Chapter 4 Bill of Exchange

【Learning Objectives】

Knowledge Objectives：

1. Master the definition and essentials of a bill of exchange.

2. Know the immediate parties and other parties of a bill of exchange.

3. Understand the major acts of a bill of exchange.

Ability Objectives：

1. Interpret any kind of bill of exchange in detail.

2. Identify different kinds of bill of exchange.

3. Know exactly the meaning and legal effect of acts such as issuance, acceptance, endorsement and dishonor, etc.

4. Write a bill of exchange with given information.

In practice, sellers of goods, in general, almost never stand upon their rights to demand cash, but readily take certain substitutes, such as bills of exchange. Bills of exchange are frequently used in the finance of export trade. In order to achieve a better comprehension of this, this chapter will be devoted to the further explanation of bills of exchange in detail.

4.1 Definition and Essentials

Definition

A bill of exchange is formally defined as an unconditional order in writing, addressed by one party（drawer）to another（drawee）, signed by the party giving it, requiring the party 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 party（payee）, or to the bearer. A bill of exchange can also be called a draft or a bill.

A typical bill of exchange is drawn in this manner：

In the sample bill shown above, the bill is drawn by Samuel Smith on Helen Brown, payable to Jim Green. In other words, Samuel Smith is the drawer who draws the bill. Helen Brown is the drawee to whom the instruction to pay the money is addressed and on whom the bill is drawn. Jim Green is the payee to whom the money is to be paid. The bill is payable 60 days after the drawee's sight of it and the amount payable is US㊣100,000.00.

Essentials

In complying with the Bills of Exchange Act 1882 of the United Kingdom, the Uniform Law on Bills of Exchange and P romissory Notes 1930 of Geneva, and Uniform Commercial Code of U.S.A.of 1952, a bill of exchange must fulfill the following requisites：

◆ The word“Exchange”

The purpose of indicating this word on a bill of exchange is to distinguish a bill from other kinds of credit instruments such as promissory notes or cheques. As the above example, we have“Exchange for US㊣100,000.00”. It is not definitely required in the Bills of Exchange Act of the United Kingdom, but in practice, indicating the word can be of great convenience to the relevant parties.

◆ An Unconditional Order in Writing

◇ Unconditional

The instrument must be made unconditional at the time of drawing. If the payment instruction is subject to any condition, it is not a bill of exchange. Please compare the following examples：

“Pay to Jim Green or order the sum of one thousand US dollars.”is a valid bill.

“Pay to Jim Green or order the sum of one thousand US dollars when the ship‘Queen' reaches the port of Shanghai.”is an invalid bill. The“when”clause makes the bill a conditional one.

◇ Order

The bill must be an order which requires the payment instruction be expressed in an imperative sentence. A mere request is not sufficient for this purpose. For ex-ample：

“Please pay Jim Green or order the sum of one thousand US dollars”or“I would be delighted if you would pay Samuel Smith or order the sum of one thousand US dollars”is merely a request and is not an order on the drawee. Such expressions would make the bill invalid.

◇ In Writing

The bill must be in writing. Oral expressions can not be admitted to vary or contradict the terms of a bill of exchange. This means when an oral expression concerning the bill is different from the bill in writing, the latter has the priority. For example, if the payable amount of a bill is at US㊣1,000, the payee can not say that he should be paid US㊣20,000 because the other day the drawee told him to pay that amount.

◆“Addressed by One Person to Another”

A bill must be addressed by one person to another so that there must be one person as drawer and another person as drawee. In the case that the drawer and the drawee on the bill are the same person or the drawee is a fictitious person, the holder may treat it either as a bill of exchange or a promissory note. “The bill is drawn by us on ourselves payable to them”is an example.

It is possible to have one or joint drawees, but no drawees in alternative or in succession. For example, a bill can be drawn on“A and B”but not on“A or B”nor on“first A then B”.

It should also be noted that the name of the drawee must be made in full and that initials will be treated as unacceptable.

◆ Signed by the Person Giving It

A bill, to be a valid instrument, must be signed by the drawer or a person authorized by him. The instrument is not valid until the drawer has signed it. Forged or unauthorized signature makes the bill invalid. For a company bill, if an individual is signing for his company, these words“For”, “On behalf of”, “For and on behalf of”and“Per pro”should prefix the name of the company, followed by the person's name and his designation. For example：

For ABC Co., London

（Signature）

John Smith, Manager

◆ Tenor

Tenor means the time to effect payment and it is indicated in the definition of the bill of exchange as“on demand or at a fixed or determinable future time”. Tenor often expresses as the due date or maturity date. A bill must be payable on demand or at a fixed or determinable future time. Thus, according to tenor, there are two broad types of bill: demand bill and usance bill.

◇ Demand Bill

A demand bill is a bill payable on demand. It means that the drawee will be required to pay at once when he sees the bill or when the bill is presented to him for payment, so the date of presentment is the due date to effect payment. A demand bill is also called a sight bill. A demand bill is usually expressed in the following ways：

On demand pay...

On presentation pay...

At sight pay...

If no time of payment is stated in a bill, it will be treated as a demand bill. For example，

Pay...

