Bill Of Exchange

Bill Of Exchange, a form of negotiable instrument, defined below, the history of which, though somewhat obscure, was ably summed up by Lord Chief Justice Cockburn in his judgment in Goodwinn v. Robarts (1875), L.R. 10 Ex. pp. 346-358. Bills of exchange were probably invented by Florentine Jews. They were well known in England in the middle ages, though there is no reported decision on a bill of exchange before the year 1603. At first their use seems to have been confined to foreign bills between English and foreign merchants. It was afterwards extended to domestic bills between traders, and finally to bills of all persons, whether traders or not. But for some time after they had come into general employment, bills were always alleged in legal proceedings to be drawn secundum usum et consuetudinem mercatorum. The foundations of modern English law were laid by Lord Mansfield with the aid of juries of London merchants. No better tribunal of commerce could have been devised. Subsequent judicial decisions have developed and systematized the principles thus laid down. Promissory notes are of more modern origin than bills of exchange, and their validity as negotiable instruments was doubtful until it was confirmed by a statute of Anne (1704). Cheques are the creation of the modern system of banking.

Before 1882 the English law was to be found in 17 statutes dealing with isolated points, and about 2600 cases scattered over some 300 volumes of reports. The Bills of Exchange Act 1882 codifies for the United Kingdom the law relating to bills of exchange, promissory notes and cheques. One peculiar Scottish rule is preserved, but in other respects uniform rules are laid down for England, Scotland and Ireland. After glancing briefly at the history of these instruments, it will probably be convenient to discuss the subject in the order followed by the act, namely, first, to treat of a bill of exchange, which is the original and typical negotiable instrument, and then to refer to the special provisions which apply to promissory notes and cheques. Two salient characteristics distinguish negotiable instruments from other engagements to pay money. In the first place, the assignee of a negotiable instrument, to whom it is transferred by indorsement or delivery according to its tenor, can sue thereon in his own name; and, secondly, he holds it by an independent title. If he takes it in good faith and for value, he takes it free from “all equities,” that is to say, all defects of title or grounds of defence which may have attached to it in the hands of any previous party. These characteristic privileges were conferred by the law merchant, which is part of the common law, and are now confirmed by statute.

Definition.—By § 3 of the act a bill of exchange is defined to be “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 to bearer.”1 The person who gives the order is called the drawer. The person thereby required to pay is called the drawee. If he assents to the order, he is then called the acceptor. An acceptance must be in writing and must be signed by the drawee. The mere signature of the drawee is sufficient (§17). The person to whom the money is payable is called the payee. The person to whom a bill is transferred by indorsement is called the indorsee. The generic term “holder” includes any person in possession of a bill who holds it either as payee, indorsee or bearer. A bill which in its origin is payable to order becomes payable to bearer if it is indorsed in blank. If the payee is a fictitious person the bill may be treated as payable to bearer (§7).

The following is a specimen of an ordinary form of a bill of exchange:—

The scope of the definition given above may be realized by comparing it with the definition given by Sir John Comyns’ Digest in the early part of the 18th century:—“A bill of exchange is when a man takes money in one country or city upon exchange, and draws a bill whereby he directs another person in another country or city to pay so much to A, or order, for value received of B, and subscribes it.” Comyns’ definition illustrates the original theory of a bill of exchange. A bill in its origin was a device to avoid the transmission of cash from place to place to settle trade debts. Now a bill of exchange is a substitute for money. It is immaterial whether it is payable in the place where it is drawn or not. It is immaterial whether it is stated to be given for value received or not, for the law itself raises a presumption that it was given for value. But though bills are a substitute for cash payment, and though they constitute the commercial currency of the country, they must not be confounded with money. No man is bound to take a bill in payment of debt unless he has agreed to do so. If he does take a bill, the instrument ordinarily operates as conditional, and not as absolute payment. If the bill is dishonoured the debt revives. Under the laws of some continental countries, a creditor, as such, is entitled to draw on his debtor for the amount of his debt, but in England the obligation to accept or pay a bill rests solely on actual agreement. A bill of exchange must be an unconditional order to pay. If an instrument is made payable on a contingency, or out of a particular fund, so that its payment is dependent on the continued existence of that fund, it is invalid as a bill, though it may, of course, avail as an agreement or equitable assignment. In Scotland it has long been the law that a bill may operate as an assignment of funds in the hands of the drawee, and § 53 of the act preserves this rule.

