What is a Bill of Exchange?

A Bill of Exchange is one of the key financial instruments in International Trade. The laws regulating Bills of Exchange in different countries come under two different legal spheres of influence: Bills of Exchange Act (1882) - United Kingdom Geneva Conventions of 1930

The Bill of Exchange is defined under these systems as follows: Bill of Exchange Act (1882) - United Kingdom "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". For a list of countries following the 'Bills of Exchange Act' (click here). Convention providing a uniform law for Bills of Exchange and promissory notes (Geneva, 1930) The League of Nations. Under Article 1 of the above convention a Bill of Exchange must contain: 1. The term "Bill of Exchange" inserted in the body of the instrument and expressed in the language employed in drawing up the instrument. 2. An unconditional order to pay a determinate sum of money. 3. The name of the person who is to pay. 4. A statement of the time of payment. 5. A statement of the place where payment is to be made; 6. The name of the person to whom or to whose order payment is to be made; 7. A statement of the date and of the place where the bill is issued; 8. The signature of the person who issues the bill. For a list of countries following the 'Geneva Conventions' (click here). The Parties to a Bill of Exchange: The Drawer - Is the party that issues a Bill of Exchange in an international trade transaction; usually the seller. The Drawee - Is the recipient of the Bill of Exchange for payment or acceptance in an international trade transaction; usually the buyer. The Payee - Is the party to whom the Bill is payable; usually the seller or their bankers.

Legislation for Bills of Exchange:

Most countries have adopted codified laws on Bills of Exchange. The legal codes in such countries have created laws that follow the rules agreed at the Geneva Conventions in order to standardise the control of Bills of Exchange. The United Kingdom Bills of Exchange Act 1882 is the basis for rules governing Bills of Exchange in Ireland, U.K. and Commonwealth countries that were part of the British Empire. These countries follow a common law framework to create and modify statutes. In relation to the most fundamental aspects of a Bill of Exchange the two sets of rules are similar in that both identify the following: A Bill of Exchange is an unconditional order to pay a specific amount of money. The Bill of Exchange must state a particular time of payment. The Bill of Exchange must contain the name of the person who is to pay.

There are, however, certain differences between the Bills of Exchange Act (1882) and the Geneva Convention. In particular the United Kingdom Act sets out fewer formal requirements for example: The term "Bill of Exchange", which is an integral part of the physical Bill according to the Geneva Convention, need not be written on the Bill. Bills can be made payable to 'bearer'. The place and date of issue are also not obligatory parts of the Bill.

The United Nations Commission on International Trade Law (UNCITRAL) is at present trying to harmonise laws through the "United Nations Convention on International Bills of Exchange and International Promissory notes

The function of the Bill of Exchange in International Trade:

The Bill of Exchange performs many functions in international trade including: Facilitates the granting of trade credit in a legal format by permitting payments on agreed future dates. Provides formal evidence of the demand for payment from a seller to a buyer. Provides the seller with access to finance by permitting them to transfer their debts to a bank or other financier by merely endorsing the Bill of Exchange to that bank or financier. Permits the banker or financier to retain a valid legal claim on both the buyer and the seller. In certain circumstances a bank or financier may have a stronger legal claim under a Bill than the party that sold them the debt. Permits a seller to obtain greater security over the payment by enabling a bank to guarantee a drawee's acceptance (guarantee to pay on the due date) by signing or endorsing the Bill. (See Guaranteed Bills of Exchange below) Allows a seller protect their access to the legal system in the event of problems, while providing easier access to that legal system.

How the Bill of Exchange is used in international trade:

A Bill of Exchange can either be payable immediately or at some future date. If a Bill is payable immediately, it is usually issued payable at sight. The term "at sight" means that a buyer should pay once they have sighted the Bill, that is once the demand for payment has been made. If a Bill is payable at some future date, it must facilitate the calculation of the actual due date. For example Bills of Exchange may be drawn payable at 60 days sight, at 60 days from Bill of Lading Date etc.

Banks should be used as agents for the collection of the Bill. Visit our section on Documentary Collections in the Products and Services or Product Diagrams area of this website for further details. Guaranteed Bills of Exchange: To provide greater payment security a seller may look to have a Bill of Exchange guaranteed by a buyer's bank. A guaranteed Bill of Exchange is one drawn on and accepted by the buyer and to which, the buyer's bank has added its guarantee that the Bill will be paid at maturity. The security to a seller comes from a bank giving an undertaking to effect payment on a certain date regardless of the financial standing of a buyer on that date

Advantages of Bills of Exchange:

Companies have used Bills of Exchange for hundreds of years. Their longevity is due to the advantages they provide in a trading transaction. A Bill of Exchange facilitates the granting of trade credit to a buyer. A Bill of Exchange provides a legal acknowledgement that a debt exists. It can provide the seller with access to financing. It can provide easy access to the legal systems in the event of non-payment.

Legal Protection afforded by Bills of Exchange: An advantage for a seller in using a Bill of Exchange is the capability of the Bill of Exchange to provide formal documentary evidence that the demand for payment or acceptance has been made to the buyer. In addition, it may be possible to sue the buyer for non-payment based solely on this documentary evidence. A seller can protect their interests by requesting that a Bill of Exchange be noted or protested for non-payment or non-acceptance. When a Bill is not paid or accepted it is said to have been "dishonoured". Noting: A Bill is noted in order to obtain official evidence that it has been dishonoured. A Notary Public represents the Bill to the drawee for acceptance or payment and minutes on the Bill the reason given for dishonour. Noting is often followed by a formal protest. Protesting: Protesting is a more formal process than noting and results in the production by the Notary Public of a formal deed of protest bearing a notary's seal. This document again provides formal evidence of the presentation of the Bill to the drawee and the reason for dishonour. The protest is accepted by most courts in the world as evidence that a Bill has been dishonoured