Bills of Exchange, Promissory

Notes and Other Independent

Payment Undertakings

Presentations by Simon Cook and Sam Fowler-Holmes

Sullivan & Worcester UK LLP
on 27 July 2017
At Pinners Hall, 105-108 Old Broad Street,
London, EC2N 1EX
 What this talk will cover
 Introduction to Bills of Exchange (BoEs) and Promissory Notes
(PNs)

 The legal requirements

 Negotiability

 Key issues to be aware of

 Independent payment undertakings from obligors

 Some possible scenarios for BoEs, PNs and IPUs

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 Introduction
 Both BoEs and PNs are independent payment undertakings

 They embody a debt due by one person to another

 Historical origins in both domestic and international trade

› Now used principally in cross-border trade transactions

› But can be used as a method of financing

 English law requirements set out in Bills of Exchange Act 1882 (the
Act) as developed by English case law

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 BoEs – example structure
Sells goods for payment in 6 months

Seller (payee and first

Buyer (drawer)
holder)

Delivers bill

Presents bill for Draws bill

Payment
payment

Bank (drawee and

acceptor)

Agrees to provide buyer with a line of credit

and accepts bill drawn by buyer

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 Statutory definitions
 “A bill of exchange is 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 a fixed
or determinable future time a sum certain in money to or to the
order of a specified person, or to bearer.” (section 3(1) of the Act)
 “A promissory note is an unconditional promise in writing made by
one person to another signed by the marker, 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 bearer.” (section
83(1) of the Act)
 Unconditional order vs unconditional promise

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 The legal requirements (1)
 Differences exist between BoEs and PNs but both are subject to the
same core requirements under the Act:
› the instrument must contain an unconditional order (in respect of a BoE) or
unconditional promise (in respect of a PN);
› it must be in writing;
› it must be addressed by one person to another;
› it must be signed by the drawer (in respect of a BoE) or the maker (in respect of
a PN); and
› it must require the drawee (in respect of a BoE) or the maker (in respect of a PN)
to pay:
 on demand or at a fixed or determinable future time;
 a sum certain in money; and
 to, or to the order of, a specified person or to bearer.

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 The legal requirements (2)
 Unconditional order or promise
“At 12 months I promise to pay A and B £500, to be held by them as
collateral security for any moneys now owing to them by J.M., which
they may be unable to recover on realising the securities they now
hold and others which may be placed in their hands by him” (Robins v
May (1839)
› Instruments payable on a contingency (e.g. I will pay subject to A putting me in
funds) will not satisfy requirements

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 The legal requirements (3)
 In writing and signed by the drawer / maker
› Previously considered that this meant you had to have a physical document
› Supported by a Law Commission paper from December 2001 which took the
view that the requirements of the Act could not be satisfied electronically and
absence of statutory instrument under the Electronic Communications Act 2000
› Case law focussed on whether a proposed ‘signature’ was adequate
› However, 2016 practice note from a joint working party of the Law Society
prepared with leading counsel (JWP) takes the view that statutory requirements
for a document to be in writing and signed can be satisfied electronically
› JWP expressly refer to section 83 of the Act relating to promissory notes
› JWP’s view formed on basis of the Interpretation Act 1978 and recent case law
regarding use of electronic signatures (Golden Ocean Group Limited v Salgaocar
Mining Industries PVT Ltd and another [2012] and J Pereira Fernandes SA v
Mehta [2006])

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 The legal requirements (4)
 In writing and signed by the drawer / maker (cont.)
› JWP do not consider the implications of their conclusion further in respect of
BoEs or PNs
› Despite JWP’s view, there are a number of issues with electronic BoEs and PNs
that continue to cast doubt on their feasibility:
› What is the original instrument?
› How are endorsements added?
› How is the instrument presented for payment?
› Protesting?
› Double-selling