◇ Usance Bill

A usance bill is a bill which is payable at a future time. A usance bill is also called a time bill or a term bill. A usance bill is usually expressed in the following ways：

☉ Payable at a fixed time after sight.

The sight here refers to the accepting date. Accepting a bill or acceptance can be understood as a formal promise from the drawee to pay when the bill falls due and the promise is given when the drawee sees the bill. For this type of bill, ac ceptance is a must for the purpose of determining the actual due date. For example,“Pay 30 days after sight...”means 30 days after the accepting date is the due date to effect payment.

☉ Payable at a fixed time after date.

The date here refers to the issuing date of the bill. For example, “Pay 60 days after date...”means that the due date will be 60 days after the issuing date. Although accepting is not needed to calculate the due date for this type of bill, acceptance is recommended for the purpose of making certain of the obligations of the drawee to the bill.

☉ Payable at a fixed future date.

For example, “Pay on July,26,2018...”

☉ Payable at a fixed time after the occurrence of a specific event which is certain to happen.

This is also called deferred payment bill. In practice, a bill is usually made at a fixed time after a B/L date. For example, “pay 3 months after the B/L date...”is a valid bill because the B/L date is a determinable future date. Another bill“pay 1 month after the death of B...”is also a normal bill because though the time of happening may be uncertain, the event is sure to happen.

On the other hand, a bill which is stated being payable on arrival of goods at a specified port, or which is payable on a person's marriage can not be a valid bill. In these cases, at the time when the bill is drawn, no one can tell whether the event is going to take place, so the bill will be regarded as conditional instructions. “Pay 30 days after the ship ‘Queen' reaches the port of London”and“pay 30 days after Susan White's marriage to John Smith”are both unacceptable as bills of exchange.

Another point to be noted with regard to tenor is how to calculate the due date.

◇ If a bill is payable at a fixed time after sight, after date or after the happening of a specific event, the time of payment is calculated by counting in the date of payment but counting out the accepting date, the issuing date or the date of happening of the specified event. After calculation, if the date of payment falls on a non-business day, the bill shall be payable on the succeeding business day. For example, if a bill is payable in 90 days after sight and the bill is presented for acceptance on April 15, 202 ×, this means that April 15 is the accepting date. According to the above rule, the tenor should be calculated from April 16 instead of April 15.

April 16-30 15 days（The accepting day, April 15, should be excluded）

May 1-31 31 days

June 1-30 30 days

July 1-14 14 days（The last date, July 14 should be included）

90 days

So the maturity date of the bill is on July 14. If this due day happens to fall on a non-business day, the date of payment will be on the next business day.

◇ If a bill is payable at a fixed time from a fixed date, then this fixed date should be counted in. For example, if a bill is payable at 90 days from April 15, then the maturity date of this bill will work out to be July 13. The difference is caused by the use of the words“after”and“from”. The word“after”should be understood to exclude the date mentioned and the word“from”will be understood to include the date, so the bill payable at 90 days from April 15 will be one day ahead. However, the word“from”is not recommended to express the tenor of a bill of exchange.

◇ If a bill is payable at × months after sight/date/stated date, the word“month”here means a calendar month and the date of payment should fall on the corresponding date of the month due. For example, the maturity date of one month after May 31 is June 30 and the maturity date of two months after Dec. 31 is Feb. 28.

◆ A Sum Certain in Money

◇ The amount of a bill should be“a sum certain”even though the amount may be payable with interest, by stated installments or according to an indicated rate of exchange.

☉ Payable at a fixed amount

If a bill is“Payable at USD two thousand only”, it is a valid bill.

If a bill is“Payable at about USD two thousand”, it is an invalid bill.

☉ Payable with interest

The interest rate should be specified in order to make the amount payable a certain one. For example：

If a bill is“payable at USD one thousand with an interest”, it is an invalid bill.

If a bill is“payable at USD one thousand plus interest at 6% p.a. （from the date hereof to the date of payment）”, it is a valid bill. In practice, interest will be calculated with the issuing date as the date of commencement and the date of payment as the final date. Suppose the date of issuing is Sept. 23 and the date of payment is Oct. 22, then，

The interest:1,000× 112 ×6% ＝ USD 5.00, and the payable amount will be:1,000 + 5 ＝ USD 1,005.00.

☉ Payable by installments

The installment must be clearly stated, otherwise, the bill will be invalid. For example：

“Pay to the order of ABC Co. the sum of one thousand US dollars by installments”is an invalid bill.

“At one month after date pay to the order of ABC Co. the sum of one thousand US dollars by ten equal consecutive monthly installments”is a valid bill. Suppose the issuing date is July 1, and a payment schedule can be worked out（See Table 4.1）.

Table 4.1 Payment Schedule

☉ Payable according to an indicated rate of exchange

The rate of exchange must be indicated if the amount is payable in another equivalent currency.

“Pay to the order of ABC Co. the sum of one thousand US dollars converted into sterling equivalent at current rate in London”is a valid bill. The current rate of exchange is the prevailing rate in London when the bill is converted.

“Pay to the order of ABC Co. the sum of one thousand US dollars converted into sterling pounds”is not a valid bill because the relevant parties do not know against which day's rate is the amount to be converted.

