Definition and Basic Characteristics of Bills of Exchange

A bill of exchange is a written commercial instrument containing an unconditional order from a person called the drawer to another person called the drawee to pay a specified amount of money to a third person called the payee on a certain date or determinable date. It is considered one of the most important commercial papers in domestic and international commercial transactions, and is subject to special laws regulating its issuance, circulation, and collection.

Basic Characteristics:

• Parties and Relationships: Includes three main parties: the drawer (issuer of the bill), the drawee (obligated to pay), and the payee (designated for payment), with the possibility of additional guarantors
• Negotiability: Transferable by endorsement or simple delivery making it a flexible credit instrument, and can be discounted from banks before maturity to obtain immediate liquidity
• Mandatory Elements: Contains a specified amount in figures and words, clear maturity date, place of payment, drawer's signature, and payment order formula without conditional terms
• Legal Guarantees: Subject to commercial paper law providing strong legal protection, and all signatories are jointly liable, with the possibility of recourse against any of them upon non-payment

Types of Bills of Exchange and Mandatory Elements

Types of Bills of Exchange:

• Simple Bill of Exchange: Without attached documents for direct transactions between known parties, relying on commercial trust and reputation
• Demand Bill: Requires payment upon presentation without waiting for a specific date, provides quick asset liquidity and is used in urgent transactions through simple endorsement
• Commercial Bill: Most common in business-to-business trade, eligible for bank discount and provides short-term business financing with commercial guarantees
• Transferable Bill: Transferable between parties through endorsement or delivery, allows trading in financial markets and conversion to securities
• Domestic Bill: For local commercial transactions between drawer, drawee, and payee within one country's borders, subject to local law and requires specific maturity date and local currency
• Real Estate Bill: Specialized in real estate and housing sector, used in home buying and selling transactions and real estate projects with relatively long terms
• Documentary Bill: Used in international trade attached with bill of lading, commercial invoices, and documents, ensures goods delivery against payment

Mandatory Elements:

Basic Data: The word "bill of exchange" in the text, unconditional order to pay a certain amount, name of drawee, maturity date and place, name of payee, date and place of issue, drawer's signature and seal.

Legal Requirements: Clarity of amount in figures and words, currency specification, absence of conditional terms, explicit payment order formula, precise identification of parties.

Difference Between Bills of Exchange and Other Commercial Papers

Bill of Exchange vs. Promissory Note: A bill of exchange represents a payment order issued by the drawer to the drawee for the benefit of the payee involving three parties, while a promissory note is a direct payment undertaking from debtor to creditor limited to two parties only, making it simpler to handle.

Bill of Exchange vs. Check: A bill of exchange allows different maturity dates and can be drawn on any person or institution, while a check requires immediate payment and can only be drawn on a bank exclusively, making it an urgent payment instrument rather than a credit one.

Bill of Exchange vs. Letter of Guarantee: A bill of exchange is a direct payment instrument aimed at collecting a specific amount, while a letter of guarantee is merely a guarantee for executing a specific obligation and is not used for direct payment but as a backup guarantee.

Relative Advantages: The bill of exchange excels in its negotiability and bank discount before maturity, flexibility in determining suitable terms for parties, providing stronger legal guarantee than ordinary bonds, plus the possibility of endorsement and transfer between parties which increases its liquidity.

Bill of Exchange Procedures (Acceptance, Endorsement, Payment)

Bill of Exchange Procedures:

Acceptance: The drawee signs on the face of the bill with the word "accepted" along with date and signature, meaning consent to payment and becoming legally obligated like the original debtor. Partial acceptance for part of the amount, conditional acceptance with additional terms, or complete refusal of acceptance is possible with the necessity of documenting protest within two business days to preserve rights against the drawer and endorsers.

Endorsement: Transfer of bill ownership by signing on its back with writing "pay to the order of" and the name of the transferee. The endorser becomes guarantor for payment along with the drawer and previous endorsers, and endorsement can be absolute (without restrictions), restricted (with certain conditions), or endorsement for collection (agency without ownership transfer). Each endorsement creates new guarantee and increases the bill's strength.

Payment: Full payment of the amount on maturity date or within grace days (usually 3 days) eliminates all obligations and the bill is received stamped with payment. Non-payment requires official protest within two business days, and recourse against all guarantors (drawer, endorsers, backup guarantors) to claim the amount with interest and expenses. Partial payment is allowed with protest on the remainder.

Rights and Obligations of Bill of Exchange Parties

Drawer: Has the right to demand acceptance of the bill from the drawee and recourse against him or guarantors upon non-acceptance or non-payment. In return, obligated to guarantee acceptance and payment of the bill, and pay the amount to the holder when recourse is made against him in case of drawee's non-payment.

