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BILL OF EXCHANGE

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 money only to ,or to the order
of , a certain person or to the bearer of the instrument.

A promise or order to pay is not conditional within the naming of this section and section 4, by
the reason of the time for payment of the amount or any installment thereof being expressed to
be on the lapse of a certain period after the occurrence of a specified event which, according to
ordinary expectation of mankind, is certain to happen, although the time of its happening may
be uncertain.

The sum payable may be certain , within the meaning of this section and section 4 , although
it includes future interest or is according to the course of exchange , and although the
instrument provides that on default of payment of an installment , the balance unpaid
shall become due .

The person to whom its clear that the direction is given or that payment is to be made
may be certain person within the meaning of this section and section 4 , although he is
misnamed or designated by description only

Suppose Rajiv has given a loan of Rupees Ten Thousand to Sameer, which Sameer has to
return. Now, Rajiv also has to give some money to Tarun. In this case, Rajiv can make a
document directing Sameer to make payment up to Rupees Ten Thousand to Tarun on demand
or after expiry of a specified period. This document is called a Bill of Exchange, which can be
transferred to some other person’s name by Tarun.

Section 5 of the Negotiable Instruments Act, 1881 defines a bill of exchange as ‘an instrument
in writing containing an unconditional order, signed by the maker, directing a certain person to
pay a certain sum of money only to or to the order of a certain person, or to the bearer of the

instrument’.
SPECIMEN OF A BILL OF EXCHANGE

Rs. 10,000/- New Delhi


20-November-2010
Five months after date pay Tarun or (to his) order the sum of Rupees Ten Thousand
only for value received
To Accepted Stamp
Sameer Sameer S/D
Address Rajiv

Parties to a Bill of Exchange


There are three parties involved in a bill of exchange. They are-
i. The Drawer – The person who makes the order for making payment. In the above
specimen Rajiv is the drawer.

ii. The Drawee – The person to whom the order to pay is made. He is generally a debtor of
the drawer. It is Sameer in this case.

iii. The Payee – The person to whom the payment is to be made. In this case it is Tarun.

The drawer can also draw a bill in his own name thereby he himself becomes the payee. Here
the words in the bill would be Pay to us or order. In a bill where a time period is mentioned,
just like the above specimen, is called a Time Bill. But a bill may be made payable on demand
also. This is called a Demand Bill.
REQUISITES OF BILL OF EXCHANGE

1. A bill of exchange must be in writing


A B ill of exchange maybe written in any language , and any for of words may be
used , provided the requirements of this section complied with section 4 of N.I Act.

2. A bill of exchange must contain an order to pay.


When a bill of exchange is drawn , the presumptions is that there are funds in the
hands of the person to whom the order is given , which are payable in any case to
the person giving the order . The essence of a bill of exchange is that the drawer
order the drawee to pay money to the payee . As a bill of exchange is an order , its is
necessary that it must ,in its term , be imperative and not necessary that it must ,in
its term , be imperative and not perceptive. The use of any particular from or words
is not essential and any words would do if there is a demand . to frame a bill ,
therefore , in such a manner that it might be treated as a mere request would cause
inconvenience and uncertainty.

However the insertion of a term of politeness or a courteous expression like ‘


please pay affixed to the order’ will not invalidate an instrument purporting to be
a bill of exchange .Thus , an instrument running ‘Mr AB will much oblige Mr CD
by paying to the order of P ‘ was held good as a bill.(Ruff Vs Webb 21 Esp 129).

Excessive terms of politeness may lead to the construction that the communication
contained in the bill was not an order . Thus, where a document in the form: ‘Mr
little , please do let the bearer have seven pounds and place into account ,and you will
oblige ..., was held not to be a demand made by a party having a right to call on
the other to pay. The fair meaning to put on such an instrument was stated to be
you will oblige me by doing it’(Little Vs Slackford , [1828] M&M 171) . the
direction to the drawee ,however ,need not be expressed by the word ‘pay’ but any
other word conveying the idea of payment ,eg credit in cash , will be sufficient .
(Edison Vs Collingridge , 1850,19 ,LJCP ,268). A mere request to pay to an account
was held not amounting to an order(P Morris Vs Solomon ,[1840]2 Mood & R 266)

In pursuance of an agreement to lend money , A give his creditors some ‘chits’ for
certain sums , addressed to B and required him to pay the amount mentioned therein .
B did so and sued A for the amount so advanced . It was held that chits were 9
neither bills of exchange , nor the cheques as agreements did not make B a banker.
(Rtaulal Vs Vrijbhukkan[1893] ILR 17 Bom 684)
3.The order contained in the bill should be unconditional

Its essence of a bill that it should be payable at all events , hence this requisites
must appear on its face with reasonable certainly . A bill of exchange cannot be as
to be payable conditionally . the drawer ,s order to the drawee must be u were an
instrument 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 of the obligation, for the instrument must be valid ab intio, and carry its validity on
its face.(Colehan Vs Cooke [1742] Willes 393).A conditional bill of exchange is invalid.
The addition of the words as per agreement does not make note conditional.(Jury Vs
Baker[1885]E B &E 459).

