Bills of Exchange — Essentials and Form (Section 5)

Section 5 of the Negotiable Instruments Act, 1881 defines a bill of exchange as "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 to the bearer of the instrument." A bill is sometimes called a draft. The defining act is the order: one person — the drawer — directs another person — the drawee — to pay a third person — the payee. Three parties, one imperative direction, one certain sum.

The structural difference from a promissory note is foundational. A note is a promise; a bill is an order. A note has two parties; a bill has three. A note creates a present and absolute obligation in the maker; a bill, in its untouched state, creates only an obligation in the drawer that can mature into a primary liability of the drawee on acceptance. The Negotiable Instruments Act notes hub maps Section 5 against the other Section 13 instruments.

Statutory text and the six essentials

Six essentials are packed into Section 5. The instrument must be (1) in writing; (2) contain an order to pay; (3) the order must be unconditional; (4) signed by the drawer; (5) the drawee and payee must be certain; and (6) the order must be to pay money — and money only — in a certain sum. Each is independent. Failing one excludes the document from Section 5; the document then fails the Section 13 master definition.

Essential 1 — In writing

The instrument must be in writing. Any form of words and any language may be used. Date and place are not strictly essential, though the absence of either has evidentiary consequences and may complicate the calculation of maturity under Sections 22 to 25. The instrument must be on stamped paper of the value prescribed by the Indian Stamp Act, 1899; an unstamped bill, like an unstamped note, is inadmissible in evidence. The procedural consequences are discussed in payment in due course (Section 10).

Essential 2 — An order to pay

This is the most distinctive feature of Section 5. The drawer must order the drawee to pay. The order must be imperative — it must direct, not request. The reason is structural: a bill of exchange operates by transferring the obligation from the drawer to the drawee through the act of acceptance, and the operation requires that the drawee be left in no doubt that he is being directed to pay. A request, a wish or a polite invitation does not produce that effect.

The line is sometimes drawn finely. A polite formula such as "please pay" prefixed to a clear direction does not invalidate the order. The English Common Pleas decision in Ruff v. Webb (1794) 1 Esp 129 is a leading authority: the form "Mr. Nelson will much oblige Mr. Webb by paying to J. Ruff or order, twenty guineas on his account" was upheld as a bill, the words of politeness not detracting from the imperative tone. The dispositive question is whether the document, read as a whole, communicates a direction.

By contrast, excessive politeness defeats the order. The English decision in Little v. Slackford (1828) M & M 171 held that the form "Mr. Little, please to let the bearer have seven pounds and place into my account, and you will oblige" was not a bill, because the document did not purport to be a demand made by a party having a right to call on the other to pay. The fair meaning, the court said, was "you will oblige me by doing it" — a request, not an order.

The Indian courts have followed the same line. The illustrative fact-patterns from the books include:

• "I request Mr. X to very kindly pay Rs. 500 on demand to Mr. C. I shall be grateful to Mr. X for his kindness." — Not a bill. Excessive politeness defeats the imperative tone.
• "Mr. B, please let C have Rs. 5,000 and debit it to my account. I shall feel obliged." — Not a bill. Same reason.
• "Kindly oblige me to pay Rs. 500 and place the same to my account." — Not a bill.

The direction need not, however, use the word "pay." Any words conveying the idea of payment will do — "credit in cash," "deliver to the credit of," or "let the bearer have" (where the imperative tone is preserved). A mere request to pay an account does not amount to an order; the document must show an entitlement to give the direction.

Essential 3 — Unconditional order

The order must be unconditional. A bill of exchange should be payable at all events. A conditional order — one that depends on a contingency — does not satisfy Section 5. The classic illustrations are taken from the English cases and reproduced in the Indian commentaries:

• "Pay X Rs. 1,000 after the arrival of the ship Victory at Bombay" — Palmer v. Pratt (1824) 2 Bing 185. The arrival of a ship is uncertain. Not a bill.
• "Mr. P, pay to my order a sum of Rs. 20,000 on receipt of the consignment of goods, which is at present, in transit." Not a bill — the consignment may not arrive.
• "Pay Rs. 500 when I marry." Conditional. Not a bill.
• "Pay Rs. 1,000 on the sale of three bales of cotton." Conditional. Not a bill.
• "Pay D Rs. 2,000 on the death of Z" — this is a valid bill. Section 5, paragraph 2 saves a promise or order to pay on the happening of an event certain to occur in the ordinary experience of mankind, even if the time is uncertain.

