Hamsha Selvanayagam LL.

B
Attorney-at-law

BILLS OF EXCHANGE

A bill of exchange is an instrument of the class called “negotiable”

Types of bills

1. Order bill

A bill drawn to or to the order of a specified person, using the word such as “pay john Smith
or order “is known as an order bill

2. Bearer bill
• A bill drawn in favor of the person for the time being in possession of the bill, using the
words such as “pay bearer’ is known as bearer
• A bill is a bearer bill when it is expressed to be so payable or
• On which the only or last indorsement is an indorsement in blank (Se 8{3} of BOE)
• Here the payee is a factious person or non-existing person the bill may be treated as
payable to bearer

3. Sight bill
A bill payable as soon as it is presented for payment
4. Time bill
➢ Paid at a future point of time
➢ After maturity it must be presented for acceptance and for payment
5. Discounted bill
This is where the holder can sell the bill to a bank or a discount house and thereby raise
money on the bill
6. Inland bill and foreign bill
An inland bill is a bill which is or on the face of it purports to be
a. both drawn and payable within Sri Lanka
b. drawn within Sri Lanka upon some person resident in Sri Lanka
Any other bill is a foreign bill

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Hamsha Selvanayagam LL.B
Attorney-at-law

The characteristics of a negotiable instrument

1. The title to it passes on delivery if it is a bearer instrument and on delivery and
indorsement if it is an order instrument. This distinguishes it from such things as a fire
insurance policy, a bill of sale and a right to recover a debt.
2. The holder for the time being can sue in his own name
3. No notice of assignment need to be given to the person liable thereon
4. A bona fide holder for value takes free from any defect in the title of his predecessors.
This quality distinguishes a negotiable instrument from an assignable contract. Choses
in action, for example, can be assigned, either at law under section 136 of the law of
property Act 1925 or in equity, but in each case the assignee takes subject to any
defences available against the assignor. In the case of a negotiable instrument, however,
the assignee takes free from any such defence.

Examples of negotiable instruments are: bills of exchange, cheques, promissory notes,

dividend warrants, share warrants and debentures payable to bearer. On the other hand,
postal orders, share certificates, bills of lading and dock warrants are not negotiable.

Requisites of bill of exchange (Section 3(1))

A bill of exchange is,

1. It must be an unconditional order

Jeny Vs Harle- where a bill directed the payment of money out of funds in the hands
of the drawe belonging to some other was held to be invalid
Bavins Vs London and south western bank
2. In writing
3. Addressed by one person to another [5(1) (2)]
Drawer and the payee can be the same person
Drawee and the payee can be the same person
the holder can decide at his opinion whether to treat the instrument as a Bill
of exchange or not,
Where drawer and the drawee are the same person or
drawee is a fictitious person or
drawee is a person not having capacity to contract

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Hamsha Selvanayagam LL.B
Attorney-at-law

4. Signed by the person giving it(Sec-23)

No person is liable as drawer or indorser or accepter of a bill who has not sign in it
Where a person signs a bill in a trade or assumed name he is liable as if he had signed it in
his own name
5. requiring the person to whom it is addressed to pay on demand, or at a fixed or
determinable future time
Payable on demand which is expressed to payable on demand or at sight or on
presentation
bill payable at future time- a bill is payable at a determinable future time when it is
expressed to be payable at a fixed period after date or sight
eg- pay ‘X’ after 3 months
On or at a fixed period- after the occurrence of a specified event which is certain to
happen, though the time of happening may be uncertain
eg- pay 3 months after X’s death
willimson vs Rider- the words “on or December 31” have been held to create
uncertainty and contingency in the time for payment
6. a sum certain in money
The some payable by a bill is some certain although it is required to be paid with
interest, by installments according to the rate of exchange
Smith vs Nightingale
Instrument promised to pay sum of £65 with lawful interest and “all other sum”.
Held, sum payable is not certain

7. to or to the order of a specified person or to bearer

Where a bill is not payable to the bearer, payee must be named or payee must be
indicated with certainty
Young
A bill drawn on D, payable to H.Davis got into the hands of another H.Davis. Wrong
H.Davis indorsed it to P. Evidence was lead to show that the indorsement was not
made by the real H.Davis. Held, indorsement is of the H.Davis is a forgery
Bank of England Vs Vagliono(read….)

From these forms it will be seen that there are three parties to a bill:

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Hamsha Selvanayagam LL.B
Attorney-at-law

a) the person who gives the order to pay – the drawer;

b) the person to whom the order to pay is given – the drawee;
c) the person to whom payment is to be made –the payee

In the examples given, “William Smith” is the drawer, “Thomas Robinson” is the drawee, and
“John Jones” is the payee. The drawer and the payee may be the same person, as may also be
the drawee and the payee. If the drawer and the drawee are the same or the drawee is a
fictitious person, the instrument may be treated as a bill of exchange or a promissory note at
the holder’s option. The holder is the payee or indorse, who is in possession of the bill, or the
bearer in the case of a bearer bill.

