Meaning and Definition of a Bill of Exchange

A bill of exchange is one of the oldest and most widely used negotiable instruments in trade and commerce, allowing a seller to obtain a firm, legally enforceable promise of payment from a buyer instead of relying on an open, unsecured credit balance. Under Section 5 of the Negotiable Instruments Act, 1881, 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 specified person, or to the bearer of the instrument.

For students of the Andhra Pradesh Intermediate (BIEAP) Class 12 Commerce course, this chapter builds directly on the credit-sale and debtor-creditor relationships studied earlier: once a seller (creditor) wants a firmer, transferable and legally enforceable claim than a simple book debt, the two parties convert that open account into a bill of exchange.

The essential features of a valid bill of exchange are:

• It must be in writing — an oral promise to pay is not a bill.
• It must contain an order to pay, not a mere request. Words such as 'please pay' would make it a request rather than an order, and the instrument would not be a valid bill.
• The order must be unconditional. An instruction to pay 'only if goods are found in good condition' is conditional and invalid as a bill.
• It must be signed by the drawer (the maker of the bill).
• The sum payable must be certain — a fixed amount of money, not goods or services.
• The parties — drawer, drawee and payee — must be certain, or at least ascertainable from the instrument.
• It must be duly stamped wherever the law requires, and it must bear a date (though an undated bill is not automatically invalid — the date can be filled in later by the holder in good faith).

A bill of exchange therefore does three things at once: it evidences a debt, it fixes a due date for payment, and it makes the claim freely transferable to a third party by endorsement — a feature an ordinary book debt never has.