An order to pay out of a particular fund is also conditional and invalid: "pay out of the money remaining in your hands belonging to X Company" was struck down in Dawkes v. Lord Deloraine (1770) 3 Wils 207 because the fund's existence and sufficiency at maturity were uncertain. The corollary applies to instruments that direct payment to be made out of identified rents, sale proceeds or future receivables — none qualifies as a Section 5 bill, though all may be enforceable as contracts.

Essential 4 — Signed by the drawer

The bill is not valid unless it is signed by the drawer. A bill without the drawer's signature, even if accepted by the drawee and negotiated to a third party, is not a bill of exchange. The signature need not appear at the foot — the drawer may sign anywhere on the instrument so long as the intention to authenticate is clear. The signature may be by initials, by mark, or by an authorised agent who signs in the name of the principal.

Where an agent signs without disclosing his agency or exceeds his authority, he is personally liable on the bill. The chapter on the parties to negotiable instruments works through agency liability under Sections 27 to 29.

Essential 5 — Drawee and payee certain

Section 5 contemplates three parties: the drawer, who makes and signs the bill; the drawee, who is directed to pay; and the payee, to whom or to whose order the amount is payable, unless the bill is payable to bearer. It is not, however, necessary that three different persons answer to these descriptions. One person may fill any two of these positions. The drawer may also be the payee — "Pay to me or order" — and the resulting instrument is good. A demand draft drawn by one office of a bank upon another office of the same bank is a recognised example: the bank is both drawer and drawee, but the bill is valid.

The drawee must be named or identifiable

A bill must specify the drawee with reasonable certainty. An instrument in the form of a bill addressed to no one is not a bill, even if a person purports to accept it. There is, however, a common-law saving from Gray v. Milner (1819) 2 R.R. 529: an instrument drawn in the form of a bill, not naming a drawee but expressed to be payable at a certain place, and accepted by a person residing at that place, is a valid bill — by his acceptance, the acceptor acknowledges that he is the person to whom the bill was directed. The case continues to be cited in Indian commentaries as the leading authority on the saving.

A bill cannot be addressed to two or more drawees in the alternative; the law abhors uncertainty in the directee. A bill may, however, be addressed to two or more drawees jointly. By contrast, payees may be alternative or joint under Section 13(2).

The payee must be named or identifiable

A bill must state with certainty the person to whom payment is to be made. The reason is operational: if the drawee accepts and pays, he must be able to know that he has discharged himself by paying the right person. A bill drawn in blank as to the payee may be filled up by a bona fide holder with his own name and is binding on the drawer — Cruchley v. Clarence (1813) 14 R.R. 596. The effect of leaving the payee blank is, in the absence of completion, that the drawer makes the bill payable to bearer.

The payee may be misnamed or designated by description only and the bill is still valid if the person intended is identifiable from the instrument and the surrounding evidence. Section 5, paragraph 4 codifies the rule.

Essential 6 — Money only, in a certain sum

The instrument must order the payment of money, and money only. An order to pay a sum of money and deliver goods or render services is not a bill. The undertaking must be wholly monetary. The standard illustration in the textbooks is an order to pay Rs. 500 and to deliver a black horse on a future date — not a bill, because the obligation is mixed.

The sum must also be certain. Section 5, paragraph 3 supplies three savings — the same savings that operate for promissory notes under Section 4. The sum is treated as certain even though it includes (a) future interest at a stated rate, (b) payment at a stated rate of exchange or in accordance with the course of exchange, or (c) on default of payment of an instalment, the balance unpaid becoming due. "Pay X or order Rs. 600 sixty days after sight" is a valid bill (a time bill, payable on the lapse of a stated period after sight). "Pay D Rs. 2,000 on the death of Z" is a valid bill because the event is certain even if the time is uncertain.

Acceptance and the transfer of liability

A bill of exchange differs from a promissory note in one further crucial respect: it must be accepted by the drawee before he is bound. Acceptance is the drawee's signed assent to the order — usually by writing "accepted" across the face of the bill and signing it. Until acceptance, the drawee is not liable on the bill; only the drawer is. After acceptance, the acceptor's liability is primary and the drawer's is secondary, conditional on the acceptor's failure to honour.

