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Bill of Exchange - Definition, Essentials and Comparison

Section 5: 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 to the bearer of the instrument.

A promise or order to pay is not “conditional,” within the meaning of this section and section 4, by reason of the time for payment of the amount or any instalment thereof being expressed to be on the lapse of a certain period after the occurrence of a specified event which, according to the ordinary expectation of mankind, is certain to happen, although the time of its happening may be uncertain.

The sum payable may be “certain,” within the meaning of this section and section 4, although it includes future interest or is payable at an indicated rate of exchange, or is according to the course of exchange, and although the instrument provides that, on default of payment of an instalment, the balance unpaid shall become due.

The person to whom it is clear that the direction is given or that payment is to be made may be a “certain person“ within the meaning of this section and section 4, although he is misnamed or designated by description only.

Bill of Exchange and Promissory Note

Like the preceding section defining a pronote this section defines a bill of exchange. It is, however, important to note the distinction between these two classes of instruments. In a promissory note, the maker of the note unconditionally undertakes to pay, whereas in a bill of exchange the maker of it gives an unconditional order directing a certain person other than himself to pay. The liability of the maker of the promissory note is absolute because he unconditionally binds himself to pay whereas the obligation undertaken by the drawer of a bill of exchange is only conditional since he becomes a surety for payment in case of default by the drawee. The maker of the promissory note is the principal debtor, whereas the drawee of a bill of exchange on acceptance becomes the principal debtor as he accepts the primary liability to pay according to the tenor of the bill. It is only when the drawee fails to pay that the drawer becomes liable as his surety.

Thus, in a promissory note there are only two parties i.e, the promisor and the promisee while in a bill of exchange there are three eg the drawer, the drawee and the payee. Barring this point, all the other essential features of the pronote are also to be found in the bill of exchange. A pronote, when endorsed in favour of a third person, is like a bill of exchange as it is an order by the endorser upon the maker to pay the endorsee.

Essentials of a Bill of Exchange

As noticed in the case of the promissory notes a valid bill of exchange must have the following prerequisites:

  1. it must be in writing,
  2. it must contain an unconditional order to pay;
  3. it must be signed by the drawer who must be a certain person ,
  4. the drawee must be certain,
  5. the payee must be certain,
  6. the amount payable must be certain
  7. the order must be to pay money and money only.


To be a valid bill of exchange it must be reduced to writing. An oral direction to pay cannot be regarded as a bill. There is no particular language or form prescribed for this But the document, so reduced to writing, must conform to all the conditions laid down in this section. As for what constitutes writing, see notes to section 4 under the head ‘instrument in writing'.

Unconditional order to pay

The order to pay must be without any condition whatsoever except as provided for in the second paragraph of this section. That paragraph seeks to lay down what is meant by an unconditional order. It has been noticed before that payment in the mercantile world cannot be made to depend on contingencies which may or may not happen. Uncertainty is bound to affect trade and commerce for the development and facility of which the bills of exchange, promissory notes and cheques are resorted to. The bill must, therefore, be payable at all events even if it is made dependent on the happening of an event it must be such an event which, in the normal order of things and ordinary course of human conduct, must happen, otherwise, it would perplex the commercial transactions of mankind and diminish and narrow their credit and negotiability, if paper securities of this kind were issued out into the world encumbered with conditions and contingencies, and if the person to whom they were offered in negotiation were obliged to enquire when those uncertain events would be reduced into certainty.

A bill dependent on a contingent event is absolutely void and even if the event happens the defect will not be cured.Thus, any instrument containing an order to pay “thirty days after the arrival of the ship Paragaon in Calcutta” is not a bill of exchange even if the ship arrives. Similarly, an instrument containing an order to pay ninety days after sight or when realised, is not a good bill. Then again an order to pay out of a particular fund is a conditional order and is, therefore, bad. It leads to uncertainty, but a mere direction to the drawee to debit it against a particular account, or to reimburse himself from a certain fund is not bad. The conditional direction, to vitiate the bill must be addressed to the drawee; if it is not addressed to the drawee the bill is a good bill.

Although direction of the drawer to the drawee must be unconditional, the acceptor or the endorser may make his own liability conditional. When an instrument becomes bad as a bill it may be acted upon by the drawee as an authority to make payment to the payee. Even a bad bill, if properly stamped, can be used in evidence as an agreement between the parties. There is no special form of the order it is enough if what is written amounts to a definite direction to pay as 'credit in cash’ and the holder can present it as a demand as of right and not as a matter of favour.