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 The legal requirements (5)
 Time for payment
› Likely to be unproblematic where on demand or fixed date
› Careful drafting needed where instrument payable at a “determinable future
time” – if this relies on the occurrence of a specified event, this must be certain
to happen
› The more certainty the better – for example, Court of Appeal held that a PN
payable “on or before” a fixed date did not satisfy the requirements as to time of
payment (Williamson v Rider [1963])

 Sum certain
› Amount due under the instrument must be clear on its face
› Interest can be charged on the amount specified in the instrument provided (a) it
is ascertainable and (b) the period that interest is payable for is certain
 Fixed rate interest acceptable
 Floating rate interest by reference to specified rate (e.g. LIBOR)?
› Default interest covered in the Act

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 Independence of BoEs and PNs
 Independence of BoEs and PNs is a fundamental characteristic
 Rights and obligations of the parties to the instrument are
independent and separate from any underlying transaction –
distinguishes these instruments from surety or accessory style
instruments (e.g. English law guarantees)
 Generally viewed as being favourable to the holder as prevents
liable party from relying on defences or provisions it would
otherwise have the benefit of in the underlying transaction
documentation
 However applies both ways so must ensure instrument covers all
relevant matters
› interest
› immunity

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 Negotiability (1)
 BoEs and PNs are both negotiable instruments (subject to no
restriction included in such instrument)
 This means they are instruments that can be transferred:
› By delivery (where issued to bearer)
› By delivery and endorsement (where issued to, or to the order of, a
specified person)
AND
› Which transfer absolute title in that instrument
› Free from any defects in title the transferor may have
 However, only a “holder in due course” will obtain such rights

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 Negotiability (2)
 A holder in due course is a transferee who:
› has taken a bill, complete and regular on the face of it
› became the holder of it before it was overdue
› had no notice that it had been previously dishonoured
› took the bill in good faith and for value
› had no notice of any defect in the title of the person who negotiated it
 The holder in due course has the right to pursue any other person
before him liable on the instrument (e.g. acceptor, drawer and any
indorser)
› In practice any such liability will usually be removed by “without recourse”
indorsements

 A holder other than a holder in due course still has right to sue but
takes subject to equities and defects in title and may have
additional requirements to satisfy
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 Delivery
 Delivery has to take place to complete a contract under a BoE or
PN
 Without delivery, there is no issue of the BoE or PN
 Drawing or making of BoE or PN, acceptance and indorsement all
require delivery – contract is incomplete and irrevocable until
delivery
 However, an acceptor who notifies the payee of his acceptance will
be irrevocably bound at that point
 Delivery can be actual or constructive (by way of attornment)

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 Indorsement
 Indorsements must be in writing and signed by the indorser
 Indorsement must be written on the instrument
 Indorsement on a copy of the instrument (or allonge) acceptable
where instrument issued or negotiated in a jurisdiction that
recognises copies
 Must be for full amount of the instrument
 Can be with or without recourse – hallmark of forfaiting
transactions is “without recourse” nature of indorsement
 Indorsement can be to a specified person (or to their order) or to
bearer

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 Presentation for payment
 Generally the acceptor of a BoE and a maker of a PN are liable on
the instrument without presentation unless the instrument
specifically states payment is to be made at a specific place and in
respect of a BoE there and that place only
 Presentation is generally needed in order to render the drawer of a
BoE or an indorser of a BoE or PN liable
 However, presentation normally carried out, especially where
dealing with parties in other jurisdictions
 Presentation should be on the relevant date of maturity for
instruments with fixed determinable future dates. When
instrument is on demand, presentation must be within a
reasonable time of issue (for BoE only) or indorsement in order to
render the drawer or indorser liable.

