BILL OF EXCHANGE, a form of negotiable instrument, defined below, the history of which, though somewhat obscure, was ably summed up by Lord Chief Justice Cockburn in his judgment in Goodwin v. Robarts (1875), L.R. Io Ex. pp. 346 Bills of exchange were probably invented by Florentine Jews. They were well known in England in the middle ages, though there is no reported decision on a bill of exchange before the year 1603. At first their use seems to have been confined to foreign bills between English and foreign merchants. It was afterwards extended to domestic bills between traders and finally to bills of all persons, whether traders or not. But for some time after they had come into general employment, bills were always alleged in legal proceedings to be drawn secundum usum et con suetudinem mercatorum. The foundations of modern English law were laid by Lord Mansfield with the aid of juries of London merchants. No ;better tribunal of commerce could have been de vised. Subsequent judicial decisions have developed and sys tematized the principles thus laid down. Promissory notes are of more modern origin than bills of exchange, and their validity as negotiable instruments was doubtful until it was confirmed by a statute of Anne (1704). Cheques are the creation of the modern system of banking.
From 2,600 cases scattered over some 30o volumes of Reports and 17 Statutes dealing with isolated points the English law re lating to Bills of Exchange, promissory notes, and cheques was codified by the Bills of Exchange Act 1882 which laid down, with one exception applicable only to Scotland, uniform rules for Great Britain and Ireland. Two salient characteristics distinguish negotiable instruments from other engagements to pay money. In the first place, the assignee of a negotiable instrument, to whom it is transferred by indorsement or delivery according to its tenor, can sue thereon in his own name ; and, secondly, he holds it by an independent title. If he takes it in good faith and for value, he takes it free from "all equities," that is to say, all defects of title or grounds of defence which may have attached to it in the hands of any previous party. These characteristic privileges were conferred by the law merchant, which is part of the common law, and are now confirmed by statute.
Three months after date pay to the order of Mr. J. Jones the sum of one hundred pounds for value received.
Brown & Co.
To Messrs. Smith & Sons, Liverpool.
A bill in its origin was a device to avoid the transmission of cash from place to place to settle trade debts. Now a bill of ex change is a substitute for money. It is immaterial whether it is payable in the place where it is drawn or not. It is immaterial whether it is stated to be given for value received or not, for the law itself raises a presumption that it was given for value. But though bills are a substitute for cash payment, and though they 'This is also the definition given in the United States, by s. 126 of the general Act relating to negotiable instruments, prepared by the conference of State commissioners on uniform legislation, which has been universally adopted.
constitute the commercial currency of the country, they must not be confounded with money. No man is bound to take a bill in payment of debt unless he has agreed to do so. If he does take a bill, the instrument ordinarily operates as conditional, and not as absolute payment. If the bill is dishonoured the debt re vives. Under the laws of some Continental countries, a creditor, as such, is entitled to draw on his debtor for the amount of his debt, but in England the obligation to accept or pay a bill rests solely on actual agreement. A bill of exchange must be an un conditional order to pay. If an instrument is made payable on a contingency, or out of a particular fund, so that its payment is dependent on the continued existence of that fund, it is invalid as a bill, though it may of course avail as an agreement or equitable assignment. In Scotland it has long been the law that a bill may operate as an assignment of funds in the hands of the drawee, and s. 53 of the Act preserves this rule.
Bills of exchange must be stamped, but the Act of 1882 does not regulate the stamp. It merely saves the operation of the stamp laws, which necessarily vary from time to time according to the fluctuating needs and policy of the exchequer. Under the Finance Act 1918, bills payable on demand and three-day bills are subject to a fixed stamp duty of twopence. The stamp may be impressed or adhesive. All other bills are liable to an ad valorem duty. All other inland bills must be drawn on impressed stamp paper, but foreign bills, of course, can be stamped with adhesive stamps, if the stamp is affixed before the bill is negoti ated in England. English law does not concern itself with foreign revenue laws. It is immaterial whether a bill drawn abroad is stamped in accordance with the law of its place of origin or not. On arrival in England it has to conform to the English stamp laws.