◇ The amount in words and in figures

The payable amount should be expressed both in words and in figures. If they differ, the words have priority over the figures. If a bill is payable at the amount of USD 1,000, the“words”should be placed after“the sum of”and expressed as“US dollars one thousand only”, while the figures will be placed after the word“exchange”as“USD 1,000”.

◇ In money

The bill should be made payable only in money other than in other kinds of physical goods or intangible services. For example, “pay to the order of Samuel Smith the sum of fifty pounds and give her a suit of clothes”is not acceptable as a bill of exchange.

◆ Payable to a Specified Person Only or His Order or to Bearer

Finally, for a bill to be complete, it must be payable to a specified person or his order or to the bearer. Thus, there are three types of bill: restrictive order bill, demonstrative order bill and bearer order bill. Different types of order will decide the negotiability of a bill and the way of negotiation. Negotiation, in simple terms, signifies the right of the payee to transfer the bill to another person in order to clear the indebtedness of the former to the latter or for other purposes. Negotiation will be discussed in the following sections. Another thing we should note here is that the word“order”in“types of order”differs from the“order”in“unconditional order”. The former actually refers to the status of the payee whereas the“order”in“unconditional order”means the payment instruction should be made as a payment order rather than a payment request.

◇ Restrictive order bill

A restrictive order bill is a bill payable to a specified person only or to a specified person not negotiable/transferable. When the bill contains words such as“only”and“not transferable”to prohibit transfer, it is a restrictive order bill and not transferable. Examples are：

“Pay to Samuel Smith only”

“Pay to Samuel Smith not transferable”

This means that Samuel Smith can not transfer the bill to another person. This kind of bill does not have a wide application in international trade because it lacks negotiability.

◇ Demonstrative /indicative order bill

A demonstrative /indicative order bill is a bill payable to a specified person or some other person designated by him, without further words prohibiting transfer. Examples are：

“Pay to Samuel Smith”

“Pay to the order of Samuel Smith”

“Pay to Samuel Smith or order’

“Pay to order”（the payee is a person designated by the drawer）

This kind of bill is negotiable. It can be transferred by Samuel Smith, the payee, through endorsement and delivery. The negotiability is made safe by endorsement; consequently, it has found wide application in international trade.

◇ Bearer order bill

A bearer order bill is a bill payable to the bearer with no specified person as payee thereon. Any person who holds a bearer order bill will become the owner of the bill. Examples are：

“Pay to the bearer”

“Pay to Samuel Smith or the bearer”

A bearer order is also negotiable. It can be transferred by the bearer through mere delivery and no endorsement is required. It enjoys full negotiability but it is not safe for the absence of endorsement. Any forged endorsement of the payee would be disregarded since a bearer bill can be negotiated and transferred by delivery without any endorsement. For this reason, it is prohibited in China.

There is another point to be noted when the status of the payee is discussed. A bill may be payable to the drawer himself, such as in collection and in letter of credit. For example, “the bill is drawn by us on you payable to ourselves”.

Other Items

◆ The Date of Issue

The date of issue refers to the date when the bill is drawn. It performs two functions: One is to make certain that the date of presentation or the date of acceptance is not before the date of issue; the other is to compute the maturity date if the time bill is payable after date of issue.

◆ The Place of Issue

Although not a requisite, it is recommended that the place of issue be indica ted in the bill because the rules or laws concerning bills of exchange may vary from country to country. When a discrepancy occurs concerning the validity of a bill, the validity is normally judged in conformity with the laws of the place of issue. Draft is normally issued in the place where the drawer resides.

◆ The Place of Payment

Payment will normally be effected in the city where the drawee resides, if there is no other indication of the location. However, a bill may be payable at another city indicated by the drawee. For example, a bill drawn on Bank of England, London may be payable at Standard Chartered Bank, Hong Kong.

◆ A Banker Designated as the Payer

If the drawee is a company rather than a bank, the drawee may request the drawer to indicate on the draft the drawee's bank to be the banker designated as the payer. For example, bill drawn on ABC Co., London

Payable by Bank of England, London

If the drawee company does not indicate a banker to be the payer at the time of issue, he may indicate the name of the banker when he accepts the time bill. For example：

Accepted

（date）

Payable at Bank of England, London

For ABC Co., London

Signature

◆ Value Received

“For value received”indicates that the payer obtains the bill because he has given value to the drawer. Value refers to anything that is sufficient to support a simple contract and may be given in the form of goods, services or money.

◆ A Set of Bill

Bills of exchange usually are made out in duplicate which represent one liabil ity only. When one part is paid, the other becomes void. The wordings of the first part of the bill will read as“pay this first bill of exchange（second of the same tenor and date being unpaid）to...”and the second part will read as“pay this second bill of exchange（first of the same tenor and date being unpaid）to...”. With these wordings, double payments under one set of bills of exchange will be avoided.

◆ Referee in Case of Need

◆ Notice of Dishonor Excused and Protest Waived

◆ Without Recourse

These last three items are not considered as essentials to a bill of exchange and Bills of Exchange Ordinance allows these parts to be optional or to be omitted.

4.2 Parties and Acts

Parties

Although the three major types of credit instruments are different, they share some important common characteristics. Therefore, we will use the bill of exchange as an example to illustrate the parties of any credit instrument in general.