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 Payment and dishonour
 Common for instruments to be expressed to be payable at payer’s
bank
› No obligation for bank to make payment without something further to this effect
› But, fact of making instrument payable at bank is sufficient authority for bank to
make payment (Kymer v Laurie [1849])

 Payment can be made to a person acting on behalf of the holder

(eg a collecting bank) provided the holder treats such payment as
discharging the payer’s liability
 Payment must be in legal tender unless otherwise agreed
 Instrument is dishonoured where it is presented and not paid
(actual dishonour) or excused from presentation and “overdue and
unpaid” (deemed dishonour)
› Unclear what is meant by overdue and unpaid, particularly in context of on
demand instruments

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 Notice of dishonour
 Where an instrument has been dishonoured by non-payment,
notice of dishonour must be served on the drawer (for BoEs) and
any indorsees
 Failure to give notice of dishonour will discharge the relevant
drawer or indorsee subject to certain limited exceptions
 Notice of dishonour must be given within a “reasonable time” of
dishonouring (section 49(12) of the Act)
 Where instrument is in the hands of an agent when dishonoured
(eg collecting bank), agent can either give notice of dishonour to
other parties or must give notice of dishonour to principal in same
way as if the agent were a holder

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 Protesting
 Protesting is a formal method of documenting that a BoE or PN has
been dishonoured
 As with notice of dishonour, it’s purpose is to ensure the holder
maintains any right of recourse he may have against the drawer of
a BoE or any indorser of an instrument
 Under the Act, protest is only required for “foreign bills” and not
for “inland bills” or for PNs
› A foreign bill is any bill that is not an inland bill
› An inland bill is a bill that is or purports to be drawn and payable in the British
Isles

 However, protesting is a mandatory requirement in a number of

jurisdictions (and is provided for under the 1930 Geneva
Convention) and it may therefore be necessary to protest to retain
rights under the instrument in other jurisdictions
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 Avals and bank guarantees
 BoEs and PNs may be supported by a bank guarantee or ‘aval’ for
credit enhancement
 Where a separate bank guarantee is used, consideration needs to
be given to how the benefit of this can be transferred to
subsequent holders
 Avals are a creature of civil law jurisdictions and are not expressly
recognised under English law
 English courts have tended to construe an aval as a voluntary with
recourse indorsement
 The aval must be on the instrument, signed by the avaliser with
appropriate wording (often ‘bon pour aval’) added

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 CRR and negotiable instruments (1)
 Independent payment undertakings such as SBLCs and demand
guarantees could be used as credit risk mitigation (CRM) for the
purposes of calculating capital requirements under EC Regulation
(EU) No 575/2013 (the CRR) where they relate to an underlying
exposure.
 Similar analysis should apply to BoEs and PNs
 “unfunded credit protection” means a technique of credit risk
mitigation where the reduction of the credit risk on the exposure of
an institution derives from the obligation of a third party to pay an
amount in the event of the default of the borrower or the
occurrence of other specified credit events (Article 4(59) CRR).

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 CRR and negotiable instruments (2)
 BoEs and PNs are not expressly listed as an eligible protection agreement
for unfunded credit protection
› “Guarantees” are eligible - No definition of what is meant by “guarantee”, but
reasonable to conclude that not limited to English law guarantees in the strict
legal sense
› BoEs and PNs can effectively function like guarantees where supporting
underlying obligations (e.g. a parent issuing a PN in respect of obligations of a
subsidiary under finance documents)

 Key criteria for guarantees (not exhaustive):

› “direct” obligation of the issuing bank (or equivalent party) to pay the
beneficiary on occurrence on certain events, which should include the default of
the underlying obligor
› “clearly defined and incontrovertible”
› must not contain any clause of provision, the fulfilment of which is outside the
direct control of the beneficiary, that would:
 allow the issuing bank to cancel unilaterally;
 increase the cost of the protection; and/or
 prevent the issuing bank from paying out in a timely manner