A bill of exchange is payable on demand when it is expressed to be payable on demand, or at sight, or on presentation, or when notice for payment is expressed. In calculating the ma turity of bills payable at a future time, three days, called days of grace, must be added to the nominal due date of the bill. For instance, if a bill payable one month after sight is accepted on Jan. I, it is really payable on Feb. 4, but when the last day of grace falls on Sunday, Christmas day, Good Friday, or a day appointed by Royal Proclamation as a public fast or thanksgiving day, the bill is due and payable on the preceding business day. On the other hand on Bank holidays (other than Christmas day or Good Friday), or when the last day of grace is a Sunday and the second day of grace a bank holiday, the bill is due and pay able on the succeeding business day (s. 14)• Acceptance.—By the acceptance of a bill the drawee becomes the principal debtor on the instrument and the party primarily liable to pay it. The acceptor of a bill "by accepting it engages that he will pay it according to the tenor of his acceptance," and is precluded from denying the drawer's right to draw or the genuineness of his signature (s. S4). The acceptance may be either general or qualified. As a qualified acceptance is so far a disregard of the drawer's order, the holder is not obliged to take it; and if he chooses to take it he must give notice to antecedent parties, acting at his own risk if they dissent (ss. 19 and 44)• The drawer and indorsers of a bill are in the nature of sureties. They engage that the bill shall be duly accepted and paid ac cording to its tenor, and that if it is dishonoured by non acceptance or non-payment, as the case may be, they will com pensate the holder provided that the requisite proceedings on dishonour are duly taken. Any indorser who is compelled to pay the bill has the like remedy as the holder against any antecedent party (s. 55). A person who is not the holder of a bill, but who backs it with his signature, thereby incurs the liability of an indorser to a holder in due course (s. 56). An indorser may by express term either restrict or change his ordinary liability as stated above. Prima facie every signature to a bill is presumed to have been given for valuable consideration. But sometimes this is not the case. For friendship, or other reasons, a man may be willing to lend his name and credit to another in a bill trans action. Hence arise what are called accommodation bills. Ordi narily the acceptor gives his acceptance to accommodate the drawer. But occasionally both drawer and acceptor sign to ac commodate the payee, or even a person who is not a party to the bill at all. The criterion of an accommodation bill is the fact that the principal debtor according to the instrument has lent his name and is in substance a surety for someone else. The holder for value of an accommodation bill may enforce it exactly as if it was an ordinary bill, for that is the presumable intention of the parties. But if the bill is dishonoured the law takes cogni zance of the true relations of the parties, and many of the rules relating to principal and surety come into play. Suppose a bill is accepted for the accommodation of the drawer. It is the drawer's duty to provide the acceptor with funds to meet the bill at maturity. If he fails to do so he cannot rely on the defence that the bill was not duly presented for payment or that he did not receive due notice of dishonour. If the holder, with notice of the real state of the facts, agrees to give time to the drawer to pay, he may thereby discharge the acceptor.
Dishonour.—The holder of a bill has special duties which he must fulfil in order to preserve his rights against the drawers and indorsers. They are not absolute duties ; they are duties to use reasonable diligence. When a bill is payable after sight, presentment for acceptance is necessary in order to fix the maturity of the bill. Accordingly the bill must be presented for acceptance within a reasonable time. When a bill is payable on demand it must be presented for payment within a reasonable time. When it is payable at a future time it must be presented on the day that it is due. If the bill is dishonoured the holder must notify promptly the fact of dishonour to any drawer and indorser he wishes to charge. If, for example, the holder only gives notice of dishonour to the last indorser, he could not sue the drawer unless the last indorser or some other party liable has duly sent notice to the drawer. When a foreign bill is dis honoured the holder must cause it to be protested by a notary public. The bill must be noted for protest on the day of its dis honour. If this be duly done, the protest, i.e., the formal notarial certificate attesting the dishonour, can be drawn up at any time as of the date of the noting. A dishonoured inland bill may be noted, and the holder can recover the expenses of noting, but no legal consequences attach thereto. In practice, however, noting is usually accepted as showing that a bill has been duly presented and has been dishonoured. Sometimes the drawer or indorser has reason to expect that the bill may be dishonoured by the drawee. In that case he may insert the name of a "referee in case of need." But whether he does so or not, when a bill has been duly noted for protest, any person may, with the consent of the holder, intervene, for the honour of any party liable on the bill. If the bill has been dishonoured by non-acceptance it may be "accepted for honour supra protest." If it has been dishonoured by non payment it may be paid supra protest. When a bill is thus paid and the proper formalities are complied with, the person who pays becomes invested with the rights and duties of the holder so far as regards the party for whose honour he has paid the bill, and all parties antecedent to him (ss. 65 to 68).
