This article is written by Amulya Bhatia, currently pursuing BBA.LL.B from Symbiosis Law School, NOIDA. This article discusses all the necessary details of a bill of exchange along with the scope of its use domestically and internationally to facilitate trade transactions. 

This article has been published by Sneha Mahawar.


Trade transactions are essential to the growth of an economy. The amalgamation of all domestic economies into a global economic system in terms of trade transactions is one of the most important aspects for the overall development of a country. In today’s world, countries don’t just exchange final products, but also exchange resources to create the final products. Even though globalisation and trade transactions are important and present new opportunities, it has seen multiple challenges. One of the most crucial challenges is inefficient and inadequate infrastructures for various aspects of the trade such as transportation, customs, and even the most important, payment methods.  

One of the major risks that businesses face internationally, is the risk associated with payments. Most businesses wish to give out products or services on credit, but can’t, due to the fear of non-payment. This is where negotiable instruments play a key role. Negotiable instruments hold great value for the economy of any country since they allow you to continue with your business activities with the certainty of receiving money for the goods and services without actually transferring any money. 

Bills of exchange are the negotiable instruments that are used widely, both domestically and internationally, to carry out trade transactions. India has seen the usage of negotiable instruments like bills of exchange, ever since the concept of trade transactions was first introduced. But the question is, how relevant are these instruments in the 21st century? This article will therefore, discuss in detail the different aspects of a bill of exchange and decipher the scope of its use in India as well as internationally. The article will also delve into whether these instruments are important for trade transactions. 

What is a bill of exchange

A bill of exchange is a mode of payment that can be utilised for the purpose of making credit payments. It is a written order that imposes liability on a party to pay a definite amount of money to another party on a pre-decided date. A bill of exchange is usually used in international trade. In simple language, a seller provides a credit period to the buyer on account of either selling goods or providing any service. This document derives its legal validity via Section 5 of the Negotiable Instruments Act 1881.

Section 5 of the Negotiable Instruments Act, 1881 states that a “bill of exchange” is an instrument in writing containing an unconditional order, signed by the maker, directing a certain person to pay a certain sum of money only to, or to the order of, a certain person or the bearer of the instrument

Let us understand the concept of a bill of exchange with the help of an example, ‘R’ purchases goods worth ₹20,000 from ‘S’. ‘S’ draws a bill of exchange for ‘R’ to pay ₹20,000 within 120 days from the date of the bill. This bill is duly accepted by ‘S’. The said bill of exchange will contain a specific date on which ‘S’ would be required to pay ₹20,000 to ‘R’. On this specific date, the bill is said to be matured. 

Features of a bill of exchange

A bill of exchange must bear the following features:

  • It has to be a document in writing.
  • The written document must contain the names of all relevant parties. 
  • The bill of exchange must be a confirmed order to make a payment on a specific date. 
  • The document has to be addressed from one party to another. 
  • It must contain the signature of the party that is giving the bill.
  • The time and date when the payment is due must also be specified. 
  • The bill should also outline the amount of money that is due.
  • The payment of the bill must be demanded to be paid in the legal currency of the country.
  • The amount that is to be paid must either be payable or demand or within a stipulated time.
  • A bill of exchange may or may not be transferable.

Parties to a bill of exchange

The following three parties are essential for the execution of a bill of exchange:

  • Drawer: The drawer refers to the party that writes the bill and orders for money to be paid. In another language, it is the person whose name is indicated on the bill. 
  • Drawee: This is the party that is required to pay the amount as specified on the bill. 
  • Payee: Payee refers to the beneficiary of the bill, meaning that according to the bill, the amount that is due is to be paid to the payee. 

The following parties are not essential to every bill of exchange and are circumstantial:

  • Holder: Holder is the person who is in possession of the bill of exchange. This is generally the payee of the bill or any other person to whom the bill is endorsed. 
  • Endorser: The drawer or holder may transfer the bill to another person to whom he owes money. The person who transfers the bill is known as the endorser. For example, ‘A’ drew a bill in ‘B’s favour amounting to Rs. 2000 at 5 months and the same was accepted by ‘B’. Now assumingly, there is another person ‘C’  who is the creditor of ‘A’ for the amount of Rs. 1500 to ‘A’, ‘A’ may endorse the bill in ‘C’s favour for the amount ‘A’ owes him. A is the endorser.
  • Endorsee: Endorsee is the party to which the bill of exchange is endorsed. Referring to the above example given in the explanation of an endorser, ‘C’ would be the endorsee.
  • Acceptor: This is the person who accepts the bill, meaning accepts the obligation of the bill.

