Himachal Pradesh National Law University, Shimla.
ASSIGNMENT ON:
AN OVERVIEW OF THE CONCEPT OF BILLS OF EXCHANGE
IN INTERNATIONAL TRADE LAW
IN COMPLIANCE TO THE TOPIC ASSIGNED, FOR SEMESTER
VII OF 2020, IN THE SUBJECT “INTERNATIONAL TRADE LAW ”
SUBMITTED TO FACULTY:
ASSISTANT PROFESSOR SARITA
FOR EVALUATION
SUBMITTED BY:
SHIVANI CHOUDHARY
VII SEMESTER
B.A., LL.B. (Hons.)
ROLL NO- 1020171806
1
ACKNOWLEDGEMENT
I would like to acknowledge a heartfelt thanks to Assistant Professor
of Law Sarita to provide me this research paper. It allowed me to
study the topic in detail and also contributed significantly to my legal
research skills. I am thankful to her for helping me to take another
step towards the transition of myself from student advocate to
advocate.
2
TABLE OF CONTENTS
ACKNOWLEDGEMENT...........................................................................2
I. INTRODUCTION....................................................................................4
i. Time.......................................................................................................... 4
ii. Mode........................................................................................................ 4
iii. Place........................................................................................................4
iv. Currency of payment.............................................................................. 4
II. PAYMENT BY BILLS OF EXCHANGE............................................. 5
III. ESSENTIALS OF A BILL OF EXCHANGE...................................... 6
IV. THE UN CONVENTION ON INTERNATIONAL BILLS OF
EXCHANGE AND INTERNATIONAL PROMISORY NOTES (1998). 8
V. THE CLAUSED BILL OF EXCHANGE..............................................9
VI. DOCUMENTARY BILL OF EXCHANGE........................................ 9
VII. BILL OF LADING AND BILL OF EXCHANGE........................... 10
IX. CONCLUSION................................................................................... 12
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AN OVERVIEW OF THE CONCEPT OF BILLS OF EXCHANGE
IN INTERNATIONAL TRADE LAW
“If commerce is the pillar of modern nations, the Bill of Exchange is the
pillar of commerce.”1
I. INTRODUCTION
As far as any trade is concerned, there are four basic element of every contract for the
sale of goods abroad regarding the payment of purchase price are:
i. Time
ii. Mode
iii. Place
iv. Currency of payment
The payment for any export represent, in law, various combintions of these four
element only. The most frequent payment methods in which banks are involved are a
collection arrangement or payment under a letter of credit. In a collection arrangement
the bank receives its instructions from the seller. The exchange of. the documents of
title represent the goods and the payment of the price is normally effected at the place
at which the buyer carries on business.
Conversely, in the case of a letter of credit the instructions to the bank usually
emanate from the buyer. The exchange of the documents and the price is normally
effected at the seller's place of business. Both these methods enable the interposed
bank to use the documents of title as a collateral security.
Other than the interposition of banks, there are two ways in which transaction can
happen in either of the two ways. First, the buyer may transfer the price to seller on
1
The Verginia Law Register, Vol 6, 73. A modern text book on Commercial Law opeens with this
sentence. Last visited 10 November, 2020) available at: [Link]
4
open account. Second, the seller may send the buyer a documentary bill of exchange.2
The paper would discuss the concept and importance bills of exchange as a method of
payment in particular.
II. PAYMENT BY BILLS OF EXCHANGE
The bill of exchange is widely used both in domestic and international commercial
relations. It has been the object of a uniform legal regulation. The bill of exchange is
an instrument by which a person, named drawer or issuer, assign another person,
called drawee, to pay on the due term an amount of money to a third person, called
beneficiary or to its order.3
Sir John Comyns, Digest in the early part of the 18th century defined Bill of
Exchange as A bill of exchange is when a man takes money in one country or city
upon exchange, and drawer a bill where by he directs another person in another
country or city to pay so much to A, or order for value received of B, and subscribes it.
A bill of exchange4 is a written, unconditional, order by one party to another to pay a
certain sum, wither immediately or on a fixed date for payment of goods or services
received.5 It is signed by the person promising to pay, and given to the person,
entitled to receive the money.
Black ‘s law Dictionary defines Bill of Exchange as under :-
“Bill of Exchange. A three party instrument in which first party draws an order
for the payment of a sum certain on a second party for payment to a third party
at a definite future time.”6
The law governing bills of exchange in India is codified in the Negotiable Instrument
Act, 1881.