There are three immediate parties to a bill of exchange: the drawer, the drawee and the payee. They are the basic parties to a bill before it is transferred to another party.

◆ Drawer

The drawer is the party who draws and signs a draft on the drawee and delivers it to the payee. He is a debtor to the draft. Before the bill is accepted by the drawee, he is primarily liable to the payee or holder of the instrument. In the event that the drawee dishonors the bill by non-acceptance or by non-payment, the drawer must redeem and pay the bill. However, when the bill is accepted, his liability be comes secondary.

◆ Drawee

The drawee is the party on whom the bill is drawn and he is the party to honor the bill at the order of the drawer. In other words, he is the party who will effect payments to the payee. In this sense, he can also be called the payer and he is another debtor to the bill. He is called a drawee because the draft is drawn on him. However, when the bill is presented to him, the drawee can make a choice whether to honor it（agree to make acceptance or payment）or dishonor it（refuse to make acceptance or payment）because he can not prevent any party to whom he owes no debt from drawing a draft on him. This means that before the drawee agrees to honor the draft, he is not yet a debtor to the bill, and if he agrees, he acknowledges his indebtedness to the bill and in the case of a time bill, he becomes an acceptor.

An acceptor is a special drawee. When a drawee signs his name on the face of a time draft indicating his promise of payment on a due date, he becomes an acceptor. His acceptance makes the acceptor assume primary liability to the bill. As a result, the drawer holds secondary liability to the bill as mentioned above.

◆ Payee

The payee is the party to receive payment. He is the first creditor to the bill and the first legal owner of the instrument. He can either claim payment against the bill or transfer（negotiate）the draft to another party. If the bill is transferred, he is called the original holder/transferor because the bill is taken away from him while the transferee, the person who takes the bill, becomes the new holder.

The following expression is often used to describe the three immediate parties of a bill of exchange and students must be familiar with it and have a clear mind to recognize the different parties.

The bill is drawn by A on B payable to C. Here, the drawer is A, the drawee is B and the Payee is C. If the drawer and the payee are the same person, the bill may be read as: the bill is drawn by us on you payable to ourselves. If the drawer and the drawee are the same person, the bill may be read as: the bill is drawn by us on ourselves payable to you.

Credit instruments can be transferred from one holder to another. In doing so, the ownership of the bill is transferred from the previous holder to the subsequent party. This process of ownership transfer is called negotiation. In the course of its negotiation, a bill of exchange may have other parties as well.

◆ Endorser

An endorser is a payee or a holder who signs his name on the back of a bill for the purpose of negotiation. Because the payee is the first holder, he will be the first endorser. When the payee becomes the endorser, he transforms himself from a creditor to a debtor because he obligates himself that he will be liable to the endorsee and his subsequent parties. For example, an endorser may make a promise to his endorsee as follows: “If you, the holder of this instrument, make proper presentation for acceptance and for payment and is dishonored, I will pay the face amount of the bill upon your proper notice on me.”In the process of negotiation, we will have the first endorser, the second endorser, the third endorser and so forth and the list can go on and on.

◆ Endorsee

An endorsee is the party to whom the instrument is transferred. He becomes the new holder to the instrument and is the creditor to the instrument. An endorsee can also become an endorser if he wishes to transfer the instrument to another party by signing his name on its back. And by doing so, he transforms himself into a debtor. If the process of negotiation creates a sequence of endorsers, similarly, it will also bring about a series of endorsees. For example, if a bill has been transferred from A to B to C and C is the holder, from the stand point of C, A and B will be his prior parties. If C continues to transfer the bill to D and D to E, then D and E will be called his subsequent parties.

◆ Acceptor for Honor

An acceptor for honor is the person who himself is not a liable party to a bill of exchange but with the consent of the holder may intervene and accept the bill in the event that the bill is dishonored by non-acceptance. He is the debtor to the bill and will make the payment when the bill falls due.

◆ Guarantor

A guarantor is another third party who guarantees the acceptance and the payment of a bill of exchange. The guaranteed can be the drawer, endorser, acceptor or acceptor for honor. The obligations of the guarantor are the same as those of the guaranteed.

◆ Holder

A holder is a party who is in possession of the instrument. A holder can be the payee/bearer or the endorsee. The payee will always be the original holder. A holder is a creditor to the bill. A person holding a forged bill or one who has stolen a bill payable to the order of another is not a holder, but a wrongful possessor. Only the legal possessor can become the holder and the perfect title to the bill will be shown as follows：

- To duly present the instrument for acceptance or payments；

- To transfer a bill to other persons；

- To endorse a bill；

- To give notice of dishonor to the prior party；

- To exercise right of recourse against the prior party；

- To sue in his own name；

- To duplicate the lost bill；

- To cross cheque or banker's demand draft, and to deliver it to a bank for collection.

The legal possessor, the holder, can be further classified as a holder for value and a holder in due course. The perfect title to a bill will be accrued to the holder in due course.