Drawee: Has the right to refuse acceptance of the bill before signing it and request reasonable time to examine it and verify its validity. After acceptance, becomes obligated to pay the full amount on maturity date without possibility of retracting acceptance.

Payee/Holder: Enjoys the right to demand acceptance and payment from the drawee, recourse against all obligors upon non-payment, and endorsement of the bill to third parties. Obligated to present the bill for acceptance and payment at specified times and officially protest upon refusal to preserve rights.

Endorser: Has the right to transfer the bill to third parties and rid himself of direct responsibility. In return, obligated to guarantee acceptance and payment to the transferee and becomes liable before him upon non-payment by original obligors.

Guarantor: Has the right of recourse against the guaranteed party after fulfilling the obligation. Obligated to pay the amount when the guaranteed party cannot pay and is considered backup surety for the bill.

Time Periods (Maturity, Statute of Limitations, Deadlines)

Bill of Exchange Time Periods:

Maturity: Bill maturity dates vary by type. Bills payable at sight are paid immediately upon presentation, bills payable at a fixed date are paid on the specified date, bills payable after a period from sight are calculated from the drawee's acceptance date, and bills payable after a period from issue are calculated from their original issuance date.

Statute of Limitations: Holder's action against the drawee becomes time-barred after 3 years from maturity date, while his action against drawer and endorsers becomes time-barred within one year from protest date or maturity if there's exemption from protest clause, and actions between obligors against each other become time-barred within 6 months from payment date or action filing against them.

Deadlines: The bill must be presented for acceptance before maturity with reasonable time allowing the drawee to examine, presented for payment on maturity day or within grace days usually 3 business days, protest must be made within two business days from refusal of acceptance or payment, and notice of non-payment to obligors within 4 business days from protest date.

Guarantees and Legal Protection

Guarantees and Legal Protection for Bills of Exchange:

First: Multiple Guarantee System Bills of exchange enjoy a graduated guarantee system starting with the drawer's basic guarantee for acceptance and payment, where he becomes responsible for paying the amount even if the drawee refuses acceptance. Each endorser adds a new guarantee layer and becomes jointly liable with predecessors, strengthening the bill. Backup guarantors can be added for enhanced protection, and the drawee becomes a basic guarantor upon acceptance.

Second: Comprehensive Legal Protection Laws provide criminal protection criminalizing issuance of bills without funds with imprisonment and fine penalties. Civil protection includes actions to recover amount with interest, compensation, and expenses. Accepted bills are considered enforceable instruments allowing direct execution on debtor's assets. Good faith holders are protected from personal defenses between original parties.

Third: Effective Enforcement Mechanisms Official protest within two business days preserves rights against all obligors. Execution includes seizure of movable and immovable property and bank accounts. Joint liability enables recourse against any signatory for the full amount. Precautionary seizure can be requested before maturity when escape risks exist.

Definition of Bill Discounting

Bill discounting is the process of selling a bill to a bank before its maturity date, where the bank pays the present value of the bill after deducting interest for the remaining period and banking commissions, and the bank undertakes to collect it from the drawee upon maturity. This process aims to provide immediate liquidity to the holder without waiting for the maturity date, while transferring collection risks from the holder to the bank which becomes the new owner of the bill.

Termination of Bills of Exchange and Exceptional Cases

Termination of Bills of Exchange:

Normal Termination:

Full Payment: Payment of the full amount on maturity date or within grace days, with receipt of the bill stamped with payment. Partial payment is acceptable with protest on the remainder.

Statute of Limitations: 3 years from maturity for holder's action against drawee, one year from protest against drawer and endorsers, 6 months between obligors against each other.

Release: Explicit waiver by creditor of his right in writing, eliminates obligation permanently and cannot be retracted.

Set-off: When mutual debts exist between the same parties, they are automatically eliminated to the equal extent.

Judicial Deposit: When creditor refuses to receive the amount, debtor deposits the amount with the court to discharge his liability.

Exceptional Cases:

Loss or Damage of Bill: A replacement copy is issued by court order with provision of guarantee, and the new copy retains the same legal force.

Obligor's Bankruptcy: Does not invalidate the bill but obligations transfer to bankruptcy estate, with possibility of obtaining urgent order for protection.

Non-enforceability: When impossible to identify parties or difficult to serve notice, rights are preserved by protest and execution can proceed when impediment is removed.

Data Deficiency: Missing data may invalidate the bill or convert it to ordinary bond depending on importance of the missing information.