Sample format of a bill of exchange

NOTE- The following format is only for reference and an actual BOE may differ with facts and circumstances.

Bangalore 20th November 2021

Rs. 50,000

Three months after the date, pay to me or my order, the sum of Rupees Fifty Thousand Only, for value received.




  Raja Ram Mohan Roy

        117, Sarita Vihar New Delhi 110025                                                                                                                                                                                                                                                                 

Advantages of a bill of exchange

The following are the advantages of a bill of exchange that make it an extremely convenient instrument of credit transactions with a guarantee of payment as it is legally binding:

  1. Legal relationship: Since a bill of exchange is a valid legal document, issuing the same establishes a lawful relationship between the creditor and the debtor. In case of non-payment, refusal to make the payment, or any kind of dispute between the parties involved, a bill of exchange serves as conclusive proof before the eyes of the law. 
  2. Terms and conditions: A bill of exchange includes all the necessary terms and conditions regarding the payment that is due to be paid such as the amount of payment, date when it is due, place of payment, etc. Since all the terms and conditions are duly specified, it becomes easier for the parties to oblige to the same.
  3. Mode of credit: A bill of exchange has been defined under the Negotiable Instruments Act, 1881 as a negotiable instrument that serves as a convenient mode of payment. The party that either buys any good or avails of any service can do this on credit and pay the respective amount on a stipulated date in the future. The provisions of a bill of exchange are so flexible that the drawer has the option of discounting the bill of exchange from the bank instead of taking the money from the other party in case of urgency.
  4. Easy transferability: We know that a bill of exchange can be endorsed further by another party. For example, if ‘B’ owes money to ‘A’ via a bill of exchange for 3 months. If ‘A’ owes money to another party, ‘C’, ‘C’ may receive the said money from ‘B’ on the stipulated date specified on the bill of exchange when ‘A’ endorses the bill in favour of ‘C’ This shows that a bill of exchange is easily transferable and is a convenient way of making credit purchases. The delivery and endorsement of the bill gives to the other party a valid title over the bill.
  5. Wider acceptance: Foreign bills of exchange will be discussed in the latter part of this article. However, from the name, it can be understood that such a bill is used internationally. Now since there is scope to buy goods or take services on credit internationally via a foreign bill, this shows that there is wider acceptance of this sort of payment. The scope of making and receiving payments has widened and become far easier after an increase in the usage of a bill of exchange.
  6. Mutual accommodation: A bill of exchange caters to the financial needs of all parties involved in the process. It allows the drawee to purchase a good or avail any service on credit, and pay the amount in the future. It also allows the drawer to continue his business with a guarantee of payment in the future. Therefore, it can be said that a bill of exchange is mutually accommodating.

Disadvantages of a bill of exchange

The following are the disadvantages of a bill of exchange:

  1. A bill of exchange is usually only used for availing short term services and are not considered a good option for long term services. 
  2. The drawee is responsible for paying the dues before or by the due date.
  3. In case of discounting of a bill, the drawee has to bear an additional burden.
  4. It is an unsuitable medium for banking services. 

Types of bills of exchange 

The following are the different types of bills of exchange that are used in India:

Inland bills

A bill of exchange would be called an inland bill under two circumstances:

  1. When it is drawn within Indian territory and is payable within India as well.
  2. When it is drawn by an Indian resident within India but maybe payable outside Indian territory.

Eg. ‘A’, a seller draws a bill in Delhi on a buyer, ‘B’ in Washington (US) but is made payable in Punjab) is an inland bill

Foreign bill

A foreign bill is one that can be paid outside of the Indian territory. Foreign bills have different rules and regulations that govern them, unlike the other bills. Generally, there are two types of foreign bills, namely, export bills and import bills. 

  1. Export bill: A bill drawn by an exporter for a party outside India.
  2. Import bill: A bill drawn by an exporter outside India. 

Demand bill

A demand bill refers to a bill that is required to be paid on demand. Such a bill does not have a specific due date or a stipulated time in which it is to be paid. The payment is to be made when the bill is presented.

Eg. ‘A’ draws a bill on ‘B’, but the said bill has no specific date of payment. The bill is payable whenever ‘A’ asks for the money.

Usance bill 

When a bill of exchange mentions the specific time frame within which the payment for the credit purchase is to be made by the buyer to the seller, such a bill is known as the usance bill. A usance bill is generally referred to as the time-bound bill because of its features.

Eg. ‘A’ draws a bill on ‘B’ which is to be paid after 3 months.

Documentary bill of exchange

A documentary bill of exchange is supported by all the relevant and necessary documents in order to prove the genuineness of the trade transaction that took place for which the bill of exchange was formed. The purpose of this is to confirm that a transaction took place between the seller and the buyer. Examples of this bill include documents against acceptance of bill and documents against payment of a bill. 

