Bill of Exchange, All You Need to Know

The article discusses bill of exchange, its types, format, parties involved, characteristics, and an example to help you understand the concept.

The bill of exchange has a long history in international trade. Arabian merchants used it in the 8th century, but it attained wide use later in the 13th century among the Langobardi of northern Italy, who were extensively involved in foreign commerce.

Since the merchants kept their assets in banks across different trading cities, a shipper obtained immediate payment from a banker after presenting a bill of exchange duly signed by the buyer. This way, the buyer accepted liability for the due payment.

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Content

• What is a Bill of Exchange?
• Understanding Bills of Exchange
• Information Included in a Bill of Exchange
• Types of Bills of Exchange
• Are bills of exchange and promissory notes the same?
• Example of Bill of Exchange

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What is a Bill of Exchange?

According to the Negotiable Instruments Act, 1881 (ACT NO. XXVI OF 1881), a “bill of exchange” is a written short-term negotiable document that mentions a debtor’s indebtedness to a creditor. It is used in international trade to pay for goods or services.

A bill of exchange is not a contract. It may mention if the payment is due on demand or at a future date. The bill of exchange can be extended with credit terms. Also, a bill of exchange must be accepted by the drawee to be valid.

Understanding Bills of Exchange

A bill of exchange transaction usually involves three parties. 

Drawee – A drawee pays the amount the bill of exchange specifies. 

Payee – A payee is the one who receives that sum. 

Drawer – A drawer is the party that obliges the drawee to pay the payee.

Usually, drawers and payees are the same entity. If the drawer transfers the bill of exchange to a third-party payee, then they can be different entities.

Bills of exchange may accrue interest if paid after a specific date, but it must specify the interest rate. They can be transferred at a discounted rate before the date specified for payment. 

The following statements stand true for a bill of exchange.

• A bill of exchange must mark the funds associated, the due date, and the parties involved.
• A bill of exchange issued by the bank is called a bank draft.  
• If individuals issue bills of exchange, they are called trade drafts. 
• If the funds need to be paid immediately/on demand, the bill of exchange is known as a sight draft. 
• In international trade, a bill of exchange helps payees and drawees deal with issues related to the fluctuation of exchange rates and differences in legal jurisdictions.
• The bill of exchange amount must be definite.
• An amount to be paid in the future is known as a time draft.  

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Information Included in a Bill of Exchange

A bill of exchange typically includes the following information:

• Title: The term “bill of exchange” must be mentioned at the top of the document.
• Information of the Payee: States the name and address of the payee.
• Amount: The amount to be paid is mentioned both numerically and textually.
• Due date: The date on which the funds need to be paid. 
• Identification number: The bill must contain a unique identification number. 
• Signature: The payee must sign the bill of exchange to commit to paying the designated funds.  

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Types of Bills of Exchange

Below are some of the types of Bills of Exchange:

Trade Bill: The Bill of Exchange used for a trade transaction is called a trade bill. A seller draws the trade bill, and a buyer accepts it.

Accommodation Bill: An Accommodation Bill of Exchange is an agreement between two parties to support each other financially. This type of bill signifies mutual benefits.

Documentary Bill: The documentary bill states if the transaction between the seller and the buyer is genuine.

Inland Bill: If the amount is payable in the specified jurisdiction and nowhere else, then an inland bill is used.

Clean Bill: A clean bill is one with no supporting documents.

Supply Bill: A supplier or contractor withdraws a supply bill for supplying specified goods.

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Are Bills of Exchange and Promissory Notes the Same?

A bill of exchange is remarkably similar to a promissory note. Both specify an obligation for a buyer to pay a seller in an agreed-upon time frame. The primary difference is that a debtor writes a promissory note while a creditor writes a bill of exchange.

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Example of Bill of Exchange 

Suppose you have a vehicle repair shop (Company ABC) specializing in German car repair and parts sales. Your business requires you to order parts from overseas inevitably. You purchased parts worth Rs. 100,000 from a vendor (Company XYZ) in Germany. They may then draw up a bill of exchange specifying that Company ABC must pay Rs. 100,000 within 30 days. 

You will be obligated to accept the terms mentioned on the exchange bill. This agreement binds both parties (Company ABC and Company XYZ). It is an instrument that acknowledges the debt between the creditor and the debtor and marks the safe dispatch of the goods.

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