Discharge.—Normally a bill is discharged by payment in due course, that is to say, by payment by the drawee or acceptor to the holder at or after maturity. But it may also be discharged in other ways, as for example by coincidence of right and liability (s. 61), voluntary renunciation (s. 62), cancellation (s. 63), or material alteration (s. 64)• A bill of exchange is the most cosmopolitan of all contracts. It may be drawn in one country, payable in another, and indorsed on its journey to its destination in two or three more. The laws of all these countries may differ. Provision for this conflict of laws is made by s. 72, which lays down rules for determining by what law the rights and duties of the various parties are to be measured and regulated. Speaking broadly, these rules follow the maxim Locus regit actum. A man must be expected to know and follow the law of the place where he conducts his business, but no man can be expected to know the laws of every country through which a bill may travel. For safety of transmission from country to country bills are often made out in sets. The set usually consists of three counterparts, each part being numbered and containing a referc.nce to the other parts. The whole set then constitutes one bill, and the drawee must be careful only to ac cept one part, otherwise if different accepted parts get into the hands of different holders, he may be liable to pay the bill twice (s. 71). Foreign bills circulating through different countries have given rise to many intricate questions of law. But the subject is perhaps one of diminishing importance, as in many trades the system "cable transfers" is superseding the use of bills of ex change.
Cheques.—A cheque "is a bill of exchange drawn on a banker payable on demand" (s. 73). For the most part the rules of law applicable to bills payable on demand apply in their entirety to cheques. But there are certain peculiar rules relating to the latter which arise from the fact that the relationship of banker and customer subsists between the drawer and drawee of a cheque. For example, when a person has an account at a bank he is, as an inference of law, entitled to draw on it by means of cheques. A right to overdraw can, of course, only arise from agreement. The drawer of a cheque is not absolutely discharged by the holder's omission to present it for payment within a reasonable time. He is only discharged to the extent of any actual damage he may have suffered through the delay (s. 74). Apart from any question of delay, a banker's authority to pay his customer's cheques is determined by countermand of payment or by notice of the customer's death (s. 75). Of recent years the use of cheques has enormously increased, and they have now become the normal machinery by which all but the smallest debts are dis charged. To guard against fraud, and to facilitate the safe trans mission of cheques by post, a system of crossing has been devised which makes crossed cheques payable only through certain chan nels. The first Act which gave legislative recognition to the prac tice of crossing was the 19 and 20 c. 95. That Act was amended in 1858, and a consolidating and amending Act was passed in 1876. The Act of 1876 is now repealed, and its pro visions are re-enacted. with slight modifications by ss. 76 to 82 of the Bills of Exchange Act 1882. A cheque may be crossed either "generally" or "specially." A cheque is crossed generally by drawing across it two parallel lines and writing between them the words "& Co." When a cheque is crossed generally it can not be paid over the counter. It must be presented for payment by a banker. A cheque is crossed specially by adding the name of the banker, and then it can only be presented through that particular banker. A cheque, whether crossed generally or speci ally, may further be crossed with the words "not negotiable." A cheque crossed "not negotiable" is still transferable, but its negotiable quality is restricted. It is put on pretty much the same footing as an overdue bill. The person who takes it does not get, and cannot give a better title to it, than that which the person from whom he took it had. These provisions are supple mented by provisions for the protection of paying and collecting bankers who act in good faith and without negligence. Suppose that a cheque payable to bearer which is crossed generally and with the words "not negotiable" is stolen. The thief then gets a tradesman to cash it for him, and the tradesman gets the cheque paid on presentment through his banker. The banker who pays and the banker who receives the money for the tradesman are protected, but the tradesman would be liable to refund the money to the true owner. Again, assuming payment of the cheque to have been stopped, the tradesman could not maintain an action against the drawer.