Stamp.—Bills of exchange must be stamped, but the act of 1882 does not regulate the stamp. It merely saves the operation of the stamp laws, which necessarily vary from time to time according to the fluctuating needs and policy of the exchequer. Under the Stamp Act 1891, bills payable on demand are subject to a fixed stamp duty of one penny, and by the Finance Act 1899, a similar privilege is extended to bills expressed to be payable not more than three days after sight or date. The stamp may be impressed or adhesive. All other bills are liable to an ad valorem duty. Inland bills must be drawn on stamped paper, but foreign bills, of course, can be stamped with adhesive stamps. As a matter of policy, English law does not concern itself with foreign revenue laws. For English purposes, therefore, it is immaterial whether a bill drawn abroad is stamped in accordance with the law of its place of origin or not. On arrival in England it has to conform to the English stamp laws.

Maturity.—A bill of exchange is payable on demand when it is expressed to be payable on demand, or at sight, or on presentation or when notice for payment is expressed. In calculating the maturity of bills payable at a future time, three days, called days of grace, must be added to the nominal due date of the bill. For instance, if a bill payable one month after sight is accepted on the 1st of January, it is really payable on the 4th of February, and not on the 1st of February as its tenor indicates. On the continent generally days of grace have been abolished as anomalous and misleading. Their abolition has been proposed in England, but it has been opposed on the ground that it would curtail the credit of small traders who are accustomed to bills drawn at certain fixed periods of currency. When the last day of grace is a non-business day some complicated rules come into play (§ 14). Speaking generally, when the last day of grace falls on Sunday or a common law holiday the bill is payable on the preceding day, but when it falls on a bank holiday the bill is payable on the succeeding day. Complications arise when Sunday is preceded by a bank holiday; and, to add to the confusion, Christmas day is a bank holiday in Scotland, but a common law holiday in England. When the code was in committee an attempt was made to remove these anomalies, but it was successfully resisted by the bankers on alleged grounds of practical convenience.

Acceptance.—By the acceptance of a bill the drawee becomes the principal debtor on the instrument and the party primarily liable to pay it. The acceptor of a bill “by accepting it engages that he will pay it according to the tenor of his acceptance,” and is precluded from denying the drawer’s right to draw or the genuineness of his signature (§ 54). The acceptance may be either general or qualified. As a qualified acceptance is so far a disregard of the drawer’s order, the holder is not obliged to take it; and if he chooses to take it he must give notice to antecedent parties, acting at his own risk if they dissent (§§ 19 and 44). The drawer and indorsers of a bill are in the nature of sureties. They engage that the bill shall be duly accepted and paid according to its tenor, and that if it is dishonoured by non-acceptance or non-payment, as the case may be, they will compensate the holder provided that the requisite proceedings on dishonour are duly taken. Any indorser who is compelled to pay the bill has the like remedy as the holder against any antecedent party (§55). A person who is not the holder of a bill, but who backs it with his signature, thereby incurs the liability of an indorser to a holder in due course (§ 56). An indorser may by express term either restrict or charge his ordinary liability as stated above. Prima facie every signature to a bill is presumed to have been given for valuable consideration. But sometimes this is not the case. For friendship, or other reasons, a man may be willing to lend his name and credit to another in a bill transaction. Hence arise what are called accommodation bills. Ordinarily the acceptor gives his acceptance to accommodate the drawer. But occasionally both drawer and acceptor sign to accommodate the payee, or even a person who is not a party to the bill at all. The criterion of an accommodation bill is the fact that the principal debtor according to the instrument has lent his name and is in substance a surety for some one else. The holder for value of an accommodation bill may enforce it exactly as if it was an ordinary bill, for that is the presumable intention of the parties. But if the bill is dishonoured the law takes cognizance of the true relations of the parties, and many of the rules relating to principal and surety come into play. Suppose a bill is accepted for the accommodation of the drawer. It is the drawer’s duty to provide the acceptor with funds to meet the bill at maturity. If he fails to do so, he cannot rely on the defence that the bill was not duly presented for payment or that he did not receive due notice of dishonour. If the holder, with notice of the real state of the facts, agrees to give time to the drawer to pay, he may thereby discharge the acceptor.