“A “bill of exchange” is an instrument in writing containing an unconditional
order, signed by the maker, directing a certain person to pay a certain sum of
2
The bill of exchage is a the bill that is attached to the bill of lading.
3
Ileana Voica, BILLS OF EXCHANGE AND PROMISSORY NOTES – COMPARATIVE
PERSPECTIVE, Juridical Tribune, Vol 1 (2011) 108.
4
Bill of exchange and draft mean the same thing in Trade.
5
See, William Hedley, Richard Hedley,, Bills of Exchange and Bankers Documentary, ( 4th edn 2001)
6
Black ‘s law Dictionary, 5th Ed. July 1973, p 149
5
money only to, or to the order of, a certain person or to the bearer of the
instrument.”7
This arrangement offers advantages to both parties. The exporter obtains a negotiable
instrument which he can tum into cash by negotiation at once, and the buyer is also
allowed a definite period of credit for settlement unless the bill is payable at sight.8 A
document otherwise in the form of a Bill of exchange, but having no drawers name to
it, is not a bill of exchange, it can be a promissory note.
III. ESSENTIALS OF A BILL OF EXCHANGE
Being a credit instrument and, therefore, an official document, the bill of exchange
has to contain certain essential mentions, and in their absence, the document does not
to have the power of an instrument of credit valuing, as granted by law to this type of
instrument9.
The essential mentions of the bill of exchange are:
The definition of a Bill of Exchange under the act is fairly exhaustive and almost
covers all the aspects related to it at one place. A Bill of Exchange requires three
parties.
a. The drawer, i.e. the person who is the maker of the bill and who gives the
order.
b. The drawee, i.e. the person who is directed to pay the bill and who on
affixing his signature becomes the acceptor ; and
c. The payee, i.e. the person to whom or to whose order the amount of the
instrument is payable, unless the bill is payable to bearer.
To analysis of the definition shows the following essential requisites of a bill:
A. A Bill of Exchange must be in Writing
A bill of exchange may be written in any language, and any form of words may be
used, provided the requirements of this section are complied with.
7
Negotiable Instrument Act, 1881, Sec 5.
8
Leighand Sillavan Ltd. v. Aliakmon Shipping Co Ltd, [1985]Q.B, 350.
9
Id.
6
B. A Bill of Exchange must Contain an Order to Pay
The essence of a bill of exchange is that the drawer orders the drawee to pay money to
the payee. As a bill of exchange is an order, it is necessary that it must, in its terms, be
imperative and not perceptive.
C. The Order Contained in the Bill Should be Unconditional
A bill of exchange cannot be drawn so as to be payable conditionally. The drawer’s
order to the drawee must be unconditional and should not make the payment of the
bill dependent on some contingency. Where an instrument is payable on a
contingency, it does not cease to be invalid by the happening of the event before the
expiry of the period fixed for the performance of the obligation, for the instrument
must be valid ab initio, and carry its validity on its face.10 A conditional bill of
exchange is invalid. The addition of the words as per agreement does not make a note
conditional.11
D. Bills Payable Out of a Particular Fund
On the same principle, a bill expressed to be payable out of a particular fund is
conditional and invalid, because it is uncertain whether the fund will be in existence
or prove sufficient when the bill becomes payable. Thus a bill containing an order to
pay ‘out of money due from A as soon as you receive it, or out of money remaining in
your hands belonging to X company is invalid.12
E. A Bill of Exchange must be Signed by the Drawer
A Bill is not valid unless the drawer signs it and if Drawer has not signed it no action
can be maintained against the acceptor or any other party who has affixed his
signature these to. If the drawer is unable to write his name, he can sign by a mark in
lieu of a signature.13
F. The Drawee must be Certain
10
Colehan v. Cooke (1742). Willes 393.
11
Jury v. Barker (1858).E.B & F 459.
12
Dankes v. Deloraine (1770). 3 willes 207.
13
Banker v. Dening (1838). 8 A&E 94
7
A bill cannot be addressed to two or more drawees in the alternative because it would
create difficulties as to recourse if the bill were dishonoured.