Mere supplication will not amount to an order. But insertion of some courtesy terms will not make the order bad, as the term “order” used in the section is not to be construed as a command. A “chit” addressed to a person with a request to pay the amount, mentioned therein, is not a bill of exchange and, as such, does not require a stamp. Where the plaintiff agreed to lend money to the defendant for payment of his trade debts and in pursuance of the agreement gave his creditors chits for certain sums which were addressed to the plaintiff and requested him to pay the amounts mentioned therein which were paid, it was held that these chits were neither bills of exchange nor cheques and, as such, not inadmissible in evidence for want of stamps and that by the agreement the plaintiff was not constituted the defendant’s banker within the meaning of clause (6) section 3 of the Stamp Act, 1879, and the chits did not require a stamp.

Drawer must be certain and sign the instrument

The drawer must be certain i.e, the person who enters into the contract should be pointed out with certainty and his signature should be obtained. Acceptance of an instrument not signed by the maker does not make it a good bill. There can be more than one drawer of a bill of exchange with joint liability but not with alternate liability. The drawer or drawers must undertake the responsibility of payment to the holder if the drawee or the acceptor dishonours it. It is only when the drawee fails to pay that the drawer would be liable as his surety. The bill to be complete must be signed by the maker. Without his signature it remains inchoate. What constitutes signature has been dealt with in section 4 ante under the head “signed by the maker”.

Drawee must be certain

Like the drawer the drawee must also be definitely indicated avoiding all chances of uncertainty. If, however, the drawee is not named in the bill itself which only mentions the place of payment and it is accepted by a person of the same address he is estopped from taking the plea that he is not the drawee or the acceptor. One person cannot accept a bill addressed to another. There may be joint drawees of a bill but an order addressed to two or more persons in succession enjoining a series of acceptances is bad and is not a bill of exchange. Where the drawer and the drawee are the same person, the holder may treat it as a bill of exchange or a pronote at his option.

Payee certain

The payee of a bill must be definitely named or indicated in the instrument with reasonable certainty to enable the drawee to make the payment to a right person. Mere misdescription of the payee in the bill will not invalidate it and oral evidence will be admissible to prove that a certain person, though misdescribed, is the right payee. Where, owing to ignorance of the event of death, a bill was drawn payable to a dead man it was not held invalid but was held payable to the personal representative of the deceased. A bill made payable to one of several persons in the alternative is a good bill.

Sum must be certain and should be money alone

See notes to section 4 under the head 'Payment of a certain sum of money only'.

Bill of Exchange and Hundi

Hundis are negotiable instruments written in some oriental language, being sometimes bills of exchange and sometimes pronotes, and are subject to local usages and are not affected by the provisions of this Act. From long before this Act the hundis have been in circulation im this country with varying usages attaching to them. Under the Hindu law a hundi payable to order was negotiable without an endorsement by the payee. A dishonoured hundi returned without any endorsement to the endorser could be sued upon by the latter. A forged endorsement confers no title both under the Law Merchant and the Hindu law.

Customs and usages, as stated before, govern the incidents of a hundi. Thus, under a Murshidabad custom, the court allowed interest on a hundi payable many days after sight, and recognising a usage at Dacca the court relieved a Gomastha of his personal liability when he drew a hundi on his principal without signing as agent overriding the ordinary rule.

There are many other instances where customs or local usages have been given effect to by the courts. Even oral acceptance is justifiable under custom. In a suit on hundi the first essential is to ascertain whether the hundi is a promissory note or a bill of exchange. A bill of exchange may include a hundi , but it does not follow that a hundi includes a bill of exchange. A hundi becomes a bill of exchange on the acceptance of a third party, though the bill is not addressed to him and he is not named as drawee provided his acceptance is not inconsistent with the address. No party can be made liable as acceptor of a bill addressed to another but where no party is named in the address the acceptor may be deemed, by his endorsement of acceptance, to have admitted himself to be the party addressed. If the drawer and drawee be the same person the instrument may be treated as a bill of exchange.

A hundi may be written on more papers than one but the aggregate value of the stamp papers should represent the correct value of the stamp to which the hundi is liable. Proof of presentation followed by dishonour is necessary to succeed in a case on a hundi. The name of the drawer of a hundi need not be separately entered in the document at any specific place but it is sufficient if it shows the person addressed, that it has been made by a third person who purports to be bound thereby. Of the various kinds of hundis, the important ones are noticed below

Shahjog Hundi

This kind of hundi is payable only to the respectable holder unlike a hundi payable to a bearer or order. An attested Shahjog hundi, insufficiently stamped, can be sued on as a bond. The Act does not apply to Shahjog hundis as such hundis are not negotiable instruments within the meaning of this Act. But many of the incidents of negotiable instruments govern these hundis under mercantile usages and customs. It is a striking illustration of the mercantile customary law prevalent in India. In considering the right to a hundi, the court is as much bound to put a reasonable construction upon the words of an endorsement or an acceptance as upon any other part of the document. When a maker or a rightful owner of a hundi payable in terms of the Shahjog, endorses it to A, he obviously means to pass the right of dealing with the hundi to A alone. It may well be that, according to Hindu customary law, A can transfer his right to a third person B by word of mouth or mere delivery notwithstanding that the special indorsement to himself is in writing.

