As we saw in the previous post, bills of exchange are essential tools in commerce, serving as a secure, transferable promise to pay. Now, let’s explore in detail how these bills are transferred, who holds them, and what responsibilities each party carries. Understanding this helps us see why bills of exchange are treated almost like cash in commercial transactions.
Transfer of Bills of Exchange
A key feature of bills of exchange is negotiability, which means they can move from one person to another without notifying the original parties. This makes the bill itself a powerful instrument for payment. Whoever receives the bill, if done correctly, can enforce it—even if there were minor issues with the previous holder’s rights.
There are two main types of bills when it comes to transfer: bearer bills and order bills.
Bearer Bills are simple: possession equals ownership. If you hold the bill, you can demand payment when it matures. For example, imagine a company in Lisbon issues a bill “payable to bearer.” If a supplier in Madrid receives it, the supplier can present it for payment without needing the drawer’s consent. Even if the named payee was fictional, the law treats the bill as a bearer bill, allowing the holder to enforce payment.
Order Bills, on the other hand, require endorsement to transfer. The payee must sign the bill to pass it on:
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Special Endorsement – The payee writes the name of the new holder and signs. For example, “Pay to Clara Rossi” signed by the original payee. Clara becomes the holder.
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General Endorsement – The payee signs without naming anyone, turning the order bill into a bearer bill. From that point, possession is sufficient to transfer it further.
This flexibility allows bills to circulate in ways that suit different commercial needs. A payee can retain control with a special endorsement or make it freely transferable with a general endorsement.
Holders of a Bill
Not all holders have the same rights. The law distinguishes three main categories:
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Mere Holder – Someone who holds the bill but has not given value for it. They can transfer it and present it for payment, but if they try to sue the drawer or acceptor, they might face defenses based on the absence of consideration.
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Holder for Value – This is someone who has given consideration, such as a seller who accepted a bill in exchange for goods. Even past debts can count as consideration, making the holder’s rights enforceable. For instance, a supplier who provided merchandise and received a bill as payment is a holder for value.
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Holder in Due Course – A special category. This holder obtains the bill in good faith, for value, without notice of previous dishonor or defects in title. They are protected from many claims that could have been raised against previous holders. For example, if a bill was obtained through a fraudulent deal earlier, a holder in due course can still demand payment from the acceptor, unaffected by past problems.
These distinctions matter because they determine how strongly the holder’s rights are protected in the commercial system.
Liability on a Bill of Exchange
A bill of exchange creates contractual obligations, but only for parties who meet certain requirements.
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Capacity to Contract – The drawer, acceptor, and indorser must have the legal ability to contract. A minor or someone mentally incapable cannot be held liable.
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Complete and Irrevocable Contract – The bill only creates a binding obligation once it is properly delivered. Until then, it is not enforceable.
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Signature – No party is liable unless they have signed the bill. Signatures can be personal or by an authorized agent. An agent must clearly indicate they are acting on behalf of someone else; otherwise, they might be personally liable. Forged signatures make the bill ineffective, unless the holder can rely on apparent authority or estoppel principles to claim payment.
Liability of Individual Parties
Each party to a bill has specific responsibilities:
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Acceptor – Once the drawee accepts the bill, they undertake to pay it at maturity. They are primarily liable.
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Drawer – Usually not required to pay immediately; their main liability arises if the bill is dishonored and they must compensate the holder.
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Indorser – Transfers the same undertaking as the drawer and guarantees the genuineness of prior signatures and endorsements. If a bill is stolen and forged, the indorser can still be liable to the immediate transferee, but not beyond that.
Bearer bills are slightly different: they require only delivery, not an endorsement, for the transferor to potentially incur liability.
Complete Example
To see all this in practice, consider the following scenario:
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Creation – A furniture exporter in Valencia sells goods to a buyer in Paris. Instead of demanding cash, the exporter issues a bill of exchange on the buyer’s bank in Paris for €30,000, payable in 60 days to “FurniTrade Ltd. or order.”
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First Transfer – FurniTrade Ltd. wants immediate funds and endorses the bill specially to their local bank, “Banco del Sol,” which pays €29,500 immediately, discounting €500.
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Second Transfer – Banco del Sol needs liquidity and endorses the bill in blank. It becomes a bearer bill, which a financial investor purchases for €29,600.
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Maturity – Sixty days later, the investor presents the bill to the Paris bank, which pays €30,000.
In this example, the bill has circulated across parties, provided liquidity at each step, and ensured secure payment at maturity.
What is the key feature of a Bill of Exchange that allows it to circulate freely in commerce?
Negotiability, allowing transfer without notifying original parties.
Only large value bills can circulate.
Bills must be endorsed by the drawer each time.
Which type of bill requires endorsement to transfer ownership?
Who is considered a Holder in Due Course of a bill?
Someone who takes the bill in good faith, for value, without notice of previous defects.
Someone who merely holds the bill without paying anything for it.
What is the primary liability of the acceptor of a bill of exchange?
To pay the bill at maturity, being primarily liable.
To endorse the bill only after payment is received.
To guarantee all prior endorsements indefinitely.
How does a general endorsement differ from a special endorsement?
A general endorsement makes an order bill a bearer bill, while a special endorsement names the new holder.
A general endorsement names the new holder, while a special endorsement allows bearer transfer.
There is no difference between general and special endorsement.