◇ Holder for value

As we have mentioned, value refers to anything that is sufficient to support a simple contract and may be given in the form of goods, services or money. A holder for value is the holder of a bill for which value has been given either by himself or by his prior parties. In the former case, we usually refer to the payee. In the latter case and according to Bills of Exchange Act, a holder for value usually refers to the holder when the value is given by his prior parties rather than by himself. For example, if a bill is drawn by A on B payable to C and accepted by B, C endorses the instrument and gives it to D as a gift. Although D gives no value for the instrument by himself, he is qualified as a holder for value for the reason that the value has already been given by C, his prior party.

A holder for value is the creditor to the bill. He enjoys the same rights but is subject to the same defects in title, if any, of the transferor. That is to say, the rights of a holder for value can not be superior to his direct prior party.

◇ Holder in due course

A holder in due course can also be called bona-fide holder. According to Bills of Exchange Act, a holder in due course is the person who is in possession of an instrument, that is：

☉ Complete and regular on its face（A complete and regular bill is the one that contains all the essentials required）；

☉ Taken before maturity；

☉ Taken in good faith and for value；

☉ Taken without notice of its previous dishonor and without notice of any infirmity in the instrument or defect in the title of the person negotiating it.

In practice, a holder in due course usually refers to a person who obtains the instrument through giving the value by himself. For example, if a person obtains an instrument as the payment to his job done, as a payment to the goods he has delivered or the services he has provided or as a repayment for the loan he has made, he will be a holder in due course. However, it should be noted that a payee can never be a holder in a due course because of the absence of negotiation. In fact, only a holder in due course has perfect title to a bill because his rights over the bill will not be affected by the title defects of his direct prior party.

Let's look at the following example and clarify which person is the holder for value and which party is the holder in due course.

If an instrument has been drawn by A on B payable to C, accepted by B and then delivered to C. Later on, C endorses the instrument and gives it to D as a gift but then D loses it in the street where it is found by E who transfers it for value to F who again endorses it and gives it to G as a gift. C is the payee or the original holder so he can only be the holder for value but not the holder in due course. D obtains the bill as a gift and not for value, he is not a holder in due course but he is qualified as the holder for value because the value has been given and transferred to him by his prior party C. E is a wrongful possessor and cannot be qualified as a holder. F has taken the bill for value and he can establish himself as a holder in due course as long as he takes the instrument in good faith. This means that the defective title of the instrument on the part of E may not prevent F becoming a holder in due course. G gives no value for the bill and can not be the holder in due course, but he can be the holder for value, because the value has been given by his prior party F. The full benefits of negotiability do not pass to a holder for value; these benefits are passed on only if the holder for value is also qualified as a holder in due course. When an instrument is dishonored, a holder in due course obtains perfect title to the bill and can claim payment from all parties liable on the instrument and prior parties have no defense to a claim for payment by a holder in due course.

In summary, the holder of a bill is the creditor to the bill and can be the pay ee, the bearer and the endorsee. In contrast, the debtors of a bill can be the drawee, acceptor, drawer and endorser who hold the liability to make payments. Their order of liability is as follows：

Before acceptance: （a）drawer, （b）the first endorser, （c）the second endorser...

After acceptance: （a）acceptor, （b）drawer, （c）the first endorser...

Acts

The acts of a bill of exchange refer to the legal acts carried out to bear the obligations to a draft, the main act of which is to issue. Other acts such as endorsement, acceptance, acceptance for honor and guarantee are based on the main act. In broad sense, the acts also include presentment, payment, payment for honor, dishonor, protest and the exercise of right recourse.

◆ Issue

To issue a draft comprises two acts to be performed by the drawer. One is to draw a draft and sign it; the other is to deliver it to the payee. Thus, the liability of the bill is established and the payee becomes the creditor to the bill.

When issuing a bill, the drawer must draw it in its complete form, containing all the essentials stipulated. The drawer must sign the bill as well. A bill without a signature or with a false signature is not a valid bill. The liability on a bill of exchange is established by a signature only as no person is liable upon a bill if he has not signed it. A bill can be made in the name of a person, a company or by some other person under his authority. A bill so made engages the drawer under the primary liability to the bill. A bill is not a“voucher of payment”. It is“money in credit”, which means that the payee's right to the bill will entirely depend on the creditworthiness of the drawer.

To deliver means to transfer the possession of the draft from one person to another. In doing so, the legal title of the draft is transferred, in this case, from the drawer to the payee. Thus, the payee is entitled to receive payments. He becomes the original holder of the bill and is the creditor to the bill.

◆ Endorsement

Endorsement is made on the back of a bill of exchange. It is an act of negotiation. A bill is negotiated when it is transferred from one person to another in such a manner as to constitute the transferee the holder of the bill. Only the holder, namely, the payee and the endorsee can endorse a bill.

Endorsement comprises two acts: one is to sign on the back of a draft; the other is to deliver it to the endorsee/transferee. The transfer of a bill of exchange is effected by delivery or by endorsement and delivery.

Endorsement is applicable only to negotiable bills of exchange and the negotiability of a bill is determined by the status of its payee, or, in other words, by the bill's type of order. In the case of a demonstrative order bill, the transfer of a bill comprises two acts to be performed by the endorser: endorsement and delivery. If a bill is of bearer order, no endorsement is required and mere delivery is sufficient to transfer the title of the bill. Endorsement is not applicable to a restrictive order bill. This kind of bill has no negotiability and transfer is prohibited.

