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Bill of exchange (B/E) or Draft
Evidences obligation to pay
Negotiable instrument: a specialized type of "contract" for
the payment of money that is unconditional and capable of
transfer by negotiation. Common examples include
cheques, banknotes (paper money), and commercial paper.
it is transferable by delivery and with the transfer, rights
embodied in it are transferred
The transferee can enforce these rights in his own name
i.e, no notice to the obligor or assignment is necessary
Where transferee takes the draft in good faith, he takes it
free of any defects of title of the transferor
Negotiable instrument
Unlike ordinary contract documents, the right to the performance of a negotiable instrument is linked to the possession of the document itself (with certain exceptions such as loss or theft).
The rights to payment are not subject to set-off, and do not rely on the validity of the underlying contract giving rise to the debt (for example if a cheque was drawn for payment for goods delivered but defective, the drawer is still liable on the cheque)
No notice needs to be given to any prior party liable on the instrument for transfer of the rights under the instrument by negotiation
Transfer free of equities—the holder in due course can hold better title than the party he obtains it from
Negotiation enables the transferee to become the party to
the contract, and to enforce the contract in his own name.
Negotiation can be effected by endorsement and delivery
(order instruments), or by delivery alone (bearer
instruments).
B/E
Autonomous contract
Not affected by breach in the
underlying contract
Therefore, are treated as cash
A bill of exchange requires in its
inception three parties--the
drawer, the drawee, and the
payee.
The person who draws the bill is
called the drawer. He gives the
order to pay money to third party.
The party upon whom the bill is
drawn id called the drawee. He is
the person to whom the bill is
addressed and who is ordered to
pay. he becomes an acceptor
when he indicates his willingness
to pay the bill. (Sec.62) The party
in whose favor the bill is drawn or
is payable is called the payee.
B/E
Bill of Exchange Act 1882
Definition in the act: ‘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 bearer’.
Seller = drawer
Buyer = drawee
Seller (drawer) will draw a bill of exchnage/draft on the
buyer (drawee)
B/E
‘Sight bills’/’sight draft’: Payable on demand or ‘at sight’:
money payable upon presentation
‘Time bill’/’time draft’: Payable at future date; buyer gets
credit
Drawer sends draft; buyer accepts draft (‘Trade
acceptance’)
Drawer becomes ‘Acceptor’
Seller can sell draft at discount
It is not necessary that the bill is accepted by the drawee
prior to negotiation (i.e., transfer by delivery) if bearer bill or
by endorsement and delivery if order bill
B/Es
Sight bill: payment on
demand or ‘at sight’
Time bills: payment at
determinable or fixed future
date
Order bill: transferable by
endorsement of drawer or
holder
Bearer bill: Rights by mere
possession
ASSIGNMENT OF PAYMENT RIGHTS
US law: payment rights can be
separated from other contractual rights UK law: Payment rights integral
part of contractual rights
ASSIGNMENT IS THE KEY INSTRUMENT IN FACTORING
Assignment = right to
transfer debt to a third
party
Factor wants the Law to
provide unencumbered
ownership—sole right to
collect in full
Invoices result from sales contract; they have no legal status on their own (unlike a bill of exchange, which has a whole legal act The Bills of Exchange Act)
Invoice is the Seller’s presentation of what he thinks is owed
• To physically possess a B/E is
to have rights
• To physically possess an
invoice gives no rights
BILL OF EXCHANGE
Autonomous control: Not
affected by breach of the
underlying contract
(seller/buyer dispute)
Bills of Exchange Act 1882:
Section 3(1) ‘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 bearer.’
BILL OF EXCHANGE: US UCC Art 3 & 4
1. Promise or order to pay is
unconditional
2. For a specified sum of money
3. Payment must be made on
demand or at definite time
4. Payee has no other obligation
other than to pay
5. Instrument payable to bearer
or ‘to order’
6. Words of negotiability
UN Geneva Convention 1930
used by Civil Code countries
POINT: B/Es have a legal
definition and force of law
behind them
Can get a summary judgment
Holder: prima facie presumed
to be holder
Holder takes B/E in good faith
Right to enforce payment
against all parties liable to the
bill: drawer, drawee, endorser
Unless proved that issuance,
acceptance or negotiation by
fraud or duress
Then illegal
Conditions for holder:
(a) Become holder before B/E
overdue or without notice of it
having been previously
dishonoured
(b) Took it in good faith for value
at the time negotiated with no
notice of defect in title of
person who negotiated it
If a customer does not accept a bill of exchange or does not
pay it on time, you can use a Protest bill of exchange
journal to change the status of the bill of exchange from
Drawn to Protested with reference to the drawn bill of
exchange.
Bill of Exchange Law
Text Question Key words Vocabulary Literature Form Act
22. Protesting the Bill of Exchange
Few institutes of the law of bills of exchange are understood in such a wrong manner as the bill protest. It is, though, quite clear: the bill protest is a written qualified certificate that a certain participant of the bill relationships (the debtor, usually) was asked to fulfill his obligations (to pay the bill, usually) but he failed to do so. The content of the certificate and the organs that may issue such an instrument are determined by the law (comp. Article I, Sections 79 and 80, BECA).
In addition to evidentiary purposes, the protest has the effect of the second preserving act (the first one being presentment). If the possessor does not have this certificate issued, it can even lead, in some cases, to extinction of bill rights. As a typical example we may mention the extinction of rights against all indirect debtors which happens when the periods set for protesting non-acceptance or non-payment are missed (in detail, see Article I, Section 53, Paragraph 1, BECA).
The possessor may be relieved from the duty of protest by including the clause "without protest" in the bill (or by a clause of a similar meaning).
Protest must contain: the names of the persons for whom and against whom it is being made; the information that the person against whom the protest is being made has been, to no avail, requested to act on the bill of exchange, or that the person could not be contacted, or that neither the premises where he does business nor his apartment could be located; the information about the place and time when the request or the failed attempt at such a request has been made; a note, in cases of acceptance or payment for honour, from whom, for whom and how the acceptance or the payment for honour was offered or made; in the event that the drawee to whom the bill of exchange was presented for acceptance requests that it be presented to him again on the following day, a note about this fact; a literal copy of the bill of exchange (copy) with all endorsements and a notes; the signature of the protesting body and the official seal or the official stamp.