G. The Sum Payable must be Certain
The sum payable is certain even though it is required to be paid with interest, or at the
indicated rate of exchange or by installment with the proviso that on the default in
payment of instalment, the whole amount shall become due and payable.14
H. The Instrument must Contain an Order to Pay Money only
An instrument containing order to pay money along with some other thing or merely
some other thing is not a valid bill. An instrument ordering the delivery up of houses
and a wharf in addition to the payment of a sum of money is not a valid bill.15
I. The Payee must be Certain
A bill of exchange ought to specify to whom the same is payable, for in no other way
can the drawee, if he accepts it, know to whom he may properly pay it so as to
discharge himself from all further liability.16 A bill cannot be drawn payable to bearer
on demand.17Where in a bill the drawee or payee is misnamed or misdescribed,
extrinsic evidence is admissible to identify him.18
IV. THE UN CONVENTION ON INTERNATIONAL BILLS OF EXCHANGE
AND INTERNATIONAL PROMISORY NOTES (1998)
Globally the law of bills of exchange is divide into two legal families.’they are the
Geneva system, founded on the Geneva Conventions,19 which has been adopted in
civil law jurisdictions, American legal systems. In order to reconcile these two
systems, UNCITRAL prepared a Convention on International Bills of Exchange and
14
Carlon v. Kenealy (1843) 12 M & W 139
15
Martin v. Chayntry (1747) 2 Stra, 1271.
16
Storey on Bills, Secction- 514.
17
Reserve Bank of India Act 1934, s31
18
See generally Willis v. Barret (1816) 2 Stark 29; Jacobs [Link] (1855) 20 main R. 132
19
There are three Geneva Conventions on the Unification of the Law relating to Bills of Exchange of
June 7, 1930, and three further Conventions signed at Geneva on the Unification of the Law relating to
Cheques of March 19, 1931.
8
Promissory Notes20 whcih was approved by the General Assembly of the United
Nations on December 9, 1988.
The Convention's aim is to create special instruments which persons engage in
intemational trade might use in place of existing instruments to make payment ot to
give [Link] provisions will only apply only if the instrument in question is
designated as “International Bill of Exchange”. And this designation must appear in
the heading and the text of the instrument.
V. THE CLAUSED BILL OF EXCHANGE
The draft customary in the export trade is not set in a simple format. Rather, they
contain a number of additional clauses. The clause can be in regard to the payment at
a specific rate of exchange or adding, to the sum payable, interest or specified charges.
Such clauses are very common, particularly when the bill is made payable in foreign
currencies in force at the buyer’s and seller’s residence, and it is unavoidable, when
the bill is negotiated, that incidental expenses, such as bankers’ charges or foreign
stamp duties, are incurred.21
Some of these clauses are customary in the trade with particular overseas countries
and others are used where the buyer intends to obtain finance in a particular manner.
Thus, "exchange as per indorsement" clauses are mainly used where the seller wishes
to discount the bill to bank; the bank then includes its discount in the sum payable
when converting the stipulated currency, into the local currency of the drawee.22
VI. DOCUMENTARY BILL OF EXCHANGE
A documentary Bill of Exchange is one where the relative shipping documents such
as Bill of Lading, marine insurance policy, invoice and other documents are sent
20
The text of the Convention may be found at htto://[Link]//org; See also Ademuni Odeke,
“The United Nations onvention on International Bills of Exchange and Promisory Notes” (1992) j.B.L.
281.
21
Indira Carr, International Trade Law, %TH ED, PG 79.
22
In view of the possibility of currency devaluations, it is advisble to specify the exchange calculation
expressly in the indorsement and not to rely on the details on the front of the bill: Tropic Plastic and
Packaging Industry v Standard Bank of South Africa 1 S.A.L.R. 108, 121-122.
9
along with the Bill of Exchange. This is the common form in export trade. The
documents are given to the bank either for collection or negotiation. in case the
importer gets the documents on acceptance, it is called Documents against
Acceptance.23 If the importer gets the documents only on payment, it is caned
Documents against Payment.
After shipment of goods, the exporter draws the bill on the importer or -more as
agreed between the exporter and frequently, on hank acting for the importer, importer,
the exporter usually draws the hill to his own order or that of his bank. Later, he
endorses the bin in favor of his bank. Exporter may request his to collect or purchase
the bill. In case of purchase of bin, exporter receives the export proceeds immediately.
In any case, the exporter’s bank sends the documents to its branch or correspondent.
bank in importer's place. The bank at that end sends the intimation of receipt, of
documents to the importer either for acceptance or payment, dependent on the nature
of bill drawn. In case of Documents against acceptance, importer accepts the bill and
then only gets title to goods. In case of Documents against payment, importer has to
make the payment for securing delivery of documents.
