Bills of Exchange and Cheques - Essay Example

Student Name Tutor Title: Bills of exchange and cheques Institution Date Introduction Bills of exchange are financial documents that are broadly used in many nations across the world. The bills are highly applied in international trade. Bank drafts and cheques are the most common forms of bills of exchange. Cheques are legal document in which an individual admits that he or she owes some amounts of cash to the payee. Several legal procedures need to be followed when using cheques for payments. It is not always obvious that using cheques for payments is a smooth activity. There are several consequences that normally arise when payment is made by cheques. This paper therefore describes the bill of exchange and the legal formalities in making payments by cheque. It also looks at what might go wrong when making payments with cheques and the remedies that prevail to individuals who are wronged. Bill of exchange As fiscal documents Bills of exchange normally instructs an individual or business addressed in the document to pay a given amount of money on a specified date within the text of the document. It is usually considered a negotiable tool. In the bill of exchange, the date the payment need to be made normally ranges from the current date to a date that falls within the next six calendar months. In order for a bill of exchange to be considered legal and binding, it usually needs an authorized signature of a debtor (Byles, 2002). A bill of exchange is essentially an order developed by an individual to another so as to pay money to a third person. In its inception, a bill of exchange normally needs three parties, which include the drawer, the drawee and payee. The person writing the bill is usually referred to as drawer. He or she normally provides the order to pay money to the third person. The party upon which the bill is drawn is usually referred to as the drawee. A drawee is an organization or an individual to whom the bill is addresses and who is ordered to give out a specific amount of money. By displaying the willingness to pay the bill, a drawee therefore becomes an acceptor. Payee is the term that is normally used to refer to the party to which the favor of the bill is drawn (Bigelow, 2010). Lipsey & Chrystal (2007) argues that Acceptance or endorsement of bills of exchange is usually done by accepting house such as banks. The moment the bill is accepted, the drawee does not need to wait for bill to mature before getting his or her funds. In case the bill is not due, the drawee can sell it at in the money market at a discount. A bill of exchange can be passed beyond the drawer, drawee and creditor. For payment or borrowing reasons, a creditor can transfer the bill of exchange to a fourth party, who may later pass the bill to another party and the process may proceed via endorsement or signature of transfer. Endorsement normally transfers the endorser’s rights to the new holder and also makes the endorser to be liable for the payment of specified amount on the draft if the drawee fails to meet payment at the time the draft is due. Failure to pay the draft should not be more or less formally acknowledged and the holder of the draft can request the payment from any endorser whose signature is displayed on the instrument. A bill of exchange can be established in form of a bank draft. Similar to cheques, bank drafts are usually set up with a specified amount of payment and with particular instructions of when to pay the creditor. A bill of exchange can either be a very simplistic document or a detailed one. In many nations across the globe, application of bill of exchange is an obvious way of doing business (Grath, 2008). The application of bill of exchange is normally accompanied by an allonge. Allonge is a piece of paper that is usually appended to some kind of agreement. The agreement can be a contract or other form of negotiable tool. In most cases, the allonge is usually utilized as a bill of exchange. Bills of exchange can incorporate a short recap of terms of transaction that are being looked at. In nations that the Napoleon code is taken as the standard for fiscal and contractual transactions, the allonge normally works as a supporting document that ensures that both parties clearly understand exactly what is included and not included in agreement’s terms. When a bill of exchange is not cashed, the holder of the bill is usually free to take legal action against the debtor according to local laws. The holder of the bill can also decide to sell the document to a collector at a discounted rate of exchange. The bill of exchange, as unconditional order to pay a given amount of money to a creditor, can assume very many different forms. The most common example of a bill of exchange is the bank cheque. A check usually specifies the person to be given the money, with the instruction to pay the face value of the cheque to the creditor’s order. The actual amount of cash to be paid is usually specified in the cheque. The date written on the cheque is often the date the cheque was issued. It can also be the date the bank is to honor the cheque. This process is known as post dating a cheque, since by post dating a cheque it implies that a creditor will physically receive a cheque at some time before it is honored. Legal formalities in making payments by cheque Cheque payments made by a buyer to a seller allows the seller to receive payment of a given amount of money from buyer’s demand account at a specified bank. Before making any payment by cheque, one needs to ensure that an organization or business store to be paid permits cheque payments. There are several organizations and business stores that do not allow payments by cheques. It is therefore important for an individual to confirm with the organization if cheque payment is allowed. A person making the payment