Bills of Exchange and Promissory Notes: Parties and the Four-Corner Model

A bill of exchange is a written, unconditional order by one person, the drawer, telling another person, the drawee, to pay a fixed sum to a named person, the payee, on a set date or on demand. The drawer is usually the exporter, the drawee is usually the importer, and the payee is usually the exporter or its bank. When the drawee signs the bill, it becomes the acceptor, and the acceptance is a binding promise to pay on the due date. The bill can then be held until maturity, discounted with a bank for early cash, or endorsed to another party. A bill of exchange is governed by national law, such as the Bills of Exchange Act, and by the ICC rules when it is used in a collection. The four-corner model for a bill of exchange shows the obligation moving between four roles. In the first corner, the drawer creates the bill and sends it to the drawee. In the second corner, the drawee accepts the bill and becomes liable to pay. In the third corner, the payee holds the bill and can endorse it to a new holder, who steps into the payee rights. In the fourth corner, the holder presents the bill to the acceptor on the due date and is paid. If the acceptor fails to pay, the holder can claim against the drawer and every endorser, because each signature on the bill is a guarantee. This chain of liability is what makes the bill useful as a payment and credit instrument. The system must record each endorsement and due date, raise an alert before maturity, and handle dishonour with a protest and recovery. A promissory note is different, because it is a promise, not an order. The maker of the note promises to pay a fixed sum to the payee on a set date or on demand, and the payee can endorse the note to another holder. The parties are the maker, who owes the money, the payee, who is owed the money, and any later holder who receives the note by endorsement. The four-corner model for a promissory note has the maker issuing the note to the payee, the payee endorsing it to a holder, the holder presenting it to the maker on the due date, and the maker paying the holder. If the maker fails to pay, the holder can claim against the maker and against any endorser, but there is no drawee or acceptor, because no one is ordered to pay. A negotiable instrument is a written document that carries a right to payment and can be transferred to another person by delivery or endorsement, so that the new holder can claim the money. The key features are that the promise is unconditional, the amount is fixed, the instrument is in writing and signed, and the transfer gives the new holder a clean title. A holder in due course, who takes the instrument in good faith, for value, and without notice of any defect, gets a stronger right than the person who transferred it, and can claim payment even if the original deal had a problem. This is why banks accept bills and notes as security, because they can rely on the instrument itself rather than on the underlying sales contract. For example, an exporter draws a bill of exchange for EUR 30,000 on an importer, payable 90 days after the shipment date. The importer signs the bill, becoming the acceptor, and promises to pay EUR 30,000 on the due date. The exporter can hold the bill until maturity, or discount it with a bank for EUR 29,000 in cash straight away, and the bank then collects the full EUR 30,000 from the acceptor when the bill falls due.