Bills of exchange
A bill of exchange is an unconditional written order by the drawer telling the drawee to pay a sum certain in money to the payee or bearer.
Definition
A bill of exchange is 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 to bearer. Every phrase matters. A document saying 'pay if the goods arrive safely' is conditional, so it is not a bill. A document saying 'please pay if convenient' is a request, not an order.
Parties to a bill
| Party | Role |
|---|---|
| Drawer | Writes and signs the bill, ordering payment (often the seller) |
| Drawee | The person ordered to pay (often the buyer) |
| Acceptor | The drawee after signing his acceptance; primarily liable |
| Payee | The person named to receive payment |
| Endorser | A holder who signs the back to transfer the bill |
| Endorsee | The person to whom it is endorsed |
| Holder | The payee or endorsee in possession, or the bearer |
| Holder in due course | A holder who took the bill complete and regular, before it was overdue, without notice of dishonour, in good faith and for value, without notice of any defect in title |
Life of a time bill
A demand bill skips acceptance and is presented straight for payment.
Kinds of endorsement
| Kind | How it is written | Effect |
|---|---|---|
| Blank | Only the endorser's signature | The bill becomes payable to bearer |
| Special | 'Pay Sunil Fernando or order', then the signature | Payable to the named endorsee |
| Restrictive | 'Pay Sunil Fernando only' | Stops further negotiation |
| Conditional | 'Pay Sunil Fernando on delivery of the goods' | The payer may ignore the condition |
| Sans recours | 'Without recourse to me' | The endorser excludes his own liability |
Dishonour and discharge
- Dishonour by non-acceptance: the drawee refuses to accept a bill presented for acceptance.
- Dishonour by non-payment: the bill is not paid when duly presented on the due date.
- Notice of dishonour must be given to the drawer and each endorser; anyone not given notice is generally discharged.
- A dishonoured foreign bill must be protested by a notary public; an inland bill may be noted.
- The holder may then sue the acceptor, the drawer and the endorsers.
- A bill is discharged by payment in due course, by the acceptor becoming the holder at or after maturity, by the holder's waiver, by intentional cancellation, or by material alteration without consent.
A Colombo machinery importer may accept a 90-day bill drawn by its foreign supplier, gaining time to sell the goods before paying. The supplier can discount the accepted bill with its bank. If the importer does not pay on the due date, the bill is dishonoured by non-payment and notice of dishonour must be given.
Short answer: “Who is a holder in due course?” A holder who took a bill complete and regular on its face, before it was overdue, without notice of dishonour, in good faith and for value, without notice of any defect in title.
Structured question: “Explain the different kinds of endorsement.” Blank, special, restrictive, conditional and sans recours: how each is written and its effect, with an example.
Essay: “Define a bill of exchange. Explain its essentials, the parties to it and the consequences of dishonour.” Give the statutory definition and break it into essentials; list the parties including holder in due course; explain acceptance and negotiation; dishonour by non-acceptance and non-payment, notice, protest, rights of the holder; discharge.
Essentials of a bill: W-O-U-S-S-T-M: Writing, Order, Unconditional, Signed by drawer, Sum certain, Time (demand or fixed), Money to a specified person or bearer.