Bill of exchange

It is defined as 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 fixed or determinable future, a sum certain in money or to the order of a specified person or to a bearer.

Differences between a bill of exchange and a Promissory note

A promissory note on the other hand is defined as an unconditional promise in writing, made up by one person to another, signed by the maker, engaging 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 a bearer.

Promissory note		Bill of exchange
It is a promise to pay		It is an order to pay
Promissory notes are made singly		Bills of exchange are often drawn in sets
Promissory note is made out by the debtor		Bills of exchange is drawn by the creditors
Promissory note does not require acceptance		Bill of exchange requires acceptance
Foreign promissory notes need		Foreign bill must be protested when dishonoured
not be protested when dishonoured

Types of bills of exchange

• Inland bill: It is a bill of exchange which is either drawn and payable within Nigeria, or drawn within Nigeria upon a person resident therein. if an inland bill is dishonoured, it need not be protested, but notice of the dishonour must be given to the drawer or indorser to make him liable. Unless a contrary intention appears on the face of a bill, the holder may treat any bill as an inland bill.

• Foreign bill: A bill of exchange drawn upon a person resident outside Nigeria, or payable outside Nigeria. If a foreign bill is dishonoured, it must be noted and protested.

• Inchoate or incomplete bill: This is a bill which is incomplete in a material particular. An example is when a person signs a blank piece of paper, and delivers it to another intending it to be converted into a bill. This operates as authority to fill it up as a complete bill, using the signature already upon it as that of drawer, acceptor or indorser. The material details that are incomplete may be dates, amounts etc.

• Accommodation bill: This is a bill of exchange in which one of the parties to the bill has signed as drawer, acceptor or indorser without having been given any value. He is called the accommodation party, and his purpose for signing is to land his name and credit to one of the other parties (the party being accommodated). The distinguishing characteristic of this type of bill is that an accommodation party is liable on the bill to a holder for value, and it is immaterial whether when holder took the bill, he knew it was an accommodation bill.

Other types of bill are

• An order bill: it is one payable to the order of a named person.
• A bearer bill: A bill payable to any person in possession it.

The parties to a bill are:

• Drawer: A person who issues the order
• Drawee: A person on whom the bill of exchange is drawn
• Payee: Person to whom payment is ordered to made.
• Indorsee: A person to whom a bill of exchange has bill negotiated.

Endorsements on negotiable instruments (e.g bill of exchange and promissory notes)

There are five types of endorsements that can be affected on a negotiable instrument. They are:

• Blank endorsement: Here the person to whom the bill is payable signs his name on the bill without mentioning any specified endorsee e.g (signed) “P. Lawal”. This operates to convert an order bill to a bill payable to bearer and can be transferred by mere delivery. A bloank endorsement can be converted into a special endorsement by the holder just inserting a name above the signature.

• Special endorsement: Here the endorser signs his name on the back of the bill with an instruction to pay a particular person. E.g pay “John Okan” (signed “P. Lawal”).

• Conditional endorsement: Here, the endorser attaches some conditions to the payment or transfer. For example: “pay Ibrahim Hassan if he completes the project on time”. The payer here has a choice to refuse payment until condition is satisfied.

• Restrictive endorsement: Here, the endorser prohibits further negotiation of the bill. The bill in such circumstances is no longer a negotiable instrument e.g “pay Kunle only”.

• Endorsement “sans recurs”: Here the endorser restricts his liability by stating that the endorsee would not have any recourse to him for payment at a future time for example if the bill is dishonoured. An endorsee would not normally accept this type of endorsement.

Differences between a cheque and other bills of exchange

A cheque is a bill of exchange drawn on a banker and payable on demand, or it can be defined as an unconditional order by a customer to a banker to pay a named person or to his order or to bearer. Now, Let us take a look at the differences between this special type of bill of exchange (cheque) and other bills.

Cheque other bills 1 The drawee is always a banker The drawee is not a banker 2 A cheque is could be rejected because the banker is not liable to the holder  but the drawer (i.e customer) It is always accepted and the acceptor is liable to the holder 3 The drawer is not discharged from liability if there is delay by the holder in presenting it for payment The drawer is discharged from liability if there is delay in presentment 4 If a cheque bears a forged or unauthorised endorsement, payment may discharge the paying banker If a bill bears a forged or unauthorized endorsement, the acceptor would not be discharged 5 Cheques may be crossed and a crossed cheque cannot be cashed over the counter Bills are not often crossed 6 Notice of dishonour is not required to claim against the drawer for non-payment Notice of dishonour is required to claim against the acceptor for non-payment 7 A cheque is always payable on demand A bill may be payable at a fixed future time 8 Several obligations arise between the banker and  his customer by reason of their contractual relationship eg cheques must be honoured up to the customer’s credit balance or agreed overdraft (if any). Damages may be claimed for wrongful dishonour This is not so in the case of other bills 9 The drawers authority to pay a customer’s cheque may be revoked by: a) countermand of payment b) Notice of customer’s death c) Notice of the customer’s bankruptcy This will not be possible where a bill has been negotiated

Recommended Reading

Jae Shim., Joel Siegel., Schaum’s Outline of Financial Accounting