4. Bills payable out of a particular fund

On the same principle, a bill or mote 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. Similarly, an order to pay ‘out of the
moneys now due or hereafter to become due to me under the will of my late father and
before making any payment to me there out ’ is not a valid bill, nor is the promise to pay
out of the proceeds of a sale a valid note.

However, an unqualified order to pay, coupled with an indication of the particular fund,
out of which the drawee is to reimburse himself, or of a particular account to be debited
with the amount, is not conditional and is therefore valid. Thus, a bill containing an
order to pay against cotton per Victory or being a portion of a value as under deposited
in security for the payment hereof or against credit No 20, and place it to account as
advised per Co, constitutes a valid bill.
5. A bill of exchange must be signed by the drawer

A bill is not valid unless the drawer signs it and if the drawer has not signed it, no action
can be maintained against the acceptor or any other party who has affixed his signature
thereto. If the drawer is unable to write his name, he can sign by a mark in lieu of a
signature. Thus, if a bill is accepted by the drawee without the drawer’s signature and
negotiated with a third-party, the instrument is not a bill of exchange. However, the
signature may be added at any time after the issue of the bill but, until it is so added, the
instrument remains inchoate and ineffectual. A document in the form of a bill signed by
the acceptor but not by the drawer is not a bill, but may be valid as an acknowledgement
of debt.

6. The drawee must be certain

The next requisite is that the instrument must order a person to pay the amount of the
bill. The person to whom the bill is addressed is called the ‘drawee’ and he must be
named or otherwise indicated in the bill with reasonable certainty. In the interest of all
parties, it seems absolutely indispensable that the drawee must be indicated in the bill
with reasonable certainty, so that the payee knows the person to whom he should present
the instrument for acceptance and payment. Likewise, the person who accepts and
pays a bill on account of the drawer should know with reasonable certainty whether it is
addressed to him. Thus, where an instrument is drawn in the form of a bill, and is
addressed to no one in particular, it is not a valid bill, even though a person writes his
acceptance on it. However such an instrument may be treated as a promise to pay, the
acceptor being liable as the maker of a note.

However, where and instrument was drawn in the form of a bill, not containing the
name of the drawee, but expressed to be payable at a certain place, and was accepted by
a person residing at that place, it was held to be a valid bill and hence the acceptor was
liable to pay the amount. It was held that, by his acceptance, the acceptor acknowledged
that he was the person to whom the bill was directed.

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.
7. 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 installment, the whole amount shall become due and payable.

In England, where a bill or note is expressed to be with interest, but no rate is prescribed,
a court would probably allow the appropriate commercial rate. An instrument payable
with lawful interest is thus not valid for uncertainty.

The sum may also be expressed to be payable by stated installments with or without a
provision that upon default in payment of any installment, the whole shall become due,
but the days of the installments must be stated.

The sum may also be expressed to be payable according to an indicated rate of


exchange or according to a rate of exchange to be ascertained as directed by the
instrument.

A bill to pay the proceeds of the sale of a consignment of goods even when valued by
the drawer at a definite sum is a good bill.

8. The instrument must contain an order to pay money and money only

The medium of payment should be the legal tender money and nothing else. 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
wharf in addition to the payment of a sum of money is not a valid bill.

9. The payee must be certain

A bill must state with certainty the person to whom payment is to be made. A bill of
exchange ought not 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

Where a bill is payable to bearer, but payee is indicated with certainty. Bill are rarely
drawn payable to bearer, but cheques are commonly so drawn. A bill cannot be drawn
payable to bearer on demand.
BILLS OF EXCHANGE AND PROMISSORY NOTES COMPARED

For most purposes , the rules that apply to bills of exchange are, in general,
applicable to promissory notes. However, there are certain points of
difference between them. These are:

• The liability of the maker of a promissory note is primary and


absolute, but the liability of the drawer of a bill of exchange is
secondary and conditional.

• The maker of a promissory note corresponds, generally, to the


acceptor of a bill of exchange (see s 32 of the Act). Hence, unless a
promissory note is expressed to be payable at a certain place,
presentment is not necessary to make him liable, and notice of
dishonor is not required.

• The position of the maker of note, however, differs from the


acceptor’s, in that a note cannot be made conditionally, while a bill
may be accepted conditionally. The reason for this distinction is that
the acceptor of a bill is not the originator of the bill and his contract is
supplementary, being superimposed on that of the drawer, while the
maker of the note originates the instrument.

• A promissory noted indorsed by the payee corresponds with an


accepted bill payable to the drawer’s order, the payee of the
promissory note having the same rights and responsibilities as the
drawer of an accepted bill.

• The maker of a promissory note stands in immediate relation with the


payee, whereas the drawer of an accepted bill of exchange stands in
immediate relation with the acceptor and not the payee.

• The following provision relating to bills do not apply to notes, namely;


presentment for acceptance, acceptance, acceptance supra protest
,and bills in sets.

• Foreign bills must be protested for dishonor, when such protest is


required by the law of the place were they are drawn.