French Law.—In fundamental principles there is general agreement between the laws of all commercial nations regarding negotiable instruments. As Mr. Justice Story, the great American lawyer, says: "The law respecting negotiable instruments may be truly declared, in the language of Cicero, to be in a great measure not the law of a single country only, but of the whole commercial world. Non erit lex alia Romae, alia Athenis, alia nunc alia posthac, sed et apud omnes gentes et omni tempore, una eademque lex obtinebit" (Swift v. Tyson, 16 Peters I). But in matter of detail each nation has impressed its individuality on its own sys tem. The English law has been summarized above. Perhaps its special characteristics may be best brought out by comparing it with the French code and noting some salient divergences. Eng lish law has been developed gradually by judicial decision founded on trade custom. French law was codified in the i 7th century by the "ordonnance de 1673." The existing "Code de Commerce" amplifies but substantially adopts the provisions of the "Ordon nance." The growth of French law was thus arrested at an early period of its development. The result is instructive. A reference to Marius' treatise on bills of exchange, published about 167o, or Beawes' Lex Mercatoria, published about 174o, shows that the law, or rather the practice, as to bills of exchange was even then fairly well defined. Comparing the practice at that time with the law as it now stands, it will be seen that it has been modified in some important respects. For the most part, where English law differs from French law, the latter is in strict accordance with the rules laid down by Beawes. The fact is that, when Beawes wrote, the law or practice of both nations on this subject was nearly uni form. But English law has gone on growing while French law has stood still. A bill of exchange in its origin was an instrument by which a trade debt due in one place was transferred to another place. This theory French law rigidly keeps in view. In England bills have developed into a paper currency of perfect flexibility. In France a bill represents a trade transaction; in England it is merely an instrument of credit. English law affords full play to the system of accommodation paper; French law endeavours to stamp it out. A comparison of some of the main points of differ ence between English and French law will show how the two theories work. In England it is no longer necessary to express on a bill that value has been given for it, for the law raises a pre sumption to that effect. In France the nature of the consideration must be stated, and a false statement of value avoids the bill in the hands of all parties with notice. In England a bill may be drawn and payable in the same place. In France the place where a bill is drawn should be so far distant from the place where it is payable that there may be a possible rate of exchange between the two. This so-called rule of distantia loci is said to be disregarded now in practice, but the code is unaltered. As French lawyers put it, a bill of exchange necessarily presupposes a contract of exchange. In England since i 765 a bill may be drawn payable to bearer, though formerly it was otherwise. In France it must be payable to order; if it were not so it is clear that the rule re quiring the consideration to be truly stated would be a nullity. In England a bill originally payable to order becomes payable to bearer when indorsed in blank. In France an indorsement in blank merely operates as a procuration. An indorsement, to operate as a negotiation, must be to order, and must state the consideration; in short, it must conform to the conditions of an original draft. In England, if a bill is dishonoured by non-ac ceptance, a right of action at once accrues to the holder. In France no cause of action arises unless the bill is again dis honoured at maturity; the holder in the meantime is only en titled to demand security from the drawer and indorsers. In England a sharp distinction is drawn between current and over due bills. In France no such distinction is drawn. In England no protest is required in the case of the dishonour of an inland bill, notice of dishonour being sufficient. In France every dishonoured bill must be protested. Opinions may differ whether the English or the French system is better calculated to serve sound com merce and promote a healthy commercial morality. But an argu ment in favour of the English system may be derived from the fact that as the various Continental codes are from time to time revised and re-enacted, they tend to depart from the French model and to approximate to the English rule. The effect upon English law of its codification has yet to be proved. A common objection to codification in England is that it deprives the law of its elastic character. But when principles are once settled common law has very little elasticity. On the other hand no code is final. Modern parliaments legislate very freely, and it is a much simpler task to alter statute law than to alter common law. Moreover, legislation is cheaper than litigation. One consequence of the codification of the English law relating to bills is clear again. Nearly all the British colonies have adopted the Act, and where countries are so closely connected as England and her colonies, it is an obvious advantage that their mercantile trans actions should be governed by one and the same law expressed in the same words.