An acceptance may be general (an unqualified assent to the order as drawn) or qualified (an assent that varies the effect of the bill — for example, by limiting the place or amount, or making the acceptance conditional). Sections 86 to 88 govern qualified acceptances. The holder is not bound to take a qualified acceptance; if he does take it without consent of the prior parties, those parties are discharged. The chapter on presentment for acceptance and payment develops the doctrine.

Time bills, sight bills and demand bills

A bill may be made payable in four temporal forms.

A demand bill is one in which no time for payment is specified; under Section 19, such a bill is payable on demand. Limitation runs from the date of the bill itself, not from the date of demand.

A sight bill is one payable "at sight" or "on presentment." Section 21 treats both expressions as equivalent to "on demand," but with the practical difference that the bill must be presented to the drawee for payment, and limitation runs from the date the demand is made.

A time bill is one payable a stated number of days or months after sight, after date, or after the happening of a specified event. "Sixty days after sight" means sixty days after presentment for acceptance or noting for non-acceptance. "Three months after date" means three months after the date of the bill. The maturity calculation under Sections 22 to 25 applies, with the three days of grace and the public-holiday rule. The relevant notice of dishonour, noting and protest rules then determine the holder's remedies on default.

Specimen and form

A standard specimen reads:

The specimen marks the architectural elements: the amount in figures, the place and date of drawing, the temporal direction ("three months after date"), the imperative "pay" addressed to a named drawee (B), the named payee (X) with the order endorsement, the consideration recital ("for value received" — conventional but not essential), and the drawer's signature on a stamped instrument.

Inland and foreign bills — Sections 11 and 12

A bill drawn or made in India and made payable in or drawn upon any person resident in India is an inland bill. All other bills are foreign bills. The distinction matters for two purposes: foreign bills must be protested for dishonour if such protest is required by the law of the place where they are drawn (Section 104); and the conflict-of-laws rules in Sections 134 to 137 apply differently to foreign bills. A bill drawn from a foreign country upon a person in India and accepted in India is treated as inland — A. G. Kidston & Co. v. Seth Brothers AIR 1930 Cal 692 is the leading authority. The chapter on dishonour by non-acceptance and non-payment develops the protest requirement.

Bills in sets — Section 132

A bill of exchange may be drawn in parts, each part being numbered and containing a provision that it shall continue payable only so long as the others remain unpaid. The set is drawn typically when the bill is to be transmitted over a long distance and there is a risk of loss or delay. All the parts together make a set, but the whole set constitutes only one bill, and the bill is extinguished when one of the parts, if a separate bill, would be extinguished. Where a person accepts or endorses different parts in favour of different persons, he is liable on each part as if it were a separate bill — Section 132 exception.

Section 133 fixes priority among holders in due course of different parts: he who first acquired title to his part is entitled to the other parts and the money represented by the bill.

Trade bills and accommodation bills

A trade bill is drawn by a creditor on his debtor in respect of a trade transaction — the seller draws on the buyer for the price of goods supplied on credit. The bill is supported by consideration in the underlying sale and benefits from the presumption of consideration under Section 118 in favour of any holder.

An accommodation bill is drawn for a different purpose: to oblige a friend, to give temporary financial assistance, or to enable a party to raise money on the strength of the accommodation party's credit, an issue developed further in negotiation by delivery and indorsement. There is no underlying sale and no consideration moves between the immediate parties. Section 43 of the Act addresses the consequences. As between the immediate parties, no recovery lies on a bill drawn without consideration. But if the bill has been transferred for value to a holder in due course, the holder may recover from the prior parties. Exception I to Section 43 prevents the accommodation party from recovering from the person whom he accommodated even if the accommodation party has paid; Exception II prevents recovery in excess of the consideration actually paid.

Section 59 supplies a further saving for accommodation paper acquired after maturity: a person who, in good faith and for consideration, becomes the holder after maturity of an accommodation bill may recover from any prior party.

Demand draft, pay order and the bill of exchange

A demand draft is a bill of exchange drawn by one bank on another office of the same bank instructing the latter to pay a specified sum to a named payee on demand. The draft is treated as a bill of exchange and is fully negotiable; the rule in Section 17 — which permits the holder to elect whether to treat an instrument with identical drawer and drawee as a note or a bill — applies. The draft cannot be drawn payable to bearer because that would offend Section 31 of the Reserve Bank of India Act, 1934.