needs also to ensure that his or her account has enough money to complete the payment. It is an offensive act to make payment by cheque while knowing very well that there is no enough money in the account or an overdraft can be given by the bank (Schmitz & Wood, 2006). When making payment by cheque it is required by law that the cheque used is generally acceptable and has all the necessary information such as the date, name of the payee, name of the issuing bank, account number, bank sort code, amount in figures and words and drawer’s signature. Using a cheque that is not legally acceptable or which does not have some common information is usually considered as a fraudulent activity. Individuals therefore who found themselves involving in this kind of activity are normally sued in the court of law (Tan, 2004). Under summary offences act 1953, it is illegal to pay for goods by cheque that cannot be paid on presentation, unless the individual who drew the cheque proves that there were sound reasons for him or her to believe that the cheque would be cashed on presentation and that there was no attempt to defraud. A person making payments by cheque should ensure that the name of the payee is well spelled and written and the date of payment is well indicated. He or she need to ensure that the amount in words and figures are similar and the signed signature is similar to account holder’s specimen signature. A person or an organization making payment by cheque need to determine if the payee has an account or not so as to decide whether to issue a crossed or uncrossed cheque. Though it is sometimes legally complex, crossing a cheque minimizes negotiability. Negotiability in this context implies that in case a cheque is issued to a particular individual, he or she can pass it to another and another person, before it reaches a drawers account. This therefore implies that in case a person issuing a cheque need to minimize negotiability he or she is allowed by law to cross it. For example if uncrossed cheque is given to Mr X and he endorses it and hand it over to Mr Y and cheque bounces later. Mr Y can easily seek payment from either Mr A or from drawer. In case the cheque was crossed, Mr Y rights would have been eliminated, depending on the actual nature of the crossing (Rob & Crockett, 2008). When making payment by cheque to a limited company, there is no need to cross it. The cheque need to be lodged in the company’s account and thus cannot be negotiated. In case a cheque is being issued to a payee who does not have a bank account it is advisable not to cross it so as to make cashing of the cheque possible. If a cheque is being issued to an individual who has a bank account and there is a fear that might land into wrong hands, it is advisable for the one drawing the cheque to cross it. When crossing the cheque it is required by law to put two diagonal lines on the face of the cheque. Rob & Crockett (2008) highlights that payment for goods and services by cheque is always considered as conditional payment. The condition is that a cheque needs to be paid on presentation. Payment by cheque has several essential practical consequences. For instance suppose Mr A purchases goods and services from Mr B and pays by cheque. The cheque can be stolen from Mr B by Mr C who forges Mr B’s endorsement and cashes it via the banking system in conditions where bank is protected and the account of Mr A is debited. In this situation, Mr B cannot request for more payment from Mr A since the payment condition was not breached. There are other crucial consequences of receiving payments by cheque, especially in private motor vehicles’ sales. For instance, in case Mr A purchases a motor vehicle by cheque from Mr B, the fundamental rule would be that the car’s ownership will only be transferred to Mr A when the cheque is given out. In case Mr A happens to act fraudulently and the cheque bounces, Mr B will find it hard to recover the motor vehicle if Mr A has already sold the car to some other person in the meantime (Lando & Beale, 2000). Conclusion From the discussion, it is clear that a bill of exchange is a fiscal document and a negotiable tool. As a fiscal document, the bill of exchange instruct an individual or business addressed in the document to pay a given amount of money on a specified date within the text of the document. A bill of exchange can also be viewed as an order developed by an individual to another so as to pay money to a third person. As a negotiable tool, a bill of exchange can be passed beyond the drawer, drawee and creditor. It is also clear that legal formalities prevail when making payments by cheque. Before making any payment by cheque, one needs to ensure that an organization or business store to be paid permits cheque payments. When making payment by cheque it is required by law that the cheque used is generally acceptable and has all the necessary information. References Byles B. 2002, Byles on bills of exchange and cheques, New York: Sweet & Maxwell. Bigelow M. 2010, Elements of the Law of Bills, Notes, and Cheques and the English Bills of Exchange ACT, New York: General Books LLC. Lipsey R., & Chrystal K. 2007, Economics, Oxford: Oxford University Press. Grath A. 2008, The handbook of international trade and finance: the complete guide to risk management, international payments and currency management, bonds and guarantees, credit insurance and trade finance, New York: Kogan Page Publishers. Schmitz S. & Wood G. 2006, Institutional change in the payments system and monetary policy, New York: Taylor & Francis. Tan M. 2004, E-payment: the digital exchange, New York: NUS Press. Rob P., & Crockett K. 2008, Database systems: design, implementation & management, London: Cengage Learning EMEA. Lando O., & Beale H. 2000, Principles of European contract law, Volumes 1-2, Amsterdam: Kluwer Law International. Read More