The following court decisions relating to bills of exchange and cheques may be singled out for special mention here. In Jones v. Waring and Gillows (1926) A. C. 67o, the House of Lords defi nitely settled that the original payee of a bill or note is not a holder in due course as there has been no negotiation of the bill within the meaning (ss. 29-31). For example, if X is induced by the fraud of Y to draw a cheque in favour of Z, X is not in any way liable to Z.
A draft drawn by one branch bank on another is not a bill of exchange within the meaning of s. 6o of the Bills of Exchange Act 1882, but it is a draft or order within the meaning of s. 19 of the Stamp Act 1853, which protects bankers paying such drafts under a forged indorsement (Capital & Counties Bank v. Gordon [1903], A.C. 240). It is still uncertain whether this section protects a banker so paying in the case of a draft drawn abroad. A draft on a banker with a receipt annexed as a condition of pay ment is not a bill of exchange drawn on a banker payable on demand because it is not "an unconditional order to the banker to pay." But a cheque written on a blank sheet of paper, on the face of which the drawer wrote "to be retained" and promised to send one of his bankers' printed cheques in substitution, is an un conditional order to pay as regards the drawer's bankers, and the payee can sue thereon if it is dishonoured on presentation for payment (Roberts v. Marsh [1915] K.B. 42).
A foreign bill of exchange indorsed in France by an agent of the payee in the agent's own name without the words "per pro" or their equivalent but so indorsed by the payee's authority is a valid and sufficient indorsement and does entitle the payee under s. 72 of the Bills of Exchange Act to recover the amount thereof from the acceptors (Koechlin & Cie v. Kestenbaum Bros. K.B. 889).
Finally bankers' anxiety as to their liability where the amount of a cheque has been altered in fraud of a careless drawer has now been set at rest by the decision in London Joint Stock Bank Ltd., v. Macmillan and Arthur (1918). A.C. 777, where the House of Lords held, that the plaintiff firm had been guilty of a breach of the special duty arising from the relation of banker and customer to take care in the mode of drawing a cheque; that the alteration in the amount of the cheque was the direct result of that breach of duty; and that the bank were therefore entitled to debit the firm's account with the full amount of the cheque.
As Lord Shaw said in his judgment : In the case of a cus tomer's cheque, admittedly genuine, no responsibility rests upon the banker for what has happened to the cheque before its pre sentation to the bank, but the responsibility for what has hap pened to it between the dates of signature and presentation rests upon the customer.
The ordinary text-books on the law of bills of exchange are constantly re-edited. See especially Byles, Bills of Exchange; Chal mers, Bills of Exchange; Nouguier, Lettres de change et des effets de commerce (France) ; Thorburn, Bills of Exchange Act 1882 (Scot land) ; Hodgins, Bills of Exchange Act 1890 (Canada) .
(M. D. C.; E. M. C. D.) United States Practice.—The American law as laid down in the Uniform Negotiable Instruments Law, prepared in 1897 and by 1927 adopted without substantial change in all the States, is largely modelled on and harmonious with the British.
Some differences require noting: National banks in the U.S.A. could issue bank notes until 1933, when Federal Reserve notes and Government notes representing actual deposited silver, known as silver certificates, became the practically universal note cur rency of the country. There is no longer a stamp tax on notes or acceptances. Days of grace on bills of exchange have been abolished, except in a very few States, as to sight drafts. The American cases are divided on whether a purchaser of overdue paper can secure better rights than his transferor had. They are divided also on whether the original payee of a bill, note or check can become a holder in due course, and on whether a drawer who negligently leaves spaces which facilitate raising the amount can hold his bank liable for the difference after the bank has paid in good faith. The other points on which specific cases are cited above are not of moment in American law. An Inland bill which does not require protest means a bill payable in the same State in which it is drawn. And the Negotiable Instruments Law con tains no codified provisions as to what law governs transactions involving bills and notes which cross state boundaries, although the courts have ruled on most of the relevant points. The system of crossing checks is unknown in the United States ; and a banker paying over a forged instrument is not protected in charging the drawer's account. He is, however, entitled to recover the pay ment from the person who thus received it on an invalid, though apparent, title. It may well be that the two systems are not par ticularly different in their practical effects in hindering forgery. Under the English the collecting banker, to be safe from ultimate liability, must and does collect only for a customer, i.e., one whom he regularly deals with, and knows. Under the American the practical result of the collecting banker's absolute liability is somewhat the same : it is equally unsafe to collect for a stranger. So far, however, as the English check is crossed specially, or car ries the notation "non-negotiable," or "account payee," it would seem to carry additional safeguards.
