Pay to order describes a check or draft that must be paid via endorsement and delivery. Pay-to-order instruments are negotiable checks or drafts that are generally written as "pay to X or order." These instruments stand in contrast to pay-to-bearer instruments, which do not require an endorsement.

Breaking Down Pay to Order

The Uniform Commercial Code (UCC) outlines rules pertaining to pay-to-order instruments. It specifies that ownership of this type of check can be transferred only via endorsement—someone who accepts a check must endorse it before transferring it somewhere else.

Pay to Order and the Uniform Commercial Code

The UCC is a set of standards among business laws that regulate financial contracts. Most states in the U.S. have adopted the UCC. The code itself consists of nine separate articles. Each article deals with separate aspects of banking and loans. (A recent addition covers electronic payments.) The UCC better enables lenders to loan money secured by the borrower's personal property.

Most states ratified the UCC in the 1950s. Louisiana is now the only state that has not fully ratified the code, although it has adopted several of the articles, including those relating to checks, drafts and other negotiable instruments.

Pay to Order and Other Forms of Check Endorsement

In addition, to pay to order, another form of check endorsement is the blank endorsement. A blank endorsement is a check that bears a signature by its creator. This enables any holder of the check to assert a claim for payment. Since no payee is specified, such an endorsement essentially turns the instrument into a bearer security. Blank endorsements are much riskier than pay-to endorsements. If the instrument is lost, it can be negotiated (cashed in or deposited) by anyone who finds it.

Restrictive endorsement and special endorsement are two additional types of check endorsements. A restrictive endorsement is when party writing the check notes “For deposit only” on the first line of the back of the check and then signs his or her name underneath. This form may only be deposited into an account with the specified name.

The special endorsement entails a payer crafting the check to give it to a particular person. The recipient of a special endorsement is the only person who may cash or deposit this check. Instructions for a special endorsement are as follows: write “Pay to the order of [name of recipient],” and sign below.