 Conflict of laws issues when satisfying requirement for CRM to be

enforceable in all relevant jurisdictions
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 Key issues (1)
Governing law and jurisdiction
 Common for BoEs and PNs not to contain a governing law clause or
a jurisdiction clause
 These instruments constitute a chain of contracts and it is
recognised that there may be a different governing law for each
contract
 How to determine what the governing law is?
› Section 72 of the Act provides some limited statutory guidance
› Focusses on place contract was formed
› Contrast with 1930 Geneva Convention for settlement of certain conflicts of laws
in connection with BoEs and PNs

 Matters not covered by the Act decided on common law principles

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 Key issues (2)
 Governing law and jurisdiction (cont.)
 Different courts will apply different conflict of laws tests so may get
a different answer depending on which court is deciding the matter
 Express governing law clause
› No reason why this cannot be included
› Would bind the initial contracting parties
› Query whether this would bind subsequent parties both as against acceptor/
maker and as against intermediate parties

 Use of side letters to select governing law

› Acceptor or other liable party may agree that both the side letter and the
instrument are governed by specific law
› Arguments for and against efficacy of the side letter
› Transferability of letter for subsequent holders

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 Key issues (3)
Capacity and authority of parties
› If a party has no capacity or authority then it will not be liable unless it is
subsequently ratified
› However, section 54 of the Act states that the acceptor is precluded from
denying the capacity and authority of the drawer as against a holder in due
course
› In respect of other parties, the incapacity of one party in the chain will not
invalidate the instrument as against the other parties in the chain

Authenticity of signatures
› No party is bound on an instrument unless he has signed it knowing what the
instrument was
› Agents may sign on behalf of their principal but must be clear that they sign in
capacity as agent
› An acceptor is precluded from claiming that the drawer’s signature was forged as
against a holder in due course
› A party has no liability where his signature is forged. However, a subsequent
indorser can not defend a claim for payment on the basis of the genuineness of
prior signatures
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 Other independent payment undertakings (1)
 Diverse range of other forms of independent payment
undertakings (IPUs) (letters of credit, SBLCs, demand guarantees)
 Focus on IPUs issued by the underlying obligor to support an
existing obligation
 IPUs share the same benefits of independence as for PNs and BoEs
 May be used for particular financing structures or where obligor
cannot or will not issue a BoE or PN
 However, these are not negotiable instruments
 Transfer of benefit of IPU should be covered
 While not negotiable instruments, contrast with contract
receivables

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 Other independent payment undertakings (2)
 Contract receivables:
› Generated by commercial contract
› Seller might deliver invoices for each delivery
› Not independent from underlying transaction – buyer may have
contractual defences to payment that should not apply to an IPU
› Contracts can be entered into and invoices can be issued electronically
 Transferability of contract receivables:
› Legal or equitable assignment
› Under English law, requirements of The Law of Property Act 1925 must
be satisfied for a legal assignment
› Silent or disclosed assignment - notice to debtor?
› Possible to assign future receivables under English law

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 Example scenarios (1)
Promissory notes
 These are often used as a ‘guarantee’ (in the non-legal sense) of an
existing obligation
 For example, PNs issued by a borrower in respect of obligations
arising under finance documents
 May have practical benefits in other jurisdictions where PNs given
more favourable treatment in making claims against obligor
 Practical issues regarding presentation where sum certain is more
than outstandings
› Present for full amount with requirements to account for surplus
› Amend PN on each repayment
› Replacement PN issued for new sum certain after each repayment

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 Example scenarios (2)
Bills of exchange
 Can be used as a method of payment (see previous diagram)
 Bills can be drawn on the buyer or, to improve credit risk, can be
drawn on the buyer’s bank
 Bills can be used within acceptance credits as an alternative to
deferred payment letters of credit
› Letter of credit is honoured by acceptance of a time bill of exchange by issuing
bank or confirming bank
› Accepting bank’s liability under the letter of credit is replaced by its liability
under the accepted bill of exchange
› The beneficiary can sell the accepted bill of exchange in order to get paid before
maturity – this should be more easily achieved than having to discount a
deferred payment letter of credit

