A bill of exchange is a binding agreement by one party to pay a fixed amount of cash to another party as of a predetermined date or on demand. Bills of exchange are primarily used in international trade. Their use has declined as other forms of payment have become more popular.Note: Accepted for Value is called Accepted for Honour in Australia and NZ. You can read about it in the Bills of Exchange Act 1909. Section 70 (3) and section 73 (7)
A written, unconditional order by one party (the drawer) to another (the drawee) to pay a certain sum, either immediately (a sight bill) or on a fixed date (a term bill), for payment of goods and/or services received.The drawee accepts the bill by signing it, thus converting it into a post-dated check and a binding contract.A bill of exchange is also called a draft but, while all drafts are negotiable instruments, only "to order" bills of exchange can be negotiated.According to the 1930 Convention Providing A Uniform Law For Bills of Exchange and Promissory Notes held in Geneva (also called Geneva Convention) a bill of exchange contains:(1) The term bill of exchange inserted in the body of the instrument and expressed in the language employed in drawing up the instrument.(2) An unconditional order to pay a determinate sum of money. (3) The name of the person who is to pay (drawee). (4) A statement of the time of payment. (5) A statement of the place where payment is to be made. (6) The name of the person to whom or to whose order payment is to be made. (7) A statement of the date and of the place where the bill is issued. (8) The signature of the person who issues the bill (drawer). A bill of exchange is the most often used form of payment in local and international trade, and has a long history- as long as that of writing.
There are three entities that may be involved with a bill of exchange transaction. They are:
Drawee. This party pays the amount stated on the bill of exchange to the payee.Drawer. This party requires the drawee to pay a third party (or the drawer can be paid by the drawee).Payee. This party is paid the amount specified on the bill of exchange by the drawee.
A bill of exchange normally includes the following information:
Title. The term "bill of exchange" is noted on the face of the document.Amount. The amount to be paid, expressed both numerically and written in text.As of. The date on which the amount is to be paid. Can be stated as a certain number of days after an event, such as a shipment or receipt of a delivery.Payee. States the name (and possibly the address) of the party to be paid.Identification number. The bill should contain a unique identifying number.Signature. The bill is signed by a person authorized to commit the drawee to pay the designated amount of funds.
Issuers of bills of exchange use their own formats, so there is some variation from the information just noted, as well as in the layout of the document.A bill of exchange is transferable, so the drawee may find itself paying an entirely different party than it initially agreed to pay. The payee can transfer the bill to another party by endorsing the back of the document. A payee may sell a bill of exchange to another party for a discounted price in order to obtain funds prior to the payment date specified on the bill. The discount represents the interest cost associated with being paid early.A bill of exchange does not usually include a requirement to pay interest. If interest is to be paid, then the percentage interest rate is stated on the document. If a bill does not pay interest, then it is effectively a post-dated check.If an entity accepts a bill of exchange, its risk is that the drawee may not pay. This is a particular concern if the drawee is a person or non-bank business. No matter who the drawee is, the payee should investigate the creditworthiness of the issuer before accepting the bill. If the drawee refuses to pay on the due date of the bill, then the bill is said to be dishonored. Similar TermsA bill of exchange issued by a person may be called a trade draft. If the document is issued by a bank, it may be called a bank draft.