Bills of Exchange - Meaning & Definition, Essentials and Specimen

Negotiable Instruments Act' 1881 Notes
Business Laws Notes B.Com 1st & 2nd Sem CBCS Pattern 

Bills of Exchange Meaning & Definition

A bill of exchange or “draft” is a written order by the drawer to the drawee to pay money to the payee. It is an unconditional order issued by a person or business which directs the recipient to pay a fixed sum of money to a third party at a future date. The future date may be either fixed or negotiable. A bill of exchange must be in writing and signed and dated. Bills of exchange are used primarily in international trade, and are written orders by one person to his bank to pay the bearer a specific sum on a specific date.

As per Section 5 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.”

Essentials of a Bills of exchange

1)      Number of parties:  A bill of exchange has 3 parties:

Ø  the drawer, who draws the bill of exchange

Ø  the drawee, who has to make the payment

Ø  the payee, who is entitled to the payment.

Sometimes the drawer and the payee can be one and the same person.

2)      It Must be in writing: The Bill of Exchange must be in writing.

3)      Express order to pay:  This is the essence of a bill of exchange. There must be an ‘order by the drawer to the drawee to pay’. The order must be a command and not an excessive request.

4)      Order must be unconditional:  The order to pay must be unconditional. In other words the happening of the condition must be certain.

5)      Order to pay money only:  Just as a promissory note, the instrument must be for money only.

6)      Sum payable to be certain:  The amount payable must be certain. There should be no ambiguity in the amount to be paid through the Bill of Exchange.

7)      Must be signed:  The instrument is complete only when it is signed by the drawer and the drawee.

8)      Must bear the stamp:  A Bill of Exchange must be properly stamped in accordance with the Indian Stamp Act, 1899 and must also be properly cancelled.

9)      Other formalities:  Formalities such as date, place, consideration, etc. are usually found in a Bill of Exchange.

10)   Requisites of a contract to be complied with:  All requisites of a valid contract like capacity to contract, consideration, free consent, lawful object must be present.

Specimen of Bills of Exchange