It should be noted that the endorsement should be made for the entire bill. An endorsement for a partial amount will be considered as invalid endorsement. Furthermore, if a bill has two or more payees or endorsees, all of them must endorse it before its being transferred unless one of them has the authority to make endorsement on behalf of all the others.

It should also be noted that if an endorsement has the name of the payee or endorsee wrongly named or misspelt, or even forged, such things would be disregarded since such a bill can be treated as a bearer bill and a bearer bill can be negotiated and transferred by delivery without any endorsement.

There are four kinds of endorsement：

◇ Special endorsement（Endorsement in full）

A special endorsement bears the signature of the endorser and at the same time spells out the name of the transferee. It is also referred to as the endorsement in full. For example：

Pay to the order of B Co., London-the endorsee

For A Co., London-the endorser

Signature（of the endorser）

A bill so endorsed remains a demonstrative order bill. It can be further transferred by endorsement and delivery. A series of consecutive special endorsements show a clear chain of endorsers.

◇ Blank endorsement

A blank endorsement only bears the signature of the transferor and no transferee is specified. It is also referred to as a general endorsement. For example：

For A Co., London-the endorser

Signature（of the endorser）

When a blank endorsement is made on a bill, it will transform the original bill from demonstrative order to bearer order. If the bill is to be further transferred, mere delivery is required. On the other hand, a blank endorsement can be changed to a special endorsement by adding above the endorser's signature such wordings as“pay to”or“pay to the order”of the transferee or some other person. However, it should be noted that if the bill is originally a bearer order bill instead of a demonstrative order bill, a special endorsement can not transform the bearer order to demonstrative order because endorsement is not required to transfer a bearer order bill.

A holder should prove his legal title to the bill by consecutive endorsements. Even the last endorsement is made in blank, he is still a legal holder. When a blank endorsement is followed by another blank one, the subsequent party will be deemed as the endorsee of the prior endorsement. Therefore, a series of blank endorsements can also be made consecutive.

◇ Restrictive endorsement

A restrictive endorsement bears such indications which will prevent the further negotiation of a bill. Examples are：

Pay to ABC Bank only... （the endorsee）

For A Co., London... （the endorser）

Signature（of the endorser）

Or

Pay to ABC Bank not negotiable... （the endorsee）

For A Co., London... （the endorser）

Signature（of the endorser）

Or

Pay to ABC Bank not transferable... （the endorsee）

For A Co., London... （the endorser）

Signature（of the endorser）

Or

Pay to ABC Bank not to order... （the endorsee）

For A Co., London... （the endorser）

Signature（of the endorser）

A restrictive endorsement will transform the demonstrative order to a restrictive order. The transferee can only claim payment against the bill and no further transfer is allowed.

◇ Conditional endorsement

A conditional endorsement transfers ownership subject to a specified term and condition. For example：

Pay to the order of B Co. on delivery of B/L to Hong Kong Bank

For A Co., London

Signature

Two points are worth remembering in connection with conditional endorsements which should not be confused with“unconditional order”stated in the definition of a bill. Firstly, a bill of exchange should be made an unconditional order at the time of issuing. But an endorsement can be made conditional. The conditional endorsement does not affect the bill as an unconditional order to pay and it has no binding on the drawer and drawee. Secondly, when the drawee agrees to honor the draft, he can choose to honor it under the fulfillment of a certain condition or he can choose to disregard the condition. In fact, conditional endorsement refers to a conditional delivery, which means that the bill will be delivered to the endorsee only when he fulfills the conditions.

A conditionally endorsed bill can be further transferred.

◆ Presentation

Presentation/Presentment is to be made by the holder to the person designated as drawee for payment if it is a sight bill and for acceptance and payment if it is a time bill.

Bills must be presented for acceptance on the following occasions and failure to do so will make the holder lose the right of recourse against his prior parties.

◇ Time bill after sight

For this kind of bill, presentment for acceptance is a legal requirement in order to fix the maturity date of the bill. If the bill is not duly presented, the holder will lose its right of recourse against his prior parties.

◇ Time bill after date

Presentment for acceptance is not legally required because the holder of this kind of bill may present the bill directly for payment at the maturity date. However, the holder is advised to make presentment for acceptance so as to secure the liability of the drawee as an acceptor.

A time bill stipulates that it must be presented for acceptance.

A time bill which is payable at a place other than that of the drawee must be presented for acceptance.

Presentment must be made within the reasonable time and at the stipulated place. According to Bill of Exchange Act 1882, the sight bill should be presented for payment and the time bill should be presented for acceptance at a reasonable hour on a business day before it is overdue. And the accepted time bill should be presented for payment at the due date. According to Uniform Law for Bills of Exchange and Promissory Notes signed at Geneva of 1930, the reasonable time for the former is within one year after it is issued, and for the later, presentment for payment should be made either on the due date or within two business days after the due date.

The holder should present the bill at the proper place specified on the bill. If no place is specified, the bill should be presented at the drawee or the acceptor's business office. If no business office is specified, the bill should be presented at the drawee or the acceptor's residence.

As most drawees on a bill will be a bank, there are three channels for present-ment：

☉ Presenting the bill at the counter of the drawee bank.

☉Presenting the bill through clearing house exchanged into the drawee bank.