A pay order — sometimes called a banker's cheque — is payable only at the issuing branch and is not a bill of exchange under Section 5; it is also not a cheque under Section 6 because the drawer and drawee are the same bank acting in the same capacity. The chapter on the crossing of cheques distinguishes the bank instruments comparatively. The distinction is exam-favourite and is developed further in the chapter on cheques and crossing.

Liability of the drawer and the acceptor — Sections 30 to 32

Section 30 fixes the drawer's liability. In the absence of a contract to the contrary, the drawer of a bill of exchange is bound, in case of dishonour by the drawee or acceptor, to compensate the holder, provided due notice of dishonour has been given to or received by him. The drawer's liability is therefore secondary and conditional on (a) presentment to the drawee, (b) dishonour, and (c) notice of dishonour to the drawer.

Section 32 fixes the acceptor's liability. After acceptance, the acceptor is bound to pay the amount thereof at maturity according to the apparent tenor of the bill. The acceptor's liability is primary and absolute: he stands to the bill in the position the maker of a promissory note stands to the note. The chapter on capacity and liability of parties develops the comparison and the special provisions for partners, agents, Hindu joint family managers and minors.

Leading authorities on Section 5

Ruff v. Webb (1794) 1 Esp 129 — words of politeness affixed to a clear direction do not defeat the imperative tone of the order.

Little v. Slackford (1828) M & M 171 — excessive politeness converts an order into a request and defeats the bill.

Palmer v. Pratt (1824) 2 Bing 185 — an order to pay on the arrival of a named ship is conditional and invalid.

Dawkes v. Lord Deloraine (1770) 3 Wils 207 — an order to pay out of a particular fund is conditional and invalid because the existence and sufficiency of the fund is uncertain.

Gray v. Milner (1819) 2 R.R. 529 — an instrument in the form of a bill, not naming a drawee but accepted by a person residing at the place of payment, is a valid bill; by his acceptance, the acceptor acknowledges himself as the directed person.

Cruchley v. Clarence (1813) 14 R.R. 596 — a bill drawn in blank as to the payee may be filled up by a bona fide holder with his own name and is binding on the drawer.

A. G. Kidston & Co. v. Seth Brothers AIR 1930 Cal 692 — a bill drawn from a foreign country upon a person in India is an inland bill within Section 11.

Distinguishing the bill of exchange from the promissory note and the cheque

A clean three-way comparison helps fix the distinctions for the exam.

Bill of exchange versus promissory note (Section 4). A note has two parties — maker and payee; a bill has three — drawer, drawee and payee. A note contains a promise; a bill contains an order. A note requires no acceptance; a bill must be accepted. The maker's liability on a note is primary and absolute; the drawer's liability on a bill is secondary and conditional. A note cannot be made payable to the maker himself or to bearer (Section 31, RBI Act); a bill may be drawn payable to the drawer, and may be drawn payable to bearer if not on demand.

Bill of exchange versus cheque (Section 6). All cheques are bills of exchange — Section 6 itself defines a cheque as "a bill of exchange drawn on a specified banker and not expressed to be payable otherwise than on demand." But not all bills are cheques. Three differences run through the cases. A cheque is always payable on demand and is always drawn on a banker; a bill may be payable on demand or at a future date and may be drawn on any person. A cheque needs no acceptance because it is payable on demand; a bill payable at a future date requires acceptance to bind the drawee. Cheques may be crossed; bills cannot be crossed. The drawer of a cheque is not discharged by delay in presentment unless the drawer has been injured by the delay (Section 84); the drawer of a bill is normally discharged by failure of presentment.

The full three-way table is in the chapter on the distinction between promissory note, bill of exchange and cheque.

Section 5 in the broader scheme

Section 5 anchors a substantial part of the Act. The maturity rules in Sections 22 to 25, the presentment rules in Sections 61 to 77, the dishonour rules in Sections 91 to 98, the noting and protest rules in Sections 99 to 104, and the conflict-of-laws rules in Sections 134 to 137 all assume a Section 5 bill. The presumptions under Section 118 — of consideration, of date, of time of acceptance, of time of transfer — operate on a Section 5 instrument. The criminal-law cluster under Sections 138 to 147 does not reach bills of exchange in the strict sense; that cluster operates only on cheques. A document that fails Section 5 is not a bill of exchange under the Act, however widely it may be treated as one in commerce. The cheque-bounce machinery in Section 138 — bouncing of cheques is reserved for cheques alone.