What Is an Order Paper?
An order paper, or order instrument, is a negotiable instrument that is payable to a specified person or its assignee. An instrument such as an order paper is negotiable only if it is payable to the order of a specified person; meaning that it must designate an individual’s name to be paid out. It is the opposite of a bearer instrument, which does not require the designation of an individual to be paid out.
- An order paper is a negotiable instrument that is payable to a specified person or its assignee.
- An order paper specifies the name of the individual to which payment of the instrument can be made.
- A bearer instrument is the opposite of an order instrument, as no individual is designated. Anyone holding the bearer instrument can be paid.
- The most common example of an order paper is a personal check.
- Endorsing an order instrument turns it into a bearer instrument, which can increase the risk of theft.
- To avoid turning an order instrument into a bearer instrument, a payee can use a special endorsement or a restrictive endorsement.
Understanding an Order Paper
An order paper is one that says “pay to the order of,” whereas a bearer instrument says “pay to the bearer of.” When an instrument states “pay to the order of,” it’s naming a specific designee who can collect payment on that instrument. Bearer instruments, on the other hand, do not name a specific payee; anyone who bears the instrument can collect payment on it. An order instrument must identify a named payee on the payee line. A bearer instrument, on the other hand, does not include the name of the payee on the instrument, and will typically not have a payee line.
A common example of an order paper is a personal check. When a person writes a personal check, they name a specific payee on the payee line, which is preceded by the phrase “pay to the order of.” Only the payee named on this line is entitled to receive payment in the monetary amount specified on the check.
Other order instruments include registered bonds, bills of exchange (a kind of check without interest), and promissory notes (a written promise to pay). By contrast, a $20 bill would be an example of a bearer instrument. A $20 bill has no payee line and names no payee. Anyone who possesses (bears) the $20 bill can use it to obtain $20 worth of goods or services.
What Makes an Order Paper?
To be considered an order instrument, a negotiable instrument must have certain characteristics. It must:
- Bear the drawer’s signature
- Be payable to the order of a named payee
- Make an unconditional promise of payment of a specific sum to a named payee
- Be payable at a specific time or on demand
An order instrument must include the phrase “pay to the order of (named person or entity)” or “to (named person or entity) or order.” If the words “or order” are included on the order instrument, the named payee is permitted to designate another party to receive the payment therein ordered.
Endorsing Order Papers
When an order paper is endorsed, it becomes a bearer instrument. For example, when you receive a payment by check and endorse that check, your check, which was an order paper prior to endorsement, becomes a bearer instrument. Once endorsed, anyone who bears, or possesses, your check can cash it, even if they’re not the person named on the payee line. It’s for this reason that consumers are advised to avoid endorsing checks until they are depositing them.
However, a payee can avoid turning an order paper into a bearer instrument after endorsing it. The payee can use a special endorsement, which involves signing the instrument over to another payee. To do this with a check, for example, the payee can write the words “pay to the order of (named person or entity)” in the endorsement space on the back of the check, and then sign it. Payees can also use a restrictive endorsement to ensure that an endorsed instrument is deposited into a specific account, for example.
View more information: https://www.investopedia.com/terms/o/order_paper.asp