Both the drawee and the payee must be named or indicated with reasonable certainty. If the
payee is fictitious or non-existing person the bill may be treated as payable to bearer
(section 7(3)). A bill drawn in favor of an existing person may be in favor of a “fictitious”
person if the person named was never intended by the drawer to take under the bill.

Bank of England v Vagliano Bros (1891) A.C.107

X, a clerk employed by V, forged Z’s signature to a bill drawn in favor of P., an existing person
with whom V did business. The forged bill was accepted by V., the drawee; X. forged P’s
indorsement and, on the, maturity of the bill, presented it for payment to V’s bank. The bank
paid, and V., on learning of the fraud, claimed that the amount if the bill should not be debited
against him by the bank. Held, as P was never intended by X. to take under the bill he was a
fictitious person. The bill was therefore payable to bearer, and, as the bank had paid the bearer,
V’s claim failed

If however, the drawer intends the payee to take under the bill, although he is induced by fraud
to form that intention, the payee is not fictitious.

Acceptance

If the bill is a sight bill, i.e. if it is payable at sight or on demand, it must be paid by the drawee
when seen by him and the question of acceptance of such a bill cannot arise. But difference is
the position if the bill is a time bill, i.e. if it is payable at a future fixed time or a fixed time after
acceptance. After a tie bill has been issued, the holder should present it to the drawee for

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Hamsha Selvanayagam LL.B
Attorney-at-law

acceptance to find out whether the drawee is willing to carry out the order of the drawer. If the
drawee agrees to obey the drawer’s order he is said to accept the bill, which he does by signing
his name on the bill, with or without the word “accepted”. Acceptance is defined as the
signification by the drawee of his assent to the order of drawer. After acceptance, the drawee is
known as the acceptor. It is not essential for the holder to present the bill for acceptance,
although it is to his advantage to do so as he thereby gains the additional security of the
acceptor’s name and, if acceptance is refused, the antecedent parties become liable
immediately. In three cases, however, a bill must be presented for acceptance.

1. When it is payable after sight, presentment for acceptance is necessary to fix the date of
payment
2. When it expressly stipulates that it shall be presented for acceptance.
3. Where it is elsewhere than at the place of residence or business of the drawee

A bill may be accepted before it has been signed by the drawer or while otherwise incomplete,
and even if it is overdue or has been dis-honoured by a previous non-acceptance or non-
payment

The rules as to presentment for acceptance are;

1. Presentment must be made at a reasonable hour on a business day and before the bill is
overdue.
2. When the bill is addressed to two or more drawees who are not partners, presentment
must be made to them all, unless one has authority to accept for all.
3. Where the drawee is dead, presentment may be made to his personal representative.
4. Where the drawee is bankrupt, presentment may be made to him or his trustee.
5. Where authorized by agreement or usage, presentment may be made through the
post (section 41(1)).

On the presentment the drawee may give either a general or qualified acceptance, or he
may refuse an acceptance.
A general acceptance assents without qualification to the order of the drawer.
A qualified acceptance in express terms varies the effect of the bill as drawn. An
acceptance is qualified which is
a) Conditional;

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Hamsha Selvanayagam LL.B
Attorney-at-law

b) Partial, i.e. for part only of the amount of the bill;

c) Local, i.e. to pay only at a particular place. An acceptance to pay at a particular place
is general acceptance, unless it expressly states that the bill is to be paid there only
and not elsewhere;
d) Qualified as to time;
e) The acceptance of some of the drawees, but not all (section19)

The holder of the bill may refuse to take a qualified acceptance and may treat the bill as
dishonored by non-acceptance (section 44(1)). If the holder does take a qualified
acceptance, the drawer and indorsers are discharged unless they have assented to it.
They are deemed to assent to a qualified acceptance if, after notice, they do not dissent
within a reasonable time.

A bill may therefore be treated as dishonored by non-acceptance when:

1. The drawee does not, after presentment, accept the bill within the customary time,
which is generally 24 hours.
2. The drawee gives a qualified acceptance
3. The drawee is dead or bankrupt, or is a fictitious person or a person not having
capacity to contract by bill.
4. Presentment cannot be effected, after the exercise of reasonable diligence.
5. Although the presentment has been irregular, acceptance has been refused on some
other ground

When a bill is treated as dishonored by non-acceptance, notice of dishonor must be given in the
manner stated below; otherwise the holder will lose his right of recourse against the drawer
and indorsers.

If the acceptance is procured by fraud, the acceptor is only liable to a holder in due course and
not to other holders.

