BILL OF EXCHANGE
The bill of exchange originated as a method of settling accounts in international trade. Arab merchants used a similar instrument as early as the 8th century AD, and the bill in its present form attained wide use during the 13th century among the Lombards of northern Italy, who carried on considerable foreign commerce. Because merchants (the buyers) usually retained their assets in banks in a number of trading cities, a shipper of goods (the seller) could obtain immediate payment from a banker by presenting a bill of exchange signed by the buyer (who, in so doing, had accepted liability for payment when due). The banker would purchase the bill at a discount from its full amount because payment was due at a future date; the purchasing merchant’s account would be debited when the bill became due. Bills could also be drawn directly on the banks themselves. After the seller received his payment, the bill of exchange continued to function as a credit instrument until its maturity, independent of the original transaction.
A bill of exchange is a written order used primarily in international trade that binds one party to pay a fixed sum of money to another party on demand or at a predetermined date. Bills of exchange are similar to checks and promissory notes—they can be drawn by individuals or banks and are generally transferable by endorsements.
Section 5 of The Negotiable Instruments Act, 1881
A “bill of exchange” is an instrument in writing containing an unconditional order, signed by the maker, directing a certain person to pay a certain sum of money only to, or to the order of, a certain person or to the bearer of the instrument.
The sum payable may be “certain’’, within the meaning of this section and section 4, although it includes future interest or is payable at an indicated rate of exchange, or is according to the course of exchange, and although the instrument provides that, on default of payment of an instalment, the balance unpaid shall become due. The person to whom it is clear that the direction is given or that payment is to be made may be a “certain person”, within the meaning of this section and section 4, although he is mis-named or designated by description only.
The difference between a promissory note and a bill of exchange is that the latter is transferable and can bind one party to pay a third party that was not involved in its creation. Banknotes are common forms of promissory notes. A bill of exchange is issued by the creditor and orders a debtor to pay a particular amount within a given period of time. The promissory note, on the other hand, is issued by the debtor and is a promise to pay a particular amount of money in a given period.