch of the bank. The bank issuing the draft charges some commission depends upon the amount of the draft. The purchaser need not be a customer of the bank.

The bank draft is like a bill of exchange payable on demand. In case the draft is lost by a purchaser, he has to report to the issuing banker for loss of the draft without any endorsement, the banker may safely refuse to pay the amount of the draft. The bank should take all the precautions and payment of the draft should be made only when the banker is fully satisfied about the valid title of the holder. The banker should take an indemnity bond and then issue a duplicate draft to the purchaser. The draft may be cancelled by the bank if it is not delivered to the payee. When a bank draft is delivered to the payee he acquires a right in the instrument, which cannot be set aside by the ‘stop-payment’ order issued by the purchaser. The bank issuing the draft sends an advice to the drawee branch, intimating about the issue of the draft.The drawee branch after verifying the signature of the authorized officials makes the payment. However, the payment of the draft should not be refused because of non-receipt of drawing advice.

The legal position with respect to bank drafts  are as follows :

  1. The relationship of the purchaser of draft and the bank from which the draft has been purchased is merely that of the debtor and creditor.
  2. The purchaser of the bank draft can call upon the bank from which he has purchased it to cancel the draft and pay back the money to him at any time before the draft has been delivered to the payee.
  3. If the sole object of the issue of the draft was to transit the money to another  person, a fiduciary relationship is created between the purchase of the draft and the bank which issued it, and the purchaser of the draft can countermand payment only if the bank has not actually parted with the money held by it as agent thus terminating the relationship of principal and agent.
  4. Ordinarily, a bank issuing a draft cannot refuse to pay the amount thereof, unless there is some doubt as to the identity of the person presenting it as being or properly representing the person in whose favour it was drawn, or in other words, unless there is reasonable ground for disputing the title of the person presenting the draft; and
  5. Once the draft has been delivered to the payee or his agent, the purchaser is not entitled to ask the issuing bank to stop payment of the draft to the payee on other grounds such as matters relating to consideration.
  6. The issuing bank can after the issue of a draft pay back the amount of the draft to the purchaser of the draft only with the consent of the payee.

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