  1. Documents against acceptance bills (D/A): A D/A bill includes documents that are given in exchange for accepting a bill. 
  2. Documents against payment bills (D/P): A D/P bill includes documents that are presented in exchange for payment of a bill. 

Clean bill

A clean bill is the opposite of a documentary bill. In such a bill, there is no evidence via documents of the trade transaction between the buyer and the seller. Since there is no proof of the trade transaction, a clean bill usually charges a higher rate of interest.

Trade bill

When a bill of exchange is drawn with the purpose of settling a trade transaction and is further accepted, it is known as a trade bill. This is usually between a seller and buyer to enable the buyer to make the purchase on credit. 

For example, when Rita sells a bike to Radha, she may draw a bill for Radha, for her to make the payment of the bike at a later date.

Accommodation bill

In a situation where there are no trade transactions, meaning that there is no sale or purchase of any goods or services, an accommodation bill is used. The purpose of this bill is the mutual benefit of both the parties involved with the intention of providing financial support to one another. In this bill, the bill is signed by the party that acts as a guarantor. This party would be liable for the bill in case the acceptor is unable to make the payment on the date of maturity. The idea of this bill is to allow a party to raise funds on credit without any consideration.

For eg. For her own convenience, ‘R’ drew on ‘C’ a bill for three months. ‘R’ had the bill discounted on a similar date with a bank around the completion of three months. Prior to the due date, ‘R’ sent the sum to ‘C’, who honoured the bill on the due date.

Supply bill

A bill that is drawn for the purpose of supplying goods to any government department by a supplier or a contractor is known as a supply bill. 


Elements of a bill of exchange

The following are some important aspects of a bill of exchange:

  1. Discounting: What happens in a situation where the payee of a bill of exchange is in need of the credit amount before the stipulated date? This is where discounting of a bill of exchange comes into play. Discounting of a bill of exchange refers to the encashment of a bill from a bank before the date the amount is actually due. The bank in this process deducts certain charges, which is referred to as a discount in this case. The bank recovers the amount from the drawee on the due date, as specified in the bill of exchange.

To understand the discounting of a bill of exchange, let us take the help of an example, Rani purchases goods from Raja, and instead of immediate payment, a bill of exchange is drawn specifying the date of payment to be 3 months later. However, Raja is in need of money 1 month after the bill is drawn. In such a situation, he may present this bill to the bank for discounting. The bank will deduct certain charges from the amount specified on the bill and pay the remaining amount to Raja. When the bill matures, i.e. on the date specified on the bill, Rani will give the payment to the bank. This process is known as discounting of a bill of exchange and is a common practice in India.  

  1. Retirement: Retirement of a bill of exchange also allows for the drawer or holder of the bill to receive the payment before the due date. If the drawee of the bill wants to pay the amount of the bill before the date of maturity, they may ask the drawer or holder of the bill for the same. If the drawer or holder agrees to pre-payment, this is known as the retirement of bills of exchange.

When the payment of the bill is made before the maturity of the bill, the drawer allows to the drawee some discount which is known as a rebate. Rebate is basically a concession allowed to the drawee for making an early payment.

For example, if ‘A’ purchased goods from ‘B’ whereby ‘B’ drew a bill of exchange on ‘A’ which was to be paid after a duration of 3 months. One month after the bill was drawn, ‘A’ had surplus funds and offered to pay ‘B’ the amount due early, at a 5% rebate. If ‘B’ accepts this offer, it would be known as the retirement of the bill of exchange.

  1. Dishonour: Dishonour of bill refers to a situation where the drawee is unable to make the payment on the date of maturity of the bill. There are two ways in which a bill can be dishonoured:

Non-acceptance: According to Section 91 of the Negotiable Instruments Act, 1881, a bill is said to be dishonoured by non-acceptance when there is a default on behalf of the drawee to accept the bill. The bill is duly presented but is not accepted within customary time. This would also apply when the drawee is incompetent to accept the bill.

Non-payment: As per Section 92 of the Negotiable Instruments Act, 1881, when the drawee is unable to make the payment required on the date of maturity of the bill, it is referred to as dishonour of a bill of exchange because of non-payment. There is a default on behalf of the drawee to make the payment by the stipulated date.

It is important to note that in both these situations, the liability of the acceptor to make the payment is restored which means that the holder of the bill can still recover the amount. 

