Definition and Usage of Bill of Exchange / Draft :
Bill of exchange is one of the most hard-to-understand concept in trade finance terms. As a result it would be more meaningful if we start with the definition of the bill of exchange.
According to UK's Bill of Exchange Act (1882) bill of exchange defined as an unconditional order in writing, addressed by one person to another, signed by the person giving it, requiring the person to whom it is addressed to pay on demand or at a fixed or determinable future time a sum certain in money to or to the order of a specified person, or to bearer". Little bit complicated. Yes it is. But do not worry. I will explain bill of exchange and its usage in detail with illustrations on the next page.
Important Note 1 : There are two main international laws exist that govern bill of exchange as a financial instrument in international trade transactions.
Bills of Exchange Act (1882) : Bills of Exchange Act (1882) is valid for United Kingdom, Ireland, commonwealth nations such as Australia, India, New Zealand etc..
Geneva Conventions (1930) : Geneva Conventions (1930) is valid for Germany, France, Austria, Belgium, Saudi Arabia, Denmark, Finland, South Korea, Greece, Taiwan, Thailand, Oman, Syria, Iceland, Poland, Italy, Czech Republic, Liechtenstein, Slovakia, Luxembourg, Hungary, Malta, Albania, Netherlands, Bulgaria, Norway, Romania, Portugal, Croatia, Spain, Bosnia-Herzegovina, Sweden, Macedonia, Switzerland, Slovenia, Turkey, Serbia, Indonesia, Lebanon, Japan, Jordan etc...
Bill of Exchange / Draft in Letters of Credit Transactions :
UCP 600 - Article 6 states that "A credit must not be issued available by a draft drawn on the applicant." (source : UCP 600)
Special Hints on Bill of Exchange / Draft from ISBP 2007 :
Drafts, transport documents and insurance documents must be dated even if a credit does not expressly so require.
Shipping documents have the following meaning under international standard banking practice; “shipping documents” – all documents (not only transport documents), except drafts, required by the credit.
Even if not stated in the credit, drafts, certificates and declarations by their nature require a signature.
The draft must be endorsed, if necessary.
The draft must be drawn on the party stated in the credit.
The draft must be drawn by the beneficiary.
A credit may be issued requiring a draft drawn on the applicant as one of the required documents, but must not be issued available by drafts drawn on the applicant.
What is Bill of Exchange? On this page I will try to explain you "Bill of Exchange" and their application in letters of credit transactions. Banks mention Bill of Exchange as "Bill of Exchange", or "Draft" in letter of credit texts.