Bills of exchange: what are they and how do they work?

Payments are critical to any business. However, as anyone who has chased an invoice is sure to know, ensuring payment isn’t always easy. A bill of exchange is designed to keep everyone accountable when it comes to making payments on time. Find out everything you need to know about bills of exchange in Australia, including the Bill of Exchange Act 1909, with our helpful guide.

What is a bill of exchange?

A bill of exchange is essentially a formal, written IOU that states when a certain amount of money needs to be paid. Sometimes known as an international bill of exchange, they are similar to a contract, binding one party to an agreed-upon payment amount.

What are the key features of a bill of exchange?

A bill of exchange must feature the following:

• It must be a written document

• It must name all relevant parties

• It must be addressed from one party to another

• It must bear the signature of the party giving it

• It must outline the time when the money is due

• It must outline the amount of money that must be paid

Another notable feature of a bill of exchange is that it features three parties, which are as follows:

• The drawer: the party who writes the bill and orders the money be paid

• The drawee: the party who is required to pay

• The payee: the party who is due to be paid

That means the drawer who demands the money in the first place is not necessarily the one due to be paid. An international bill of exchange allows one party to demand payment to a third party.

Is a bill of exchange a legal document?

In Australia, the rules around bills of exchange are governed by the Bill of Exchange Act 1909. So, what does the bill have to say about the legality of these documents? In accordance with the Bill of Exchange Act 1909, a bill of exchange is an unconditional order for one party to pay another. While it is not quite the same as a contract, they are similar types of documents, and a bill of exchange can also be used as part of a contract to ensure payment. Furthermore, the holder of the bill can sue for any payments not made.

What’s the difference between a cheque and a bill of exchange?

A bill of exchange is similar to a cheque in the sense that similar details must be included, while both documents function as requests for payment from one party to another. However, a cheque is slightly more straightforward in that it is merely a request from a bank’s customer to have the bank pay someone from a specific account. A bill of exchange requests that the recipient makes payment, regardless of where the funds originated.

A cheque clearly states where the money will come from and is far more direct: one person writes the cheque, one person banks it, and the bank fulfils it. In the case of a bill of exchange, the bill writer may have no further involvement in actually paying the amount. However, they should assist the payee where the drawee is late or reluctant, so they retain some accountability. 

How to utilise an international bill of exchange

A bill of exchange can be used in situations wherein Company A requests payment from Company B, and Company B assigns the payment to Company C to streamline the process. When it comes to international bills of exchange, it’s the same process, but on a global scale.

For example, imagine that Company A sells books purchased from Company B, which in turn, places orders with Company C. Company B places an order with Company C and produces a bill of exchange that requires Company A to pay Company C upon receipt of the order.

Company B’s debt to Company C is paid with money owed by Company A. Although this may seem somewhat inconvenient, the main benefit of bills of exchange is the fact that they do not have to be paid immediately. In more recent times, bills of exchange have become less commonly used, with other delayed payment methods, like credit cards, becoming far more popular.

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