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 Example scenarios (3)
IPUs
 Can be used in a wide range of scenarios where the obligor has an
underlying payment obligation
 Common example is in buyer led supply chain finance structures
 However, can be used in more complex transactions:
› Participation arrangement relating to an underlying receivables purchase
agreement
› Participant was originally named as loss payee but this did not provide capital
relief for exposure
› Insurers agreed to provide co-assurance for participant alongside grantor (being
purchaser under the RPA) BUT would not include non-vitiation language
› Participant subject to risk of breach by grantor taking policy off risk
› This risk was mitigated by grantor providing an independent payment
undertaking in participation agreement in respect to any amount not paid by
insurers due to grantor breach

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 Questions?

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 Future dates for your diary:

Breakfast seminars 2017

28 September 2017 26 October 2017

23 November 2017 14 December 2017

Anniversary Party 16 November 2017

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 Simon Cook
Partner

Simon Cook is a partner in the Trade & Export Finance Group in our London office. He has experience in a wide variety
of banking and finance transactions, including in particular in relation to structured trade finance, trade finance,
project finance, invoice discounting facilities and borrowing-base facilities in Africa, the Middle East, Asia and the CIS.
His work in the structured trade area covers a range of pre-export and prepayment financings acting for both lenders
and borrowers notably in oil, telecoms, soft commodities and metals sectors with particular experience in Africa and
the Middle East.
Simon has worked and travelled extensively in Africa and the Middle East, having spent over three and a half years in
Dubai. He has participated in a number of structured trade finance and project finance conferences and seminars
throughout Europe, the Middle East and Africa, including speaking at conferences on PPP in South Africa; on project
finance and structured trade finance at Afrexim's annual structured finance conferences in Egypt, Ghana, Zambia and
South Africa; and at structured trade finance seminars and general finance in London, Paris, Lisbon, Geneva, Frankfurt,
Amsterdam, South Africa, Zambia, Uganda, Ghana, Nairobi and Dubai.

Sullivan & Worcester UK LLP

Tower 42
25 Old Broad Street
London EC2N 1HQ

T +44 (0)20 7448 1002

F +44 (0)20 7900 3472
scook@sandw.com

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 Sam Fowler-Holmes
Associate

Sam Fowler-Holmes is an associate in the Trade & Export Finance team. He specialises in structured and unstructured
trade finance and has advised financial institutions on a range of products including large-scale pre-export financing,
supply-chain financing, funded and risk participations, and bank-to-bank lending. Sam's experience includes advising in
relation to numerous jurisdictions across mainland Europe, CIS, Africa and Asia and for a range of commodities
including, oil, gas, metals and cocoa.

Sullivan & Worcester UK LLP

Tower 42
25 Old Broad Street
London EC2N 1HQ

T +44 (0)20 7448 1006

F +44 (0)20 7900 3472
sfowlerholmes@sandw.com

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 Awards & Recognition
TFR “Best Law Firm in Trade Finance”
Trade & Forfaiting Review (TFR) named Sullivan & Worcester "Best
Law Firm in Trade Finance" in its 2014, 2015 and 2016 TFR Excellence
Awards
GTR “Best Law Firm Poll”
Sullivan & Worcester UK LLP was top ranked firm in the Global Trade
Review (GTR) Best Law Firm 2015 and 2016 polls
The Legal 500 UK 2016
Geoffrey Wynne and Simon Cook are listed as
Leading Lawyers and Sullivan & Worcester UK LLP was ranked
in the following category in The Legal 500 UK:
› Trade Finance (Tier 1)
Chambers UK 2016
Chambers UK ranked Sullivan & Worcester UK LLP, along with
Geoffrey Wynne and Simon Cook, in the following area:
› Commodities: Trade Finance (UK-wide)
TFR Fellowship Award 2017
Trade & Forfaiting Review (TFR) honoured Geoffrey Wynne
with the TFR Fellowship Award in its 2017 TFR Excellence
Awards

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