Holder in due Course.—The holder of a bill has special rights and special duties. He is the mercantile owner of the bill, but in order to establish his ownership he must show a mercantile title. The bill must be negotiated to him, that is to say, it must be transferred to him according to the forms prescribed by mercantile law. If the bill is payable to order, he must not only get possession of the bill, but he must also obtain the indorsement of the previous holder. If the bill is payable to bearer it is transferable by mere delivery. A bill is payable to bearer which is expressed to be so payable, or on which the only or last indorsement is an indorsement in blank. If a man lawfully obtains possession of a bill payable to order without the necessary indorsement, he may obtain some common law rights in respect of it, but he is not the mercantile owner, and he is not technically the holder or bearer. But to get the full advantages of mercantile ownership the holder must be a “holder in due course”—that is to say, he must satisfy three business conditions. First, he must have given value, or claim through some holder who has given value. Secondly, when he takes the bill, it must be regular on the face of it. In particular, the bill must not be overdue or known to be dishonoured. An overdue bill, or a bill which has been dishonoured, is still negotiable, but in a restricted sense. The transferee cannot acquire a better title than the party from whom he took it had (§ 36). Thirdly, he must take the bill honestly and without notice of any defect in the title of the transferor,—as, for instance, that the bill or acceptance had been obtained by fraud, or threats or for an illegal consideration. If he satisfies these conditions he obtains an indefeasible title, and can enforce the bill against all parties thereto. The act substitutes the expression “holder in due course” for the somewhat cumbrous older expression “bona fide holder for value without notice.” The statutory term has the advantage of being positive instead of negative. The French equivalent “tiers porteur de bonne foi” is expressive. Forgery, of course, stands on a different footing from a mere defect of title. A forged signature, as a general rule, is a nullity. A person who claims through a forged signature has no title himself, and cannot give a title to any one else (§ 24). Two exceptions to this general rule require to be noted. First, a banker who in the ordinary course of business pays a demand draft held under a forged indorsement is protected (§ 60). Secondly, if a bill be issued with material blanks in it, any person in possession of it has prima facie authority to fill them up, and if the instrument when complete gets into the hands of a holder in due course the presumption becomes absolute. As between the immediate parties the transaction may amount to forgery, but the holder in due course is protected (§ 20).

Dishonour.—The holder of a bill has special duties which he must fulfil in order to preserve his rights against the drawers and indorsers. They are not absolute duties; they are duties to use reasonable diligence. When a bill is payable after sight, presentment for acceptance is necessary in order to fix the maturity of the bill. Accordingly the bill must be presented for acceptance within a reasonable time. When a bill is payable on demand it must be presented for payment within a reasonable time. When it is payable at a future time it must be presented on the day that it is due. If the bill is dishonoured the holder must notify promptly the fact of dishonour to any drawer and indorser he wishes to charge. If, for example, the holder only gives notice of dishonour to the last indorser, he could not sue the drawer unless the last indorser or some other party liable has duly sent notice to the drawer. When a foreign bill is dishonoured the holder must cause it to be protested by a notary public. The bill must be noted for protest on the day of its dishonour. If this be duly done, the protest, i.e. the formal notarial certificate attesting the dishonour, can be drawn up at any time as of the date of the noting. A dishonoured inland bill may be noted, and the holder can recover the expenses of noting, but no legal consequences attach thereto. In practice, however, noting is usually accepted as showing that a bill has been duly presented and has been dishonoured. Sometimes the drawer or indorser has reason to expect that the bill may be dishonoured by the drawee. In that case he may insert the name of a “referee in case of need.” But whether he does so or not, when a bill has been duly noted for protest, any person may, with the consent of the holder, intervene for the honour of any party liable on the bill. If the bill has been dishonoured by non-acceptance it may be “accepted for honour supra protest.” If it has been dishonoured by non-payment it may be paid supra protest. When a bill is thus paid and the proper formalities are complied with, the person who pays becomes invested with the rights and duties of the holder so far as regards the party for whose honour he has paid the bill, and all parties antecedent to him (§§ 65 to 68).

Discharge.—Normally a bill is discharged by payment in due course, that is to say, by payment by the drawee or acceptor to the holder at or after maturity. But it may also be discharged in other ways, as for example by coincidence of right and liability (§ 61), voluntary renunciation (§ 62), cancellation (§ 63), or material alteration (§ 64).