VII. BILL OF LADING AND BILL OF EXCHANGE
Bill of Lading is a document issued by a carrier to a transporter mentioning the type,
quantity and destination of goods to be delivered. It acts as a shipment receipt, when
the goods are being delivered at the pre-agreed destination by the carrier.24 This
document is required while releasing the cargo to the buyer, thus it must be
accompanied with the shipped product, no matter the mode of transportation be and
this must be acknowledged by an authorized representative of carrier, shipper and
receiver.25
Whereas, Bill of Exchange is a negotiable instrument used in international
transportation created by the exporter which is given to the importer. This document
legally binds the buyer as a promise to pay the agreed amount to the exporter on the
23
See generally, Gnmzweig und Hartmann GmbH v Irvani, [1988] 1 W.L.R. 1285
24
See Sucre Export SA v Northern Shipping Ltd (The Sormovskiy 3068) [1994] 2 Lloyd’s Rep 266.
25
Id.
10
specific date, upon the receipt of the goods or certain day ensuing receipt of the
goods.26(eg. 10 days after receiving the goods).
Like the Bill of Lading, it provides the shipping details along with the financial
obligations held by the buyer to the seller, thus legally binding both the parties
involved.
VIII. DISHONOUR OF BILLS OF EXCHANGE
A bill of exchange gets dishonoured when the person who is the acceptor of the bill or
the drawee of the cheque makes a default by not paying off the liability which lies
upon such a person. Such a person has a liability or duty to discharge himself of the
liability by making the payment as stipulated by the instrument. When he fails to do
so the instrument is called to be dishonoured.
The Negotiable Instruments Act, 1881 has dealt with the dishonour of instruments
under chapter 8 of the Act from sections 91 to 98. When an instrument is presented
for payment and the acceptor fails in making the payment it is said that the instrument
has been dishonoured.
It has to be borne in mind that if there is non-acceptance then the dishonour will be
only for a bill of exchange, and if there is a non-payment then dishonour can be for
any negotiable instrument which would include a bill of exchange.
A. DISHONOUR BY NON PAYMENT
Sec 92 of the Act contemplates that a promissory note, bill of exchange or cheque is
called as dishonoured by non-payment when the maker of the note, acceptor of the
bill or drawee of the cheque fails to or does not pay the amount which he was liable to
do as per the instrument. He fails to discharge his liability which was under an
obligation to do.27
26
Sze Hai Tong Bank Ltd v Rambler Cycle Co Ltd [1959] 2 Lloyd’s Rep 114, at p 120.
27
The Negotiable Instrument Act, 1881.
11
As stated earlier that dishonour by way of non-acceptance can only be for a bill of
exchange, however in cases of any negotiable instrument which includes a bill of
exchange the dishonour can happen for non-payment. In cases where the acceptor acts
with an intention to prevent the instrument-from being presented, or he is not found
after [Link] search, it is deemed that an instrument is dishonoured-even without
presentment.
In the case of Barendra Kumar Bera v. Chottan Mukherjee28, it was held that the term
notice in terms of sec 94 of the act means to intimate or instruct someone to do
something. It is not necessary that the notice be in writing. When the statute does not
provide that the notice be in writing then it may be verbal.29
In the case of Rakesh Nemkumar Porwal v. Narayan Dhondu Joglekar30, it was held
that the conditions and facts under which dishonour takes place need to be completely
ignored. The law is only concerned with the fact that the payment was not done
irrespective of the reasons behind it. Had it not been the case then the legislature
would have given exceptions to the section and offence therein31.
There is an absence of any such intention which can be made out to provide any
exceptions or carve out exceptions. However, an exception has been made out which
is that a period of fifteen days is provided to a person to make good the liability that
has incurred and the dishonour for its payment. It a last opportunity that is granted to
make the payment and the legislature has adopted a no nonsense approach.32
IX. CONCLUSION
We have discussed the concept of Bill of Exchange in this paper. From
what we have talked about in this paper, one thing that can be carved out
is that India do not have substantial and separate for Bills of Exchange.
28
2009 (83) AIC 795 (Calcutta HC)
29
Id.
30
1994 (3) BomCR 355
31
Id.
32
Tropic Plastic and Packaging Industry v Standard Bank of South Africa 1 S.A.L.R. 108, 121-122.
12
United States of America and United Kingdom have distinct acts for it.
The increasingly globalized economy demands for a seperate law on this,
as it will aid specializing trade and make it more clear, and fair.
13
