What is a Bill of Exchange?

What is a Bill of Exchange?

A bill of exchange is a formal, written instrument that binds one party to pay a certain sum of money to another person on demand or at a predetermined date. The sole purpose of a bill of exchange is to determine when payment is required when something is bought on credit. The Bills of Exchange Act 1909 (Cth) governs everything regarding bills of exchange. Whilst a bill of exchange has been well established and has been made redundant through the use of other instruments such as credit cards, bills of exchange are still relevant in some transactions. 

Who is involved 

A bill of exchange involves three parties:

  1. The Drawee: The person who is obliged to pay the bill
  2. The Drawer: The person that writes up the bill and obliges the drawee to pay the bill
  3. The Payee: The party that receives the payment 

NOTE: The drawer and payee are generally the same entity unless the bill has been transferred to a third party payee that was not involved in the creation of the bill of exchange.

Purpose of a Bill of Exchange 

A bill of exchange is an instrument that is issued when:

  • A party that purchases things using credit 
  • Businesses are involved in transactions that involve large sums of money and other businesses on an international scale. As a result, bills of exchange are primarily used in international trade.

What does a Bill of Exchange include?

A bill of exchange generally includes the following to be valid:

  • The amount of money being paid must be specified 
  • The signature of the person who is authorising the drawee to pay the amount 
  • The date which the amount is to be paid
  • The name of all parties involved must be stated 

Bill of Exchange Example

Lets say that Shanil’s Book Shop buys books from Steam Book Distributors for $45,000. Steam Book Distributors receives his books from Steam book Distributors; however he has agreed to pay his distributors at a later date. As a result, Steam Book Distributors wrote a formal bill of exchange for this sale. Due to the fact that the company has written the bill, he becomes a drawer. Similarly, Shanil is the drawee as he will have to pay the money to the party written on the bill because Steam had sent the books to him. To pay debt to Steam’s suppliers, Steam asks that the money is paid to Moe’s Book & Co. It is specified that the bill has to be paid within 60 days. Therefore, Moe’s Book & Co is the payee as Shanil must send the $45,000 to Moe’s Book & Co within 60 days. 

In summary 

A bill of exchange still remains relevant in many circumstances today despite the fact that the use of other forms of payment plans have trumped bills of exchange in terms of popularity. Consequently, it is still critical that an individual is familiar with how a bill of exchange functions even though the popularity of this payment plan has declined.

Do you need help with drawing up a bill or understanding your role in a bill of plan you are a party to? Speak to one of our lawyers today at 1300 337 997.

About Liv Chum

Liv is one of OpenLegal's paralegals. Liv is a passionate student of the law, with a real interest in the way that business and legal requirements intersect.