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

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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. 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. Bills of exchange are fully negotiable instruments, which means that the holder of the bill can discount the bill to other holders, with an order bill this is done by indorsement. With a bearer bill it is done with transfer.

It is obvious that bills of exchange are not the only methods of payment for goods sold under a contract. Other methods consist of cash payment and credit agreements, which form part of the promise to pay in the contract for sale, and documentary credits. In order to see how bills of exchange rank in relation to these in terms of usefulness and comparative advantage it will be pertinent to first explain the workings of these other methods of payment to establish their own merits.

The first I shall consider is payment in cash. In actual fact cash is technically a form of bearer bill. If one is to look closely at any bank note one will notice the words ‘I promise to pay the bearer on demand the sum of…’ and signed by the chief cashier of the Bank of England. It should, however, for the purposes of this essay, be treated as something different, mainly because it is a unilateral contract made by the Bank to the whole world and does not show us how certain parties to a contract deal with their obligations of payment.

The next method of payment to look at is the credit agreement. Although credit agreements and bills of exchange may on the face of it look the same there are inherent differences, as will be seen later. Credit agreements come in many forms, such as a Hire Purchase, or a Conditional Sale. With many of these agreements the seller will take out what is termed a retention of title clause, keeping property in the goods until they have been paid for and thus gaining security on the credit.

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The final method of payment I would like to consider is the documentary letter of credit. These are usually used to finance international trade when a seller does not wish to be liable to the bank for any default of the buyer in relation to the contract of sale or any ancillary contract. Not only does the documentary credit system prevent this from happening but also it allows the seller to have a guarantee of payment by an entity recognised for its creditworthiness. The buyer of goods is required to enter into an arrangement with an issuing bank. The bank ...

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