Template:M intro repack Bills of Exchange Act 1882

“Bill of exchange”

Defined in section 2 as:

“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”

Unpicking this there are three parties involved here: is the person making the order (the “drawer”) who directs its bank or moneybags of some kind (the “drawee”) to pay a specified sum to a third party creditor (the “payee”). Hence the exchange: Drawer gives payee the bill in exchange for goods and services. The drawee accepts it as good value recognising it as a claim for the payment of money — a debt — against the drawee.

One needs to designate clearly who is drawer and drawee: the third party need not be specified, and if it is not the bill will be payable on presentation by the bearer.

This triangular arrangement makes for uncertainty at the point of delivery, especially as the drawee is not represented. How does the payee know the drawee will acknowledge the debt? This is depends on a preexisting arrangement, to which payee is not party or even witness, whereby drawee agrees to honour bills drawn by drawer, against reimbursement in due course by the drawer. And a fee, and interest. Hence Sir MacKenzie’s good sense to enshrine all this in legislation which, once settled, ought not need to be changed unless technology should intervene to change the way merchants do business.

So there are some complicated arrangements springing into life here:

• A payment obligation between drawer and payee conditionally discharged by delivery of a bill
• A payment obligation between drawee and payer which, if dishonoured, triggers reinstatement of the primary payment obligation from drawer
• A payment obligation from drawer to drawee to reimburse the latter for settling its original payment obligation.

Derivatives fans may see this as redolent of a give-up.

Negotiability

All this is further confused if the holder of a bill of exchange is entitled to negotiate it — to sell it, effectively, in the secondary market to a random third party.

If it is a bearer bill, one can negotiate it by simple delivery. If the bill is made out to specified payee, the payee can “indorse” it, by signing it.

You might think there is some scope for fraud here, and you might be right. There are many provisions on the Bills of Exchange act about that.

“Cheque”

Older folk may think, and would be right in thinking, a bill of exchange sounds rather like a cheque. Indeed, per section 73, a cheque is a specific type of bill of exchange: one drawn on a bank, and payable on demand.

“Promissory note”

A bill where the drawer and the drawee are the same person — that says, effectively, “I direct myself to pay you this sum, only later” — is a promissory note. An IOU, effectively. Debt securities generally have this character. They are a form of securitised loan.