Bills of Exchange: a simplistic insight into how it works.

In Opium and Empire the author Richard J. Grace wrote about the careers of William Jardine and James Matheson. Both Jardine and Matheson were of Scottish descents were engage in opium trade with the East India Company and China. The most mercurial commodity was the Indian opium which was sold away from Canton because the trade was illegal in China. Matheson was skill at perfecting the facility for negotiating bills drawn on London.

Bills drawn by Matheson gave time to buyers to pay for the value of the goods either on demand or at some point of time in the future. In this way he could dispose of large stocks of opium in return for payment at a later date thus facilitating trade. For his load full of opium crates on board vessels ready to sail from India or the port of Canton, he arranged its sale to traders in London by drawing on bills of exchange. Once drawn executed and accepted by buyers, the bills were discounted at financial institutions or were privately indorsed on the instrument to transfer title in the instrument to third parties enabling them to collect payment when due. To this day Bills of Exchange are engaged financing international trade. What are Bills of Exchange that are crucial to commerce? An understanding of the law on bills is essential to determine how such instruments works and the rights obligations and liabilities of the parties that are engaged in the instrument. Given that bills involve various parties and are intricate, an overall general outline of the features are discussed without going into details[1].

Bills of exchange were introduced in England over two hundred years ago. During the reign of Edward IV merchants from Italy brought their customs of trade relating to such instruments into England. The utilitarian of bills in business over time has grown to such an extent that disputes involving capacity, rights and liabilities arising from such use were resolved by the Crown Courts where rules governing its inception and operation were adjudicated leading to a plethora of common law cases. The customs and usage by the merchants adjudicated by the Courts were later codified in the Bills of Exchange Act 1882.  The aim was not to modify the law on negotiable instruments but to state accurately and concisely the existing law. Hong Kong being a British Colony at the time adopted the Act in 1885 called the Bills of Exchange Ordinance, Cap 19 with amendments in later years to include provisions of the English Cheques Act 1957.

Drawing a bill requires compliance with the statutory provisions of the Ordinance. The first step to the existence of a bill is to have it drawn by a party called a drawer. He is the creditor who provides finance to an importer of goods called a drawee. The drawee undertakes to pay the bill on demand or at some future date. He is the debtor. A bill need not necessarily be paid to the drawer. Instead it could be directed to be paid to a third party or usually to a financial institution, a bank. The third party is often referred to as the payee or holder[2] of the bill. The time of payment and the amount of payment are stated on the bill to reflect when the bill is due for payment, such as “60 days after sight”. From the aforesaid it can be deduced that there are three parties to a bill (other than cheques and promissory notes which are also bills of exchange) drawer, drawee and payee. There may be potential additional parties to the bill in the course of dealing with the bill such as an indorser, an indorsee, and the holder in due course[3]. From the aforesaid it can be deduced that a bill is not a single contract but is a series of contracts resulting in different liabilities that depended upon the capacity in which that person became a party to the bill. Each of these parties who later appear in the bill by signing on the bill incurs a different liability. Each of these rights and obligations are central to the law relating to bills and negotiable instruments.

Section 3(1) of the Ordinance encapsulates the definition of a bill by stating it to mean an instrument that is drawn unconditionally, addressed by one person to another, signed by the person giving it, requiring the person to whom it is addressed to pay a sum certain in money on demand or at some future determinable date.

Care should be taken by a person drawing the bill for it must not be conditional since a bill is an order requesting the drawee to pay and is not a mere request for payment. Bills drawn on a contingency is not a bill of exchange. A conditional bill is one that requires the fulfilment of a condition before the drawee is liable[4].

Once drawn, a bill has to be presented for acceptance by the drawee. The bill has to be presented to the drawee at the address disclosed on the bill; at a reasonable time of the day and on a business day complying with the provisions required by the Ordinance[5]. The requisites of a valid acceptance are set out in section 19 of the Ordinance. The kinds of acceptance are signified by the drawee when it is accepted[6]. A bill is accepted when the drawee places the word “accepted” across the bill and signs his signature on it. Once the drawee accepts a bill he is called “Acceptor” of the bill in place of the drawee. On acceptance of the bill the instrument is delivered to the drawee.

