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What are the advantages of a bill of exchange over other methods of payment?

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Introduction

What are the advantages of a bill of exchange over other methods of payment? The definition of a bill of exchange is set out in Section 3 of the Bills of Exchange Act 1882: (1) A bill of exchange is an unconditional order in writing, addressed by one person to another...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. In effect the bill works in the following way; Person A, the drawer of the bill, draws a bill on B, the drawee, ordering him to pay money at some point to C, the holder of the bill (C can also be referred to as the payee or the indorsee). There are two kinds of bill: a bearer bill and an order bill. The former instructs the drawee to pay the person in possession of the bill. The latter instructs him to pay the person whose name it is indorsed to.1 A bill can also be payable on demand or by acceptance. An example of the former of these is a cheque. This instrument is in many ways different to other forms of bill of exchange, which in some cases causes authors to put them into a separate category. S, however, the truth of these instruments is that they are a species of a bill of exchange and consequently I shall not treat them separately for the purpose of this essay.

Middle

Although in some circumstances this principle may seem harsh there are many reasons as to why it is better than the provisions for other methods of payment. One such reason is that, as a negotiable instrument, the bill can be passed to third parties that are no party to the original contract of sale. They should therefore be able to take free from any defects or defaults under the original contract. If they could not then the security and marketability of the bill of exchange would be undermined. A second reason is that s3 BoEA states that bills of exchange are 'unconditional orders in writing'. Their payment could not therefore be contingent on the goods being correct or deliverable or subject to the buyer accepting the goods. Thirdly, it has been stated by many authors and in the judgements of cases that bills of exchange 'are taken as equivalent to deferred installments of cash'.5 If this were not the case then it is impossible to see how a bill of exchange could be in any way different from a credit agreement. Another consequence of the autonomy principle is the relaxation of the contract rules with respect to bills of exchange, especially in the area of consideration. Details of the consideration allowed is set out in s27(1) of which part b is of special importance. This states that consideration can be an antecedent debt or liability.

Conclusion

The bill of exchange in this situation offers little security and the benefits of the documentary credit are greater. The bill of exchange is very important in the world of commerce and it is no wonder that mercantile custom would come up with such a valuable and advantageous concept. 1 Note here that there are two kinds of indorsement. The drawee will only be able to pay the indorsee if there has been a special indorsement, i.e. the indorsor has written the name of the indorsee on the bill. If the indorsement is made in blank the bill is converted into a bearer bill and the drawee will pay whoever is in possession of it at the time of maturity. 2 [1977] 1 WLR 713. It must be remembered that this characteristic is also shared by documentary credits. 3 Sale of Goods Act 1979 s18 rule 1 4 section 39 and 41 SGA 5 Nova (Jersey) Knit v Kammgarn Spinnerei GnbH [1977] 1 WLR 713 per Lord Wilberforce. 6 Note that Goode does not follow this argument and believes that no such exception is created. He believes that it is merely reinforcing 'the well and established common law rule that a payment or transfer of an existing debt is made for value, for the creditor's right to payment is thereby extinguished. 7 Ss54-56 Bills of exchange Act 1882 8 Professor Goode: Commercial Law p526. 9 See s136 Law of Property Act 1925 10 this is in effect a bona fide purchaser of the bill for value without notice of any defects.

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