Divergences in Practice: But the bulk of the divergences in the two countries lie rather in men's practices than in the law. The form of banker's advance in America is not by prearranged over draft, but by some such device as the banker taking the custo mer's note and crediting his account. And especially, it is the note, not the acceptance, which is in America the common in strument of credit. Nor can it be overlooked that credit instru ments are much less used in America than in England in mer cantile transactions—as contrasted with banking, or real estate mortgage, or open market borrowing transactions. The common American mercantile practice for a seller is to evidence credit by mere book entries, and to wait for his money, whereas in Eng land it is common for the seller to take the buyer's acceptance at once on delivery of the goods, and to proceed to realize funds by discounting the acceptance with a banker or investor. This English practice prevails in American export trade ; furthermore, under the Federal Reserve Act a very considerable volume of transactions has grown up in which the buyer's banker gives ac ceptances in the buyer's behalf, against commission and security. But the attempt at general introduction of the acceptance into domestic trade—the "trade acceptance" movement, seems to be making very slow headway.
Checks: On the other hand the check bulks even larger in the United States than in England. This involves no real disharmony with the foregoing. For whereas the true bill of exchange, pay able thirty to ninety days after acceptance, is primarily a credit instrument, which can hardly flourish where men are content to leave debts in open account, the check—drawn on a bank, and payable on demand—is an instrument of payment, and useful in payment regardless of the credit system. The reliability of the check as an assurance of payment can be greatly increased by certification, i.e., by the banker on whom the check is drawn stamping or writing across the check a form of words—such as "certified" or "good"—which by law makes the banker directly responsible for payment. Certification, which is very common in America, is therefore closely similar to acceptance of a time bill of exchange. But since the drawer's order on a check is to pay on demand, the banker who certifies has not in strictness honoured the order, and when the payee acquiesces in, or induces, the banker's act the drawer is discharged as in the case of a qualified acceptance. (N.I.L. s. 187, 188, 142.) After a check has been certified for the holder payment can no longer be stopped by the drawer, nor refused for insufficient funds; it is therefore neces sary and proper for the banker, on certifying, to immediately charge the drawer's account to cover his own obligation. It must be noted, however, that, if ,it is the drawer himself who has the check certified in order to procure an instrument which he can use as the full equivalent of cash, he retains some power to stop payment until the check passes into the hands of a holder in due course.
Investment Instruments: The American Negotiable Instru ments Law undertakes, as the English act does not, to lay down the requirements to which "an instrument to be negotiable must conform" (s. I). Chief among these requirements is that the in strument contain an unconditional promise or order to pay a sum certain in money. This language may be and often has been con strued to deny negotiability to any document of any kind which fails to meet the requirements laid down, a situation which has given rise to some perplexities and conflicting decisions in regard to long-term investment instruments. Especially concerned are bonds—which have their promise to pay conditioned on various clauses of the underlying mortgage—and such more modern in struments as interim certificates, by which the maker engages, not to "pay a sum certain in money," but to deliver a described bond when issued. This ill-advised extension of a code drawn primarily with notes, bills of exchange and checks in mind has made cur rent dealings in investment paper somewhat uncertain, despite the established practice on the exchanges of relying on a purchase bona fide and for value just as if the paper carried the full pro tection of negotiability. All that can yet be said with certainty is that in the absence of a specific statute such as is found in New York, or of amendment in the code, a purchaser of such paper cannot be sure of acquiring rights any better than those of his seller.