The term bill of exchange has been defined under Section 5 of the Negotiable Instruments Act. 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.
The parties to a bill of exchange are
• The maker of a bill of exchange or Cheque is called the Drawer.
• The person thereby direct to pay is called the Drawee.
• The Payee to whom the payment is to be made is called the payee.
• The Endorsee to whom the bill is negotiated.
• One who accepts the bill generally the drawee is the acceptor but a stranger may accept it on behalf of the drawee is called acceptor.
• Holder who endorses the bill in favour of any other person is called endorser.
Person in whose favour the bill is endorsed by the endorser is called endorsee.
Characteristic of a Bill of Exchange
1. It must be in writing: The Bill of Exchange must be in writing.
2. Order to pay: There must be an order to pay. It is the essence of the bill that the drawer orders the drawee to pay money to the payee. The term order means any request or direction, which show an intention of the drawer to pay.
3. Unconditional order: This order must be unconditional. The bill is payable at all events. The order of the payment of the bill must not dependent on a contingent event. A conditional bill of exchange is invalid.
4. Signature of the drawer: The drawer must sign the instrument. The instrument without the proper signature will be unclear and ineffective. It is permissible to add the signature at any time after the issue of the bill.
5. Parties: There must be three parties in a bill of exchange and the parties must be certain. The drawer, drawee and the payee are the parties in a bill of exchange.
6. Certainty of amount: The order must be to pay a certain sum of money.
7. Payment medium: The instrument must contain an order to pay money and money only. The distinctive order to pay anything is invalid.
8. Stamping: A Bill of Exchange is valid when it is duly stamped as per the Stamp Act.
9. Cannot be made payable to bearer on demand: A Bill of Exchange as originally drawn cannot be made payable to the bearer on demand.
Essentials of a bill of exchange
In order that an instrument may be called a bill of exchange it should satisfy the following conditions:
1. It must be in writing.
2. It must contain an unconditional order to pay.
3. It must be signed by the drawer.
4. There must be three parties to the instrument and the parties must be certain.
5. The order must be to pay a certain sum of money.
6. The instrument must contain an order to pay money and money only.
7. It must comply with the formalities as regards date, consideration, stamp etc.
A bill of exchange like a promissory note may be written in any language. It may be written in any form of words provided the requirements of the section are complied with.