By accepting a bill the drawee undertakes to pay according to the tenor of his acceptance. The liability of the drawee is primary whereas the liability of the drawer is secondary and conditional. That is because the drawer’s liability is akin to that of a surety and his liability is dependent on a notice given to him of the dishonour.

Where a drawee refuses to accept a bill when presented for acceptance, the bill is regarded as dishonoured. On a bill being dishonoured, notice of dishonour has to be given to the drawee as well as the drawer. In the case of a foreign bill drawn abroad[7], the bill has to be protested[8] by a notary in order to render the drawee and the drawer liable otherwise they are discharged from liability.

Protesting of a bill is carried out by a notary[9] who makes a copy of the bill and presents it to the drawee a second time for acceptance. If the drawee refuses acceptance a right of recourse immediately accrues to the holder against the drawer and indorser.

The holder of a bill may not wish retain it until maturity in order to collect payment. He may transfer the bill to another party by indorsement on the bill. It occurs when the holder places his signature on the face or back of the bill along with the name of the party to whom it is being transferred. The act of signing and transferring the bill in such manner as to constitute the transferee the holder of the bill is regarded as a negotiation.[10]

A bill negotiated in this way transfers title to another who acquires the same liability as his indorser.

The holder of the instrument may indorse the instrument in blank or they may be special, conditional or restrictive[11]. An indorsement in blank mentions no indorsee and a note so indorsed becomes payable to bearer. A special indorsement mentions the person to whom or to whose order the note is payable. When a note has been indorsed in blank, any holder may convert the blank indorsement into a special indorsement by writing above the indorser's signature a direction to pay the note to or to the order of himself or some other person.

In the course of dealing with a bill there may be other features attaching to it, such as “referee in case of need,”[12] “accommodation bill” not specifically mentioned in this article.

The above are the basic essential features of bills of exchange on how bills are drawn, accepted by the drawee, and indorsed to pass title to a third party. The capacity of each party’s function and liability are not fully discussed; their technicalities and legalities would have to be considered carefully in order to give effect to the bill.

 

[1] To the uninitiated, he should consult Chalmers on Bills of Exchange; Byles, Bills of Exchange for a detail understanding of its principles. A short discussion of Bills can be found in Brook’s Notary by N.P. Ready.
[2] Note that under the nomenclature definition under the Ordinance a holder means the payee or indorsee of a bill or note who is in possession of it, or is the bearer thereof.
[3] It arises when the bill is negotiated.
[4] The order given by the drawer to the drawee must be unconditional.
[5] Section 41(1) prescribes rules for acceptance.
[6] Section 17 sets out the requisites of an acceptance. Section 18 sets out the time for acceptance. Section 19 sets out the requisites of an acceptance and the nature of such acceptance. An acceptance may be a general or a qualified acceptance. For a distinction and consequence of such acceptance, see Chalmers, Bills of Exchange at para: 2-126 onwards.
[7] As to what constitutes a foreign bill, see Section 4 of the Ordinance.
[8] The manner of protest is set out in Brooke’s Notary under the heading “noting and protest” where this is fully discussed.
[9] A general discussion on the functions of a Notary, see David Beaves article on Functions of Notary appearing in Hong Kong Lawyer, August 2021. Section 51(7) provides a detail requirements to be done by a Notary.
[10] Section 31 discusses negotiation of a bill. As to what constitutes a valid indorsement, see Section 32.
[11] Section 33 provides for conditional indorsement and Section 34 definite what are restrictive indorsements.
[12] A referee in case of need is when the drawer of a bill or an indorser inserts in it the name of a person to whom the holder may resort in case it is dishonoured by non-acceptance or by non-payment: Section 65(1) of the Ordinance.

Jurisdictions

Former Consultant at Winnie Leung & Co.