Bill of Exchange: Meaning, Essentials, Parties and Kinds (Section 5)

A bill of exchange is an order rather than a promise. The drawer directs another person, the drawee, to pay money to a payee. Bills grew up to settle trade debts between distant places without moving coin, and they remain important in trade finance, especially for exports and imports. This note covers the definition in Section 5, its explanatory paragraphs, the parties, acceptance, and the main kinds of bill.

1. The Statutory Definition

Section 5, Negotiable Instruments Act, 1881

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 meaning of this section and section 4, by reason of the time for payment of the amount or any instalment thereof being expressed to be on the lapse of a certain period after the occurrence of a specified event which, according to the 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 payable at an indicated rate of exchange, or is according to the course of exchange, and although the instrument provides that, on default of payment of an instalment, the balance unpaid shall become due.

The person to whom it is clear that the direction is given or that payment is to be made may be a "certain person", within the meaning of this section and section 4, although he is mis-named or designated by description only.

2. The Essentials

In writing: as with a note, an oral order is not a bill.
An order to pay: the language must be imperative. A polite form ("please pay") is still an order; a mere request or authority that leaves the drawee free to refuse as a matter of courtesy is not.
Unconditional: the order must not depend on a contingency. An order to pay "out of the proceeds of the sale of my house" or "if the goods arrive" is conditional. Directions on which account to debit, or a statement of the transaction behind the bill, do not make it conditional.
Signed by the drawer: the statute calls him the "maker"; Section 7 calls him the drawer.
Certain drawee: the person directed to pay must be named or otherwise indicated with reasonable certainty.
Certain sum of money only: the explanatory paragraphs allow interest, exchange rates and acceleration clauses.
Certain payee, or bearer: the drawer may name himself as payee; a misnamed or described payee is enough. Bills payable to bearer on demand are barred by Section 31 of the RBI Act.

3. The Parties

Drawer: the person who makes the bill and gives the order.
Drawee: the person directed to pay. He is not liable on the bill until he accepts it.
Acceptor: the drawee who has signed his assent on the bill and delivered it or given notice of acceptance (Sections 7 and 33). The acceptor becomes the principal debtor (Section 32).
Payee: the person named to receive payment. The drawer and payee may be the same person ("pay me or my order").
Drawee in case of need: a person named in the bill or in an indorsement to whom the holder may resort if the bill is dishonoured (Section 7; Topic 32).
Acceptor for honour: a person who, after dishonour by non-acceptance, accepts the bill to save the credit of a party (Section 7; Topic 32).
Indorser and indorsee: created when the bill is negotiated (Topic 23).

4. Acceptance

A note needs no acceptance because the maker is already bound. A bill, by contrast, binds the drawee only once he accepts. Acceptance must be signed on the bill by the drawee, usually with the word "accepted" (Section 7). Bills payable after sight must be presented for acceptance to fix their maturity; other bills may be presented, and the holder often does so to obtain the drawee's commitment early (Sections 61 to 63; Topics 18 and 25). Until acceptance, the drawer is the party primarily answerable; after acceptance, the acceptor is primarily liable and the drawer becomes liable as a surety for him (Section 37).

5. Kinds of Bill

Inland and foreign (Sections 11 and 12): a foreign bill must be protested for dishonour if the law of the place of making or payment requires it (Section 104; Topic 31). Foreign bills are often drawn in sets (Topic 39).
Demand and time bills: a bill payable on demand, at sight or on presentment is a demand (sight) bill; one payable after a fixed period after date or sight is a time or usance bill, and attracts three days of grace (Topic 11).
Trade and accommodation bills: a trade bill arises from a genuine sale of goods or services; an accommodation bill is signed by a party, without consideration, to lend his name and credit to another (Section 43; Topic 14).
Documentary and clean bills: a documentary bill is accompanied by documents of title such as a bill of lading. Under D/P (documents against payment) the documents are released only on payment; under D/A (documents against acceptance) they are released on acceptance. A clean bill carries no documents.
Hundis: indigenous bills in Indian languages governed by usage (Topic 5).

6. Bills in Modern Commerce

Domestic use of bills has declined with electronic payments, but bills remain central to export and import finance and to receivables financing. Banks purchase or discount bills, and the Reserve Bank's Trade Receivables Discounting System (TReDS) allows invoices and bills of micro, small and medium enterprises to be financed on electronic platforms. In each case, the Act's rules on acceptance, negotiation, dishonour and notice determine the rights of the parties.

⚠ Key point

A bill of exchange is a written, unconditional order, signed by the drawer, directing a certain person (the drawee) to pay a certain sum of money only to, or to the order of, a certain person, or to bearer (Section 5). The explanatory paragraphs on events certain to happen, interest and exchange, acceleration and misnamed payees apply to notes and bills alike. The drawee is not liable until he accepts; the acceptor then becomes the principal debtor. Bills may be inland or foreign, demand or usance, trade or accommodation, documentary (D/P or D/A) or clean.

7. Related Topics and Provisions

Promissory note (Topic 6)
Cheque (Topic 8)
Acceptance (Topic 18)
Maturity and days of grace (Topic 11)