The term Shahjog should be subordinate to the directions of the successive owners and should mean “the right men to be paid”. There is no rule of Hindu law, customary or otherwise, which should have the effect of making the word Shahjog mean payable to the bearer quite independently of the endorsement. There is no principal of mercantile expediency having the force of law or otherwise which would be served by the Courts disregarding the direction of the endorsee and treating a specially endorsed and accepted hundi as if it were an English Negotiable Instrument made payable to bearer and, as such, part of the currency of the country.

A hundi payable to Shahjog will pass by mere delivery regardless of the authenticity or otherwise of any endorsement which may be put on it. In an Allahabad case it has been held that a Shahjog hundi when transferred by endorsement is payable to the bearer as the phrase “a respectable person” means the same thing as “a bearer” and it is a perfectly good negotiable instrument.

Under the Law Merchant where the title of the holder is based on forgery, the holder is liable to make good the amount to the drawee. Under the usage applicable to Shahjog hundis the Shah is liable to repay the amount with interest to the drawee unless he produces the forger. In a full bench decision of the same Court it has been laid down that there is no custom relating to Shahjog hundis by which a drawee making payment to a person having no title, although a Shah, is absolved from liability.

Jokhmi Hund

This is another instance of customary law among the Indian merchants. This hundi is drawn on condition that the money shall be payable only in the event of the arrival of the goods against which it is drawn. Jokhmi means “against risk” or “against goods ”. The drawer draws this kind of hundi on the drawee on condition that in the event of the arrival of the goods it will be accepted and payment will be made and then negotiates it for value which may be less than what is covered by the instrument. It enables the drawer to raise money, on the strength of the instrument, from any person who desires to make some profit at a certam risk; for, if the goods are totally lost the money is not recoverable by the holder either from the drawee or from the drawer. It is in the nature of an insurance policy, with this difference, that the money is paid beforehand, to be recovered if the ship is not lost. But even in that case if the drawee refuses to accept it, the remedy of the holder is against the drawer only. In the case of partial loss of the goods the holder is entitled to recover the amount.

Namjogr Hundi

Just as a “Shahjog” hundi is payable only to a Shah or a respectable person the Namjog hundi is payable to the person named in the document. The forms of these two hundis are similar , only the name of a specified payee has to be inserted in place of the Shah. It is payable also to the order of the payee and can be negotiated like a bill of exchange by endorsement and delivery. But if the hundi is accompanied by a scrip containing the description of the person in whose name it is granted it cannot be endorsed or transferred. In that case it is to be paid to that person alone.

Jawabee Hundi

It is like a letter of recommendation to a banker for payment of a particular sum to a person to whom money has to be paid. A person desirous of making a remittance writes to the payee and delivers the letter to a banker who either endorses it on to any of his correspondents near the payee’s place of residence or negotiates its transfer. On its arrival, the letter is forwarded to the payee who attends and gives his receipt in the form of an answer to the letter, which is forwarded by the same channel to the drawer of the order. The banker may cancel the order for payment by an advice to his correspondents at any time before payment, in case the so-called drawer fails in his promise to provide the banker with the amount of the order.

Zikri chit

It is a request to a certain person residing in the town at which a hundi is addressed or made payable by the drawer of a hundi to accept it for honour in case it is dishonoured by the drawee. This is meant for the protection of the holder of the hundi. It is in the form of a letter given by the drawer or any other prior party to the holder. This form of hundi is prevalent all over the country in connection with the Marwari hundis and, according to a custom among the Marwari Shroffs, it requires no noting or protest.

Darshani Hundi

This is a hundi payable at sight. It is negotiable and the price of this is regulated by demand and supply. Sometimes it is sold at a premium and sometimes at a discount. It is a very common form of hundi prevalent in the market.

Miadi Hundi

It is called Muddati hundi, that is, a hundi payable after a specified period of time. On the security of these hundis or pronotes capitalists advance loans. It is the usual practice of the capitalists to deduct the interest in advance for the period up to the due date. It will be noticed that the various classes of hundis described above may be Miadi bundi only if the stipulation be to make the payment after a specified period.

Created on 2021/01/25 14:19 by LawPage • Last modified on 2021/01/25 14:22 by LawPage