☉Inter branches and correspondents presenting bill by airmail/courier to the drawee bank.

If the bill is duly presented and is dishonored by the drawee, the holder will obtain an immediate right of recourse against all the prior parties till the drawer. Otherwise, he will lose the right of recourse against them. That is to say, the drawee and all the other prior parties are discharged of their liability on the bill.

◆ Acceptance

Acceptance of a bill is the signification by the drawee of a time bill of his assent to the order given by the drawer. The drawee has no liability on the bill until he signs the bill in such a way as to signify acceptance of liability to pay the money stated in the bill.

A valid acceptance requires two acts: one is for the drawee to write the word“Accepted”on the face of a bill and sign below. The mere signature of the drawee, without additional words, is sufficient. The other is for the drawee to return the accepted bill to the payee. In practice, the return of the accepted bill can be replaced by the drawee's issuing of an acceptance notice to the payee. In the case that the bill is a time bill after sight, the accepting date is deemed to be the sight date from which the maturity date can be worked out. After acceptance, the drawee will then credit the amount payable to the payee's account at maturity.

The drawee is allowed to have reasonable time to deliberate whether or not to accept the bill. According to Bills of Exchange Act 1882, acceptance is generally to be made at a reasonable hour on a business day subsequent to the presentment of the bill before it is overdue. According to Uniform Law for Bills of Exchange and Promissory Notes at Geneva of 1930, acceptance should be made within the first or the second presentment. In order to be convenient, the accepting date and the due date will be stated when the acceptance is made：

ACCEPTED

（date）

To mature

（date）

For name of the drawee

Signature

When the drawee has made his acceptance, he is known as the acceptor instead of this drawee and he becomes primary liable to the bill. When this happens, the drawer will be secondarily liable to the bill. In practice, an accepted bill can be transferred more easily than an unaccepted one because it has the definite undertaking of the drawee to make payment on the due date.

◆ Payment

The ultimate purpose for a bill of exchange is to get paid. Payment is carried out when the bill is paid. Payment of a sight bill is made when the bill is presented to the drawee and payment of a time bill is made at maturity. A bill will be discharged only when payment is made in due course. The so-called payment in due course includes the following：

◇ Payment should be made by or on behalf of the drawee or the acceptor and not by the drawer or any endorser. The payment made by the drawer or any endorser is not a final payment because he may claim payment from the drawee or the acceptor.

◇ Payment should be made on or after the maturity date of the bill and can not be made in advance.

◇ Payment should be made to the holder and if the bill has been transferred, the bank will check the endorsements or at least the sequence of the endorsement before making payment.

◇ Payment should be made in good faith, without knowing that the holder's title thereto is defective.

In short, payment in due course means payment made at or after the maturity of the bill to the holder thereof in good faith and without notice that his title to the bill is defective. When the payment is made in due course, it is the final payment and the bill is discharged. That is to say that the drawee's or the acceptor's liability to the bill ends and so does the liabilities of other debtors to the bill such as the drawer and the endorsers, if any.

Payment may be made in the national currency of the drawee's country or in the currency stated on the draft, depending upon the foreign exchange regulations enforced in the drawee's country.

◆ Dishonor

Dishonor is a failure or refusal to make acceptance or payment of a bill of exchange when presented to the drawee. A bill of exchange may be dishonored either by non-acceptance or by non-payment. When a bill is only offered a qualified ac ceptance, the holder may take it as dishonored by non-acceptance. Other instances of dishonor may arise when the drawee's deliberate avoidance, his bankruptcy or even his death makes the acceptance or the payment impossible.

When a bill is dishonored either by non-acceptance or non-payment, the right of recourse will be accrued to the holder at once. That is to say, the holder may exercise his right of recourse against his prior endorsers and drawer for payment.

◆ Notice of Dishonor

When a bill is dishonored by non-acceptance or by non-payment, the holder must give notice of dishonor to the drawer or to all the endorsers for whom the holder may wish to make liable. The purpose of giving such notice is to inform the drawer and prior endorsers the default of acceptance or payment so that they may get ready to honor the payment. However, according to the Bills of Exchange Act 1882, if the notice of dishonor is not given, the holder shall be discharged of the right of recourse against the drawer and all the endorsers. For a holder in due course, however, his recourse claim shall not be prejudiced by such an omission. According to the Geneva's Uniform Law 1930, the right of recourse of the holder shall remain unless the drawer and/or the endorsers do suffer loss due to his omission of giving the notice, in which case the holder must compensate for the loss. There are two methods in which the notice of dishonor may reach the prior parties and the drawer.

For the first method, the notice of dishonor must be given on the next business day after the dishonor of the draft by the holder to his direct prior party who shall do so in quick succession till the notice is given to the drawer. Any party failing to do so shall remain liable to the holder and lose his own right of recourse against all his prior endorsers and the drawer. For a holder in due course, however, his recourse claim shall not be prejudiced by such an omission. The first method will be shown as Chart 4.1.

Chart 4.1 Notice of Dishonor

For the second method, the holder gives the notice of dishonor to each endorser and the drawer separately in order to retain their liability thereon. In this case, there is no need for each subsequent party to inform his direct prior party. Take the abovementioned example. F, the holder will give notice to E, D, C, and B till A. In practice, for the first method, the holder may have no knowledge of every prior party and he can be fairly certain that each prior party will pass on the notice.

