Bill of exchange (B/E) or Draft

Evidences obligation to pay

Negotiable instrument: a specialized type of "contract" for

the payment of money that is unconditional and capable of

transfer by negotiation. Common examples include

cheques, banknotes (paper money), and commercial paper.

it is transferable by delivery and with the transfer, rights

embodied in it are transferred

The transferee can enforce these rights in his own name

i.e, no notice to the obligor or assignment is necessary

Where transferee takes the draft in good faith, he takes it

free of any defects of title of the transferor

Negotiable instrument

Unlike ordinary contract documents, the right to the performance of a negotiable instrument is linked to the possession of the document itself (with certain exceptions such as loss or theft).

The rights to payment are not subject to set-off, and do not rely on the validity of the underlying contract giving rise to the debt (for example if a cheque was drawn for payment for goods delivered but defective, the drawer is still liable on the cheque)

No notice needs to be given to any prior party liable on the instrument for transfer of the rights under the instrument by negotiation

Transfer free of equities—the holder in due course can hold better title than the party he obtains it from

Negotiation enables the transferee to become the party to

the contract, and to enforce the contract in his own name.

Negotiation can be effected by endorsement and delivery

(order instruments), or by delivery alone (bearer

instruments).

B/E

Autonomous contract

Not affected by breach in the

underlying contract

Therefore, are treated as cash

A bill of exchange requires in its

inception three parties--the

drawer, the drawee, and the

payee.

The person who draws the bill is

called the drawer. He gives the

order to pay money to third party.

The party upon whom the bill is

drawn id called the drawee. He is

the person to whom the bill is

addressed and who is ordered to

pay. he becomes an acceptor

when he indicates his willingness

to pay the bill. (Sec.62) The party

in whose favor the bill is drawn or

is payable is called the payee.

B/E

Bill of Exchange Act 1882

Definition in the act: ‘an unconditional order in writing,

addressed by one person to another, signed by the person

giving it, requiring the person to whom it is addressed to

pay on demand or at a fixed or determinable future time a

sum certain in money to or to the order of a specified

person, or bearer’.

Seller = drawer

Buyer = drawee

Seller (drawer) will draw a bill of exchnage/draft on the

buyer (drawee)

B/E

‘Sight bills’/’sight draft’: Payable on demand or ‘at sight’:

money payable upon presentation

‘Time bill’/’time draft’: Payable at future date; buyer gets

credit

Drawer sends draft; buyer accepts draft (‘Trade

acceptance’)

Drawer becomes ‘Acceptor’

Seller can sell draft at discount

It is not necessary that the bill is accepted by the drawee

prior to negotiation (i.e., transfer by delivery) if bearer bill or

by endorsement and delivery if order bill

B/Es

Sight bill: payment on

demand or ‘at sight’

Time bills: payment at

determinable or fixed future

date

Order bill: transferable by

endorsement of drawer or

holder

Bearer bill: Rights by mere

possession

ASSIGNMENT OF PAYMENT RIGHTS

US law: payment rights can be

separated from other contractual rights UK law: Payment rights integral

part of contractual rights

ASSIGNMENT IS THE KEY INSTRUMENT IN FACTORING

Assignment = right to

transfer debt to a third

party

Factor wants the Law to

provide unencumbered

ownership—sole right to

collect in full

Invoices result from sales contract; they have no legal status on their own (unlike a bill of exchange, which has a whole legal act The Bills of Exchange Act)

Invoice is the Seller’s presentation of what he thinks is owed

• To physically possess a B/E is

to have rights

• To physically possess an

invoice gives no rights

Acceptance by Drawee not necessary

17th Edition July 2009

BILL OF EXCHANGE

Autonomous control: Not

affected by breach of the

underlying contract

(seller/buyer dispute)

Bills of Exchange Act 1882:

Section 3(1) ‘an unconditional

order in writing, addressed by

one person to another, signed

by the person giving it,

requiring the person to whom

it is addressed to pay on

demand or at a fixed or

determinable future time a

sum certain in money to or to

the order of a specified

person, or bearer.’

BILL OF EXCHANGE: US UCC Art 3 & 4

1. Promise or order to pay is

unconditional

2. For a specified sum of money

3. Payment must be made on

demand or at definite time

4. Payee has no other obligation

other than to pay

5. Instrument payable to bearer

or ‘to order’

6. Words of negotiability

UN Geneva Convention 1930

used by Civil Code countries

POINT: B/Es have a legal

definition and force of law

behind them

Can get a summary judgment

Holder: prima facie presumed

to be holder

Holder takes B/E in good faith

Right to enforce payment

against all parties liable to the

bill: drawer, drawee, endorser

Unless proved that issuance,

acceptance or negotiation by

fraud or duress

Then illegal

Conditions for holder:

(a) Become holder before B/E

overdue or without notice of it

having been previously

dishonoured

(b) Took it in good faith for value

at the time negotiated with no

notice of defect in title of

person who negotiated it

BACK TO INVOICE V. B/E

Buyer can argue about an

invoice

Buyer cannot argue about a

B/E

UNITED NATIONS CONVENTION ON INTERNATIONAL BILLS OF

EXCHANGE AND PROMISSORY NOTES

If a customer does not accept a bill of exchange or does not

pay it on time, you can use a Protest bill of exchange

journal to change the status of the bill of exchange from

Drawn to Protested with reference to the drawn bill of

exchange.

Bill of Exchange Law

Text Question Key words Vocabulary Literature Form Act

22. Protesting the Bill of Exchange

Few institutes of the law of bills of exchange are understood in such a wrong manner as the bill protest. It is, though, quite clear: the bill protest is a written qualified certificate that a certain participant of the bill relationships (the debtor, usually) was asked to fulfill his obligations (to pay the bill, usually) but he failed to do so. The content of the certificate and the organs that may issue such an instrument are determined by the law (comp. Article I, Sections 79 and 80, BECA).

In addition to evidentiary purposes, the protest has the effect of the second preserving act (the first one being presentment). If the possessor does not have this certificate issued, it can even lead, in some cases, to extinction of bill rights. As a typical example we may mention the extinction of rights against all indirect debtors which happens when the periods set for protesting non-acceptance or non-payment are missed (in detail, see Article I, Section 53, Paragraph 1, BECA).

The possessor may be relieved from the duty of protest by including the clause "without protest" in the bill (or by a clause of a similar meaning).

Protest must contain: the names of the persons for whom and against whom it is being made; the information that the person against whom the protest is being made has been, to no avail, requested to act on the bill of exchange, or that the person could not be contacted, or that neither the premises where he does business nor his apartment could be located; the information about the place and time when the request or the failed attempt at such a request has been made; a note, in cases of acceptance or payment for honour, from whom, for whom and how the acceptance or the payment for honour was offered or made; in the event that the drawee to whom the bill of exchange was presented for acceptance requests that it be presented to him again on the following day, a note about this fact; a literal copy of the bill of exchange (copy) with all endorsements and a notes; the signature of the protesting body and the official seal or the official stamp.