A bill drawn on M. in favor of A. was accepted by M. through the fraud of F held, M was not
liable on the bill to A.: Ayres v. Moore (1940)1 K.B.278

Acceptance for Honour

If a bill dishonored by a non-acceptance, the holder may nevertheless allow any other person
to accept it for the honour of the drawer. The bill itself sometimes has inserted in it the name

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Hamsha Selvanayagam LL.B
Attorney-at-law

of a person to whom the holder may resort in case the bill is dishonoured. Such a person is
called the referee in case of need, but there is no obligation on the holder to resort to the
referee in case of need (section 15)

To be valid, an acceptance for honour can only take place after the bill has been protested for
non-acceptance and is not overdue.

The acceptance for honour supra protest must:

a) Be written on the bill and indicate that it is an acceptance for honour; and
b) Be signed by the acceptor for honour (section 65)

It may state for whose honour the bill is accepted, but if it is does not so state it is deemed to be
accepted for the honour of the drawer.

The effect of accepting a bill for honour is that the acceptor for honour becomes liable to pay
the bill provided that:

a) It is presented to the drawee for payment;

b) It is not paid by the drawee
c) It is protested for non-payment; and
d) He has notice of these facts (section 66)

Every person who has accepted a bill becomes liable to pay it according to the tenor of his
acceptance (section 54(1))

Negotiation

A bill is said to be negotiated when it is transferred from one person to another in such a
manner as to constitute the transferee the holder of the bill. It may be negotiated by the holder
at any time either before or after acceptance in the following manner:

a) In the case of bearer bill, by delivery.

b) In the case of an order bill, by indorsement followed by delivery. If an order bill is
delivered without indorsement, the transferee acquires such title as the transferor had

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Hamsha Selvanayagam LL.B
Attorney-at-law

in the bill, and in addition the right to have the indorsement of the transferor (section
31)

Presentment for payment (Sec-45)

If a bill is on demand it must be presented for payment by the holder on the day it falls
due.

➢ when a bill is accepted generally presentment for payment is not nessary

➢ by terms of a qualified acceptance presentment for payment is required
➢ time for presentment for payment depends on the type of the bill

A bill is duly presented for payment which is presented in accordance with the
following rules

45(1) - When the bill is not payable on demand presentment must be made on the day if
falls due.

45(2) – Where the bill is payable on demand, presentment must be made within a
reasonable time after its issue. In order to render drawer liable.

45(3) – Presentment must be made by the holder or by some person authorized to

receive payment on behalf of the holder.

➢ At a reasonable hour
➢ At a proper place.

45(4) a – A bill is presented at the proper place, where a place of payment is specified in
the bill, and the bill is there presented.

45(4) b – A bill is presented a proper place, where no place of payment is specified but
the address of the drawee or accepter is given in the bill and the bill is there presented

45(4) c – A bill is presented at a proper place, where no place of payment is specified

and no address in given, the bill is presented at the drawee’s accepter’s place of
business, if known. If not known at his ordinary residence if known.

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Hamsha Selvanayagam LL.B
Attorney-at-law

45(4) d – A bill is presented at a proper place, at any other case if presented to the
drawee or accepter whenever he can be found or if presented at drawee’s or accepter’s
place of business or last known residence.

45(5) – Where a bill is presented at the proper place and after exercise of reasonable
diligence, no person authorized to pay or refuse payment can be found there, no further
presentment of drawee or accepter is required.

45(6) – Where a bill is drawn and accepted by two or more persons, who are not
partners and no place of payment is specified, presentment must be made to all of them.

45(7) – Where the drawee or accepter of the bill is dead, no place of payment is
specified; presentment must be made to the personal representative.

Notice of Dishonour (Sec 48)

When a bill has been dishonoured by non-acceptance or by non-payment notice of

dishonor must be given to the drawer or each indorser.

The rules with regard to giving of notice of dishonour (Section 49)

R1) the notice of dishonour must be given by or on behalf of the holder or indorser who at the
time of giving of such notice is himself liable under it.

R2) Notice of dishonour may be given by an agent either in his own name or in the name of any
party entitled to give notice.

R3) Notice is given by or on behalf of the holder it enures for the benefit of all subsequent
holders and all prior indorsers who have the right of recourse against the party to whom it is
given.

R4) The benefit of the holder and all indorsers subsequent to the party to whom notice is given.

R5) Notice must be given in writing or by personal communication.

R6) The return of a dishonoured bill to the drawer or an indorser is deemed a sufficient notice
of dishonour.

R7) Written notice need not be signed.

R8) Notice of dishonour may be given to the party himself or to his agent.

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Hamsha Selvanayagam LL.B
Attorney-at-law

R9) When the drawer or indorser is died and the party giving notice known it, the notice must
be given to a personal representative.

R10) where the drawer or indorser is insolvent or bankrupt, notice must be given to the party
himself or to the assignee or trustee.

R11) Two or more drawers or indorsers, who are not partners, notice must be given to each of
them.

R12) Notice must be given as soon as the bill is dishonoured or within a reasonable time.

R13) Where the bill went dishonoured is in a hands of an agent either he may himself give
notice parties liable on the bill or he may give notice to his principal.

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