If the drawer or the endorser states besides his name on the bill such wordings as“Notice of dishonor excused”, it means that in the event the bill is dishonored, the holder can claim compensation from him without giving him a notice of dishonor.

◆ Protest

Protest is a formal certificate given by a notary party or other authorized person to evidence that a bill of exchange has been dishonored. The protest should be done on the very day or no later than the next business day from the day of dishonor.

After a bill is dishonored and a notice of dishonor is given, the holder may hand the bill again to a notary party who will present it again to the drawee so as to obtain a legal proof of the act of dishonor. If it is dishonored again, the notary party then will draw a protest and return it to the holder together with the bill, against which the holder may exercise his right of recourse against the prior parties.

According to the British Bills of Exchange Act, foreign bills should be protested whereas inland bill need not. If a foreign bill is not so protested, the holder will lose his right of recourse against his prior parties.

The protest fee is to be borne by the drawer and will be charged to him at the time when the compensation is made. However, the drawer may indicate besides his name on the bill such wordings as“protest waived”or“please do not protest if dishonored”so that he will not be responsible for the protest fee. In this case, the holder may claim payment from him without protest and if the holder still wants the notary party to draw up a protest, he himself will pay for the protest fee.

◆ Right of Recourse

Right of recourse means that the holder of a bill of exchange has the right to claim compensation from the drawer and the endorsers in the event that the bill has been dishonored. The compensation should include the amount payable on the bill with interest, the fees for giving the notice of dishonor and protest and other incurred expenses.

The holder may exercise his right of recourse only when he has completed the following procedures.

◇Present the bill to the drawee for acceptance or payment and it is dishonored by non-acceptance or non-payment.

◇ Give notice of dishonor to his prior party in one business day following the day of dishonor.

◇ Make a protest for non-acceptance or non-payment in one business day following the day of dishonor.

The recourse claim should be enforced within the legal limit of time which is six years according to the British Bills of Exchange Act or six months according to the Geneva's Uniform Law.

It should be noted that the endorser can only file his recourse claim against his prior parties but not his subsequent parties. For example：

The holder C is actually the prior party to D and E. Therefore, if the bill is dishonored, C can only sue B and A but not E and D.

NOTES

1. A bill of exchange is defined as an unconditional order in writing, addressed by one party（drawer）to another（drawee）, signed by the party giving it, requiring the party to whom it is addressed to pay on demand, or to the order of a specified party（payee）, or to the bearer.

匯票是由一方（出票人）發給另一方（受票人），由出票人簽字，要求受票人按要求向指定的某人或其指定人或持票人支付款項的無條件書面命令。

在國際結算中采取的匯付方式通常是順匯法，即由付款方主動向收款方匯付。

在國際進出口業務中，貨款的結算除采取順匯法外，有時還采取逆匯法，即由出口人主動向進口人索取貨款。出口人向進口人索取貨款時，往往開出匯票作為要求付款的憑證。這種匯票的基本格式是：

匯票

No.31526

金額：U.S. ㊣35,000.00中國成都2014年4月2日 憑本匯票正本（副本不付）于見票后90天 付與中國銀行倫敦分行或其指定人 叁萬伍仟美元整。

等值付訖，請匯我戶。

ABC公司

倫敦

中國輕工業進出口公司四川省分公司

2. sight bill 即期匯票，也叫demand bill

time bill 遠期匯票，也叫usance bill

3. drawer 出票人

drawee 受票人

payee 收款人

acceptor 承兌人

4. The payee is the party who receives payment.

收款人是接受款項的一方。

5. An endorser is a payee or a holder who signs his name on the back of a bill for the purpose of negotiation.

背書人是指收款人或持票人在匯票背面簽字以便進行轉讓的人。

6. The endorsee is the party to whom the instrument is transferred.

被背書人就是經背書的票據被轉至的一方。

7. A holder is a party who is in possession of the instrument.

持票人指的是票據占有人，即票據的收款人。

8. Acceptance of a bill is the signification by the drawee of a time bill of his assent to the order of the drawer.

承兌是指遠期匯票的付款人在匯票上簽字，用以表示到期付款的意愿的票據行為。

9. Right of recourse means that the holder of a bill of exchange has the right to claim compensation from the drawer and the endorsers in the event that the bill has been dishonored.

追索權指的是持票人在票據被拒付時對背書人、出票人及其他票據債務人行使請求償還的權利。

EXERCISES

Ⅰ. Translate the following Chinese terms into English.

出票人

受票人

承兌人

跟單匯票

銀行匯票

提示

特定背書

銀行承兌匯票

遠期匯票

空白背書

Ⅱ. Translate the following English terms into Chinese.

sight bill

right of recourse

notice of dishonor

bearer

clean bill

holder in due course

commercial bill

conditional endorsement

protest

commercial acceptance bill

Ⅲ. The following is a bill of exchange which has been completed; please answer the following questions.

1. Who are the drawer and payer？

2. Is this bill of change a sight bill or time bill？

3. Who is the remitting bank of this collection business？

BILL OF EXCHANGE