Conflict of Laws.—A bill of exchange is the most cosmopolitan of all contracts. It may be drawn in one country, payable in another, and indorsed on its journey to its destination in two or three more. The laws of all these countries may differ. Provision for this conflict of laws is made by § 72, which lays down rules for determining by what law the rights and duties of the various parties are to be measured and regulated. Speaking broadly, these rules follow the maxim Locus regit actum. A man must be expected to know and follow the law of the place where he conducts his business, but no man can be expected to know the laws of every country through which a bill may travel. For safety of transmission from country to country bills are often made out in sets. The set usually consists of three counterparts, each part being numbered and containing a reference to the other parts. The whole set then constitutes one bill, and the drawee must be careful only to accept one part, otherwise if different accepted parts get into the hands of different holders, he may be liable to pay the bill twice (§ 71). Foreign bills circulating through different countries have given rise to many intricate questions of law. But the subject is perhaps one of diminishing importance, as in many trades the system of “cable transfers” is superseding the use of bills of exchange.

A cheque “is a bill of exchange drawn on a banker payable on demand” (§ 73). For the most part the rules of law applicable to bills payable on demand apply in their entirety to cheques. But there are certain peculiar rules Cheques. relating to the latter which arise from the fact that the relationship of banker and customer subsists between the drawer and drawee of a cheque. For example, when a person has an account at a bank he is, as an inference of law, entitled to draw on it by means of cheques. A right to overdraw, can, of course, only arise from agreement. The drawer of a cheque is not absolutely discharged by the holder’s omission to present it for payment within a reasonable time. He is only discharged to the extent of any actual damage he may have suffered through the delay (§ 74). Apart from any question of delay, a banker’s authority to pay his customer’s cheques is determined by countermand of payment or by notice of the customer’s death (§ 75). Of recent years the use of cheques has enormously increased, and they have now become the normal machinery by which all but the smallest debts are discharged. To guard against fraud, and to facilitate the safe transmission of cheques by post, a system of crossing has been devised which makes crossed cheques payable only through certain channels. The first act which gave legislative recognition to the practice of crossing was the 19 and 20 Vict. c. 95. That act was amended in 1858, and a consolidating and amending act was passed in 1876. The act of 1876 is now repealed, and its provisions are re-enacted with slight modifications by §§ 76 to 82 of the Bills of Exchange Act 1883. A cheque may be crossed either “generally” or “specially.” A cheque is crossed generally by drawing across it two parallel lines and writing between them the words “& Co.” When a cheque is crossed generally it cannot be paid over the counter. It must be presented for payment by a banker. A cheque is crossed specially by adding the name of the banker, and then it can only be presented through that particular banker. A cheque, whether crossed generally or specially, may further be crossed with the words “not negotiable.” A cheque crossed “not negotiable” is still transferable, but its negotiable quality is restricted. It is put on pretty much the same footing as an overdue bill. The person who takes it does not get, and cannot give a better title to it, than that which the person from whom he took it had. These provisions are supplemented by provisions for the protection of paying and collecting bankers who act in good faith and without negligence. Suppose that a cheque payable to bearer, which is crossed generally and with the words “not negotiable,” is stolen. The thief then gets a tradesman to cash it for him, and the tradesman gets the cheque paid on presentment through his banker. The banker who pays and the banker who receives the money for the tradesman are protected, but the tradesman would be liable to refund the money to the true owner. Again, assuming payment of the cheque to have been stopped, the tradesman could not maintain an action against the drawer.

A promissory note is defined by section 83 of the act to be an “unconditional promise in writing made by one person to another, signed by the maker, engaging to pay on demand, or at a fixed or determinable future time, Promissory notes. a sum certain in money to or to the order of a specified person or to bearer.” A promissory note may be made by two or more makers, and they may be liable either jointly, or jointly and severally, according to its tenor (§ 85). For the most part, rules of law applicable to a bill of exchange apply also to a promissory note, but they require adaptation. A note differs from a bill in this: it is a direct promise to pay, and not an order to pay. When it issues it bears on it the engagement of the principal debtor who is primarily liable thereon. The formula for applying to notes the rules as to bills is that “the maker of a note shall be deemed to correspond with the acceptor of a bill, and the first indorser of a note shall be deemed to correspond with the drawer of a bill payable to drawer’s order” (§ 89). Rules relating to presentment for acceptance, acceptance, acceptance supra protest, and bills in a set, have no application to a note. Moreover, when a foreign note is dishonoured it is not necessary, for English purposes, to protest it. All promissory notes are, under the Stamp Act 1891, subject to an ad valorem stamp duty. Inland notes must be on impressed stamp paper. Foreign notes are stamped with adhesive stamps. For ordinary legal purposes a bank note may be regarded as a promissory note made by a banker payable to bearer on demand. It is, however, subject to special stamp regulations. It is not discharged by payment, but may be re-issued again and again. In the interests of the currency the issue of bank notes is subject to various statutory restrictions. A bank, other than the Bank of England, may not issue notes in England unless it had a lawful note issue in 1844. On the other hand, Bank of England notes are legal tender except by the bank itself.