  1. Renewal of a bill of exchange: In a situation where the drawee is aware that being able to meet the payment obligation would not be possible, the drawee may contact the drawer and request for an extension for the time to make the payment. If the drawer accepts this request, the old bill is cancelled and a new bill with the requested changes comes into effect after being duly presented, accepted, and delivered. The drawee may be required to pay interest on this delayed payment. 

For example, Nihar sells goods to Asim on 7th March 2015 amounting to ₹50,000. To facilitate the transaction, a bill is drawn for 2 months which is duly accepted by Asim. On the due date, Asim is unable to meet his liabilities and requests Nihar for an extension of time for another 2 months at an interest of 10%. Asim agrees to pay the interest immediately and this is accepted by Nihar. This is known as the renewal of a bill of exchange. Now Nihar has agreed and accepted a new bill in favour of Asim.  

Legal interpretation of bills of exchange

To understand the scope and use of bills of exchange, it is necessary to understand its functioning at both a domestic and international level:


Since time immemorial, instruments of credit have been used in India to facilitate trade transactions and are popularly known as ‘Hundies’. With evolution and advancements, these instruments are now called bills of exchange or promissory notes. In India, a bill of exchange as a valid form of payment was legalised through the Negotiable Instrument Act, 1881 which came into impact on 1st March 1882. The main objective of the Act is to allow easy trade transactions. The Act facilitates easy settlement of payments in businesses by allowing credit transactions with a guarantee of payment. The Act protects all parties partaking in a transaction involving a negotiable instrument and provides rules of law that are to be followed. 

The definition of a bill of exchange, its features, types, and different elements including dishonour, renewal, and retirement have all been incorporated in this Act and are followed when parties engage in a trade transaction that is settled through a bill of exchange.

International perspective of bills of exchange

A bill of exchange derives its legal validity from the Negotiable Instruments Act, 1881 in India. However, this cannot govern international transactions. We have the United Nations Convention on International Bills of Exchange and International Promissory Notes for this purpose. 

The United Nations Convention on International Bills of Exchange and International Promissory Notes (the UBNC or ‘Convention’, hereinafter) is the culmination of work by the United Nations Commission on International Trade Law (UNCITRAL). It was adopted by the General Assembly of the United Nations on 9 December 1988.  

The Convention presents an option for international transactions and establishes a set of rules and regulations for the use of an international bill of exchange with the purpose of allowing easy trade transactions. In the first session, in 1968, special emphasis was placed on making international payments a priority to expand globalisation. During its formulation, the inputs and comments of governments, banks, and other interested parties were taken into consideration. 

The Convention aims to facilitate international trade and finance. The basic idea behind the introduction of this Convention is to get rid of the multiple disparities and uncertainties in terms of negotiable instruments that may be used for international payments. Some important articles of the Convention include its own definition of the terms “bill of exchange” and “promissory note”. Furthermore, the conditions that would make a bill of exchange or a promissory note an international instrument are explicitly stated. 

As per Article 3 of the Convention, a bill of exchange is a written document that, 

a) contains an unconditional order whereby the drawer directs the drawee to pay a definite sum of money to the payee or to its order; 

b) is payable on demand or at a definite time; 

c) is dated; and 

d) is signed by the drawer.

The most important aspect of the Convention is the idea of unifying this field of law. International trade has numerous benefits such as the availability of international products, better living conditions, an increase in employment, etc. International trade would automatically increase if the medium to make international payment is simpler and uniform. This Convention enables international payments in a much more convenient manner and further promotes uniformity in the observance of good faith in international transactions. 


It is clear that a bill of exchange serves as an important instrument in order to carry out trade transactions. It is a security that gives a guarantee of payment as the rules and regulations associated with this instrument are specifically laid down in the Negotiable Instruments Act. It is no surprise that trade credit is an essential tool for the growth of any as it effectively puts less pressure in comparison to what immediate cash payment would have on any business. Therefore, a bill of exchange plays a major role in the execution of a credit system of payment and performs as a substitute for money. What can be done to incorporate the bills of exchange and other negotiable instruments in today’s age of technology is to digitise these instruments in order to increase their usage. 

A bill of exchange has both advantages and disadvantages that have to be taken into consideration when opting for this form of payment method. However, the use of bills of exchange is growing internationally and its pros such as uniformity in international payment, guaranteed payment, and legal validity are most certainly outweighing its cons.


Students of Lawsikho courses regularly produce writing assignments and work on practical exercises as a part of their coursework and develop themselves in real-life practical skills.

LawSikho has created a telegram group for exchanging legal knowledge, referrals, and various opportunities. You can click on this link and join:

Follow us on Instagram and subscribe to our YouTube channel for more amazing legal content.


Please enter your comment!
Please enter your name here