Bills of Exchange and Bankers' Documentary Credits

William Hedley, Richard Hedley

• Publisher: Informa Law from Routledge
• Year: 2020
• eBook ISBN: 9781000341553
• Topic: Law
• Subtopic: Banks & Banking
• Index: Law

Bills of exchange and bankers' documentary credits are the fundamental financial instruments and mechanism of settlement for international trading transactions. Bills of Exchange and Bankers' Documentary Credits, 4th Edition provides a highly readable, yet in-depth account of the law and practice relating to bills of exchange, cheques and bankers documentary credits. The authors explain how the Bills of Exchange and other instruments work in practice, drawing particular attention to the problems which are likely to arise and how best to resolve them. Furthermore, because the parties to financial transactions are often based in different countries, it deals with jurisdiction and choice of law to enable you to make the most informed and profitable choices.

SECTION ONE

BILLS OF EXCHANGE

CHAPTER 1

INTRODUCTION

1.1 A bill of exchange is a piece of paper which is used to transfer money from one person to another instead of using the actual money itself.

It is a personal humbug and is inconvenient to carry large quantities of coins in our pockets and we gladly change these for banknotes whenever possible. Even this, however, is less convenient than leaving the money with a bank and merely carrying a cheque-book or debit card. Bearing this in mind it is not difficult to appreciate how in dealing with large quantities of money it is a practical impossibility to pay in cash, and it is obviously very desirable to use the alternative of paying by the giving of a slip of paper.

The best known type of bill of exchange is a “cheque” by which we transfer money at our bank to people to whom we are indebted. A cheque is payable “on demand”, that is, at any time, whereas an “ordinary” bill (sometimes called a “time” bill) is often not payable until, say, three months after it is drawn up and signed. Thus, bills of exchange (apart from cheques) are more commonly employed in commercial transactions where the person who is paying for the goods does not wish, for one reason or another, to make immediate settlement of his account. Thus, if on 1 April Y buys 10,000 tons of coal from Z in Poland to be shipped to Liverpool to arrive on 1 July, Y can pay for the goods with a three months’ bill. By this method, Y gets a fixed period of credit, and in the meanwhile Z has a document which he can use immediately.

1.2 What usually happens is that Y (the buyer of the coal) makes arrangements with a finance house that they will provide the money for the purchase. Y then draws the bill on the finance house, and they accept it to show that they have agreed to pay it in three months’ time. Y then sends the bill to Z in exchange for the documents of title to the coal. Z now has a bill which he knows will be paid by the finance house on 1 July. Z is then in a position, if he wishes, to take the bill to another finance house, perhaps in Poland or Switzerland or London for that matter, and get them to discount the bill: that is, pay him immediately (less whatever commission or interest they may charge) and then they will take the bill from Z by negotiation, and, as the new owners of it, will present it for payment to the original finance house in London on 1 July.

This way, Y gets his coal and three months’ credit. Z gets paid immediately, and the two finance houses assist by carrying out their specialist function. Everything does, of course, depend on the standing of the finance house in London who “accept” the bill. Unless the acceptor is unimpeachable the transaction never really can get under way.

1.3 The use of bills of exchange is, therefore, an important and essential part of financing international trade, and, of course, they are used widely within the British Isles,¹ even where no foreign element is present.

The system of accepting bills and their discounting and presentment for payment is today a highly sophisticated part of the financial and banking scene, but, of course, it was not always so. In the beginning it was the merchant traders who, for a suitable rate of interest, were prepared to accept bills of exchange to give efficacy to transactions of smaller concerns. This was the beginning of the merchant banks, and on the outbreak of the First World War in 1914, a group of these merchant banks in London formed an informal committee to deal with the obligations of German customers. This laid the foundations for the Accepting Houses Committee, which is now one of the most powerful institutions in the City of London, and co-ordinates the business interests of the member banks. Obviously, a bill accepted by a member of the Committee is deemed to be a first-class security, and is, therefore, able to command the best possible terms and rates of interest.

1.4 The law relating to bills of exchange had developed through the usage of traders from about the 14th century into a body of law called the “Law Merchant”.² This body of law was only lightly touched on by Parliament, until it was codified by the Bills of Exchange Act 1882.³

The 1882 Act was drafted by that great commercial lawyer, Sir Mackenzie Chalmers, after reading some 2,500 cases, which made up the law prior to the Act. The Act was simply intended to state the law as it was, but obviously, here and there a change had to be introduced if common sense dictated, or, if a particular point was not clear, a decision one way or another had to be taken. It is for this reason that cases decided prior to 1882 are still available, where appropriate, as authority for, or examples of, the points with which they deal. The 1882 Act has lasted over the years without substantial amendment; the only statutory modification of any consequence being the Cheques Acts 1957 and 1992, which gave bankers some additional protection when dealing with unindorsed or irregularly indorsed cheques.

1.5 One of the most important functions of the Act was to assist the concept of negotiability⁴ by creating a special type of holder who would get a good title to a bill of exchange even if there had been all manner of irregularities in the prior dealings with it, provided he acted in good faith and without any knowledge of the irregularities. He is called by the Act a “holder in due course” and is referred to many times. He is given substantial protection, and a variety of presumptions are made in his favour, not available to lesser legal mortals. To reach the status of a “holder in due course” the Act lays down stringent rules which must be complied with, but, assuming the heights of Parnassus are reached, a “holder in due course” has little to fear of claims which may be made against him.

At one time, bills of exchange carried an ad valorem stamp duty, but this was abolished from 1 February 1971, and need not now be considered.⁵

All countries use bills of exchange, and many have adopted a code similar in terms to the 1882 Act.⁶

1 The law of Scotland differs in one or two important aspects. See, for example, ss. 98 and 100 of the Bills of Exchange Act 1882.

2 For a history of this subject, see Holdsworth, H E L VIII, pp. 113 et seq. See also a short account per Cockburn LCJ in Goodwin v. Robarts (1875) 33 LT 272, at pp. 275 et seq; affirmed on appeal (1876) 35 LT 179. By far the best history of the subject is Dr Holden’s book History of Negotiable Instruments in English Law (1955), University of London.

3 S. 1 of the 1882 Act. One great commercial judge considered it “ … the best drafted Act of Parliament ever passed”: per MacKinnon LJ, in Bank Polski v. Mulder [1942] 1 KB 497, at p. 500. The 1882 Act repealed and mostly re-enacted the few statutory provisions as did at that time exist: s. 96. Where any other Act or any document makes reference to any of the statutory provisions replaced by the 1882 Act, those Acts or documents are to be construed as if reference was to the corresponding provisions of the 1882 Act: s. 99.

4 See infra Chap. 4.

5 Finance Act 1970, s. 32.

6 Almost all the Commonwealth countries and the USA. Different systems have been adopted by most Continental European jurisdictions. This is considered infra in more detail in Chap. 10.

CHAPTER 2

CONTRACT ON A BILL

2.1 It follows from all that has been said that a bill of exchange is part of a contract, and, like any other contract, can be legally enforced. The ordinary law of contract applies to bills of exchange, and the elements needed for a valid contract will be considered in a moment, but before doing so something must be sa...

Table of contents

• Cover
• Half Title
• Title Page
• Copyright Page
• Foreword
• Preface to the Fourth Edition
• Table of Contents
• Table of Cases
• Table of Statutes
• Table of Statutory Instruments
• Table of International Conventions
• Table of ICC Conventions
• Section One – Bills of Exchange
• Section Two – Cheques
• Section Three – Miscellaneous Documents
• Section Four – Electronic Fund Transfers
• Section Five – Bankers’ Documentary Credits
• Appendices
• Index