Bills of Exchange; Laws Relating to Bills of Exchange

What Is a Bill of Exchange?

A bill of exchange is a written order used primarily in international trade that binds one party
to pay a fixed sum of money to another party on demand or at a predetermined date. Bills of
exchange are similar to checks and promissory notes—they can be drawn by individuals or
banks and are generally transferable by endorsements.

Key Takeaways
 A bill of exchange is a written order binding one party to pay a fixed sum of money to
another party on demand or at some point in the future.
 A bill of exchange often includes three parties—the drawee is the party that pays the
sum, the payee receives that sum, and the drawer is the one that obliges the drawee to
pay the payee.
 A bill of exchange is used in international trade to help importers and exporters fulfill
transactions.
 While a bill of exchange is not a contract itself, the involved parties can use it to
specify the terms of a transaction, such as the credit terms and the rate of accrued
interest.

Understanding Bills of Exchange

A bill of exchange transaction can involve up to three parties. The drawee is the party that
pays the sum specified by the bill of exchange. The payee is the one who receives that sum.
The drawer is the party that obliges the drawee to pay the payee. The drawer and the payee
are the same entity unless the drawer transfers the bill of exchange to a third-party payee.
Unlike a check, however, a bill of exchange is a written document outlining a debtor's
indebtedness to a creditor. It's frequently used in international trade to pay for goods or
services. While a bill of exchange is not a contract itself, the involved parties can use it to
fulfill the terms of a contract. It can specify that payment is due on demand or at a specified
future date. It's often extended with credit terms, such as 90 days. As well, a bill of exchange
must be accepted by the drawee to be valid.
Bills of exchange generally do not pay interest, making them in essence post-dated checks.
They may accrue interest if not paid by a certain date, however, in which case the rate must
be specified on the instrument. They can, conversely, be transferred at a discount before the
date specified for payment. A bill of exchange must clearly detail the amount of money, the
date, and the parties involved including the drawer and drawee.
Features of a bill of exchange
A bill of exchange must bear the following features:
 It has to be a document in writing.
 The written document must contain the names of all relevant parties.
 The bill of exchange must be a confirmed order to make a payment on a specific date.
 The document has to be addressed from one party to another.
 It must contain the signature of the party that is giving the bill.
 The time and date when the payment is due must also be specified.
 The bill should also outline the amount of money that is due.
 The payment of the bill must be demanded to be paid in the country's legal currency.
 The amount that is to be paid must either be payable or demand or within a stipulated
time.
 A bill of exchange may or may not be transferable.

Example of Bill of Exchange

Say Company ABC purchases auto parts from Car Supply XYZ for $25,000. Car Supply
XYZ draws a bill of exchange, becoming the drawer and payee in this case. The bill of
exchange stipulates that Company ABC will pay Car Supply XYZ $25,000 in 90 days.
Company ABC becomes the drawee and accepts the bill of exchange and the goods are
shipped. In 90 days, Car Supply XYZ will present the bill of exchange to Company ABC for
payment. The bill of exchange was an acknowledgment created by Car Supply XYZ, which
was also the creditor in this case, to show the indebtedness of Company ABC, the debtor.

UNITED NATIONS CONVENTION ON INTERNATIONAL BILLS OF EXCHANGE

AND INTERNATIONAL PROMISSORY NOTES

Article 3: Definition of Bill of Exchange and Promissory Note

 A bill of exchange is a written instrument that:
(a) Contains an unconditional order from the drawer to the drawee to pay a
specified sum of money to the payee or to their order.
(b) Is payable either on demand or at a specific time.
(c) Includes a date.
(d) Is signed by the drawer.
  A promissory note is a written instrument that:
(a) Contains an unconditional promise from the maker to pay a specified sum
of money to the payee or to their order.
(b) Is payable either on demand or at a specific time.
(c) Includes a date.
(d) Is signed by the maker.
Article 7: Interpretation of Formal Requirements
 Specifies that the sum payable in an instrument is considered definite even if the
instrument mentions:
(a) Interest.
(b) Payment by installments on successive dates.
(c) Payment by installments with a stipulation that the unpaid balance
becomes due upon default.
(d) Payment according to an indicated exchange rate.
(e) Payment in a currency different from the one expressed in the instrument.
 Also, states that if interest is mentioned but the date from which interest runs isn't
specified, interest begins from the date of the instrument.
Article 8: Handling Discrepancies Between Words and Figures
 If there's a discrepancy between the sum written in words and figures, the sum in
words prevails.
 In case the sum is expressed more than once in either words or figures and there's a
discrepancy, the smaller sum prevails.
 If an instrument mentions a currency without specifying a particular state, it's
considered the currency of the state where payment is to be made.
 If an instrument specifies payment with interest, it must also indicate the interest rate.
 The interest rate can be either definite or variable, but variable rates must follow
specific rules.
Article 9: Payable on Demand or at a Definite Time
 Defines when an instrument is deemed payable on demand or at a definite time.
 Acceptance, endorsement, or guarantee after maturity turns an instrument into one
payable on demand for those parties.
 An instrument is considered payable at a definite time if it mentions:
(a) A stated date or a fixed period after a stated date or the date of the
instrument.
 (b) A fixed period after sight.
(c) Payment by installments on successive dates.
(d) Payment by installments on successive dates with a provision that
theunpaid balance becomes due on default.
 Time of payment for specific situations is clarified.
Article 10: Multiple Drawers or Payees
 Bills of exchange may be drawn by multiple drawers or made payable to multiple
payees.
 Notes may be made by multiple makers or made payable to multiple payees.
 Rules for instruments payable to payees in the alternative or in any other case are
outlined.
Article 15: Definition of a Holder
 Explains who is considered a holder of an instrument.
 A holder can be the payee in possession of the instrument or someone in possession of
an instrument endorsed to them, with an uninterrupted series of endorsements, even if
any endorsement was forged or unauthorized.
Article 16: Actions with a Blank Endorsement
 Clarifies the actions that can be taken with an instrument having a blank endorsement,
including further endorsements, conversion to special endorsements, and transfers.
Article 18: Unconditional Nature of Endorsement
 States that endorsements must be unconditional.
 Conditional endorsements don't affect subsequent parties.
Article 19: Ineffectiveness of Endorsement for a Part of the Sum
 Specifies that an endorsement in respect of a portion of the sum due on the instrument
is not valid.
Article 25: Liability in Case of Forged Signature
 Addresses liability when an endorsement is forged.
 Parties involved in the chain of payment may be liable for damages caused by the
forgery, depending on their knowledge and actions.
 The damages recoverable from the forger may not exceed a certain amount.
Article 33: Liability Based on Signature
 A person is not liable on an instrument unless they have signed it.
 Signing in a name other than one's own makes that person liable as if they had signed
in their own name.
Article 34: Forgery and Liability
 Clarifies that a forged signature does not impose liability on the person whose
signature was forged.
 However, if that person consents to be bound by the forged signature, they are liable
as if they had signed it themselves.
Article 35: Material Alteration
 Discusses the effects of material alterations on liability.
 Parties who sign after an alteration are liable according to the altered text.
 Parties who sign before the alteration are liable according to the original text, unless
they make, authorize, or assent to the alteration.
These articles cover various aspects of bills of exchange, promissory notes, endorsements,
and the liabilities of parties involved in these financial instruments.