In fundamental principles there is general agreement between the laws of all commercial nations regarding negotiable instruments. As Mr Justice Story, the great American lawyer, says: “The law respecting negotiable instruments Foreign laws. may be truly declared, in the language of Cicero, to be in a great measure not the law of a single country only, but of the whole commercial world. Non erit lex alia Romae, alia Athenis, alia nunc alia posthac, sed et apud omnes gentes et omni tempore, una eademque lex obtinebit” (Swift v. Tyson, 16 Peters i). But in matters of detail each nation has impressed its individuality on its own system. The English law has been summarized above. Perhaps its special characteristics may be best brought out by comparing it with the French code and noting some salient divergences. English law has been developed gradually by judicial decision founded on trade custom. French law was codified in the 17th century by the “Ordonnance de 1673.” The existing “Code de Commerce” amplifies but substantially adopts the provisions of the “Ordonnance.” The growth of French law was thus arrested at an early period of its development. The result is instructive. A reference to Marius’ treatise on bills of exchange, published about 1670, or Beawes’ Lex Mercatoria, published about 1740, shows that the law, or rather the practice, as to bills of exchange was even then fairly well defined. Comparing the practice of that time with the law as it now stands, it will be seen that it has been modified in some important respects. For the most part, where English law differs from French law, the latter is in strict accordance with the rules laid down by Beawes. The fact is that, when Beawes wrote, the law or practice of both nations on this subject was nearly uniform. But English law has gone on growing while French law has stood still. A bill of exchange in its origin was an instrument by which a trade debt due in one place was transferred to another place. This theory French law rigidly keeps in view. In England bills have developed into a paper currency of perfect flexibility. In France a bill represents a trade transaction; in England it is merely an instrument of credit. English law affords full play to the system of accommodation paper; French law endeavours to stamp it out. A comparison of some of the main points of difference between English and French law will show how the two theories work. In England it is no longer necessary to express on a bill that value has been given for it, for the law raises a presumption to that effect. In France the nature of the consideration must be stated, and a false statement of value avoids the bill in the hands of all parties with notice. In England a bill may be drawn and payable in the same place. In France the place where a bill is drawn should be so far distant from the place where it is payable that there may be a possible rate of exchange between the two. This so-called rule of distantia loci is said to be disregarded now in practice, but the code is unaltered. As French lawyers put it, a bill of exchange necessarily presupposes a contract of exchange. In England since 1765 a bill may be drawn payable to bearer, though formerly it was otherwise. In France it must be payable to order; if it were not so it is clear that the rule requiring the consideration to be truly stated would be a nullity. In England a bill originally payable to order becomes payable to bearer when indorsed in blank. In France an indorsement in blank merely operates as a procuration. An indorsement, to operate as a negotiation, must be to order, and must state the consideration; in short, it must conform to the conditions of an original draft. In England, if a bill is dishonoured by non-acceptance, a right of action at once accrues to the holder. In France no cause of action arises unless the bill is again dishonoured at maturity; the holder in the meantime is only entitled to demand security from the drawer and indorsers. In England a sharp distinction is drawn between current and overdue bills. In France no such distinction is drawn. In England no protest is required in the case of the dishonour of an inland bill, notice of dishonour being sufficient. In France every dishonoured bill must be protested. Opinions may differ whether the English or the French system is better calculated to serve sound commerce and promote a healthy commercial morality. But an argument in favour of the English system may be derived from the fact that as the various continental codes are from time to time revised and re-enacted, they tend to depart from the French model and to approximate to the English rule. The effect upon English law of its codification has yet to be proved. A common objection to codification in England is that it deprives the law of its elastic character. But when principles are once settled common law has very little elasticity. On the other hand no code is final. Modern parliaments legislate very freely, and it is a much simpler task to alter statute law than to alter common law. Moreover, legislation is cheaper than litigation. One consequence of the codification of the English law relating to bills is clear gain. Nearly all the British colonies have adopted the act, and where countries are so closely connected as England and her colonies, it is an obvious advantage that their mercantile transactions should be governed by one and the same law expressed in the same words.

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