Bills of Exchange Versus Promissory Notes:
This note discusses the differences and similarities between bills of exchange and other negotiable instruments such as promissory notes and cheques.
Differences and Similarities between a Bill of Exchange and a Promissory Note:
According to section 1(1) of the Bills of Exchange Act, 1961 (Act 55), 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.”
According to section 83(1) of Act 55, a promissory note is “an unconditional promise in writing made by one person to another signed by the maker, 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 to bearer.”
1. Unconditional Order versus Unconditional Promise: A bill of exchange is an unconditional order given to another to pay money to another (or to the person giving the order). On the other hand, a promissory note is an unconditional promise by a person to pay money to another person. An order signifies a command or an instruction while a promise signifies an assurance or a declaration to do something.
2. Default Number of Parties:Per the definition of a bill of exchange as an unconditional order addressed by one person to another to pay money to another, there are three parties involved in a bill of exchange transaction. These parties are the party giving the unconditional order (drawer), the party to whom the order is given (drawee), and the party to whom payment is to be made (payee or bearer). Per the definition of a promissory note as an unconditional promise made by one person to another to pay that other person money, there are two parties to a promissory note. These parties are the party making the unconditional promise (the promisor or maker) and the party to whom the promise is made (the promisee or payee).
3. Party who has the Obligation to Pay:In a bill of exchange, one person (the drawer) makes an order to another (the drawee), who, post acceptance, has the obligation to pay money to another. Thus, the person giving the order and the person paying are often different people (except when the drawer addresses the bill to himself). In a promissory note, however, the party making the promise and the party with the obligation to pay are the same person.
4. Presentment for Acceptance:A bill of exchange, in order to render a drawee liable for payment, must be presented to the drawee for acceptance (see sections 51 and 52). However, section 89(3) expressly provides that
The following provisions as to bills do not apply to notes, namely, provisions relating to-
(a) presentment for acceptance;
Understandably, the reason for there not to be a need for acceptance of promissory notes is because the maker of the note, by making the note undertakes to be personally liable to the payee and there is thus no need to present the note to another person to accept.
When an Instrument can either be a Bill of Exchange or a Promissory Note:
When a drawer of a bill of exchange addresses the bill to himself, thereby becoming the drawee or when the drawer addresses the bill to a fictitious person or a person lacking contractual capacity, section 3(2) provides that "…the holder may treat the instrument, at his option, either as a bill of exchange or as a promissory note."
Respectfully, the key reason behind the provision in section 3(2) is that when the drawer is the same as the drawee, some or all differences between a promissory note and a bill of exchange usually disappear.
1. Same Number of Parties: A bill of exchange typically has three parties while a promissory note has two parties. When the drawer and the drawee become the same person because the drawer addresses the order to pay to himself, there will now be two parties in that particular bill of exchange transaction, thereby making the number of parties equal to the number of parties in a promissory note transaction.
2. The Person who has the Obligation to Pay becomes same as the Person Making the Order or Promise: Under a bill of exchange, one person gives an order whilst another person makes the payment. In a promissory note, the party making the promise is the same party who actually pays. When the drawer becomes the same person as the drawee, he becomes both the party making the order and the party making the payment.
3. Can an order to oneself be construed as a promise? Arguable.
Thus, a drawer addressing a bill of exchange to himself causes the bill to lose some characteristics which distinguish it from a promissory note. In the absence of such differences, the holder is being given an option to decide if the instrument is a bill of exchange or a promissory note.
A Cheque as a Type of Bill of Exchange:
A cheque is considered a type of bill exchange, and any attempt to distinguish it from a bill of exchange is therefore futile. However, a cheque as a bill of exchange can be distinguished from other types of bills of exchange based on who the drawee is.
A cheque is defined as "…a bill of exchange drawn on a banker payable on demand. Except as otherwise provided in this Part, the provisions of this Act applicable to a bill of exchange payable on demand apply to a cheque." (per section 72). Essentially, when the drawee is a banker and not any other entity, the bill of exchange is considered a cheque.