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◇Learn the definition and major types of financial instruments．
◇Learn and analyze the definition of bills of exchange．
◇Learn the major essentials of bills of exchange．
◇Learn the concepts of value， negotiation and acceptance．
◇Learn the major parties of bills of exchange， their rights and obligations．
◇Think about the relationship between bearer and holder．
A financial instrument， or a credit instrument， or simply an instrument， is a written or printed paper issued by one person to make unconditional payment to another person up to a certain sum of money within a certain period of time either by this person himself or by another third person designated by him．
Documents play a very important role in the modern era of international settlement． Financial instruments are made to make ／ collect payments． They have taken the place of cash and are devised as medium of exchange to facilitate commercial transactions by eliminating the use of money in the settlement process for import and export．
The most commonly used credit instruments in international settlement are bills of exchange， promissory notes and checks． Of the three， bills of exchange are the most popular type in the settlement process and most provisions stated in the Bills of Exchange Act are applicable to promissory notes and checks． Promissory note and checks will be introduced in Chapter 5．
According to the Bills of Exchange Act 1882 of the United Kingdom， a bill of exchange is an unconditional order in writing， addressed by one party （drawer） to another （drawee）， signed by the party giving it， requiring the party 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 party （payee）， or to bearer．
A bill of exchange can also be called a draft or a bill． A typical bill of exchange is drawn in this manner shown in Figure 3.1。
Figure 3.1 Sample Bill of Exchange
For better understanding， the above sample draft is indicated as the following breakdowns：
（1）An unconditional order in writing
（2）Addressed by one person （the drawer）
（3）To another （the drawee）
（4）Signed by the person giving it
（5）Requiring the person to whom it is addressed
（6）To pay
（7）On demand or at a fixed or determinable future time
（8）A sum certain in money
（9）To or to the order of a specified person or to bearer （the payee）
Figure 3.2 shows the bills of exchange used in practice。
Figure 3.2 Bills of Exchange Used in Practice
As is shown in Figure 3.2， bills of exchange used in practice are often made out in a set of two which represent one liability only． When one part is paid， the other becomes void． The wording of the 1st part of the bill will read as“ pay this first bill of exchange （second of the same tenor and date being unpaid） to...” and the 2nd part will read as“pay this second bill of exchange （first of the same tenor and date being unpaid） to...” With these wordings， double payments under one set of bills of exchange will be avoided．
“For value received” indicates that the payee obtains the bill because he has given value to the drawer． Value refers to anything that is sufficient to support a simple contract and may be given in the form of goods， services or money．
Essentials refer to those prerequisite items in bills of exchange to make such bills of exchange complete and valid． All the 9 items in the breakdown list of the definition are called the essentials to a bill of exchange． The following will make a detailed explanation of 2 essentials， namely， tenor as in indicated and types of order．
Tenor is stated in the definition as“on demand or at a fixed or determinable future time”． Tenor means the time to effect payment by the drawee to the payee and it expresses the due date or maturity date of the draft． According to tenor， a draft is to pay on demand or at a fixed or determinable future time．
（1） Demand bill． A demand bill is also called a sight bill． A demand bill means that the drawee is required to pay at once when he is upon request， when he sees the bill or when the bill is presented to him for payment． In addition， a bill is payable on demand if it is so specified or if time for payment is not stated in a bill．For a demand bill， the date of presentment is the due date to effect payment．
Ways to express a demand bill are summarized as follows：
①“On demand pay...”．
②“On presentation pay...”．
③“At sight pay...”．
④“Pay...”．
（2）Usance bill． A usance bill is also called a time bill or a term bill． A usance bill is payable at a fixed or determinable future time． A usance bill is usually expressed in the following ways：
①Payable at a fixed future time． It should be noted that the future time means the time of the tenor is made later than the issuing date．
②Payable at a fixed time after date． For example，“ pay 60 days after date...” means that the due date will be 60 days after the issuing date．“Date” refers to the issuing date of the bill．
③Payable at a fixed time after sight．“ Sight” means the presentation of the bill to the drawee for acceptance． When the drawee of such a bill sees it， he should make acceptance．
Acceptance can be understood as a formal promise from the drawee to pay when the bill falls due． For this type of bill， presentment for acceptance is a must for the purpose to determine the accepting date against which the due date can be fixed．
For example，“pay one month after sight...” means one month after the accepting date is the due date to effect payment． Suppose the bill is presented on 9 Jan． 2023 and the acceptance is made on the same date， then the due date will be on 9 Feb． 2023．
④Payable at a fixed time after the occurrence of a specific event which is certain to happen． In practice， such a bill is usually made at a fixed time after the B ／L date． As shipment is normally deemed as a specific event which is sure to happen， a fixed time after B ／ L date is a determinable future date．
For example，“pay 3 months after the B ／ L date...”．
Types of order are stated in the definition as payable “to a specified person or his order or to bearer （the payee）”．
According to the different descriptions of the payee， a bill takes three corresponding types of order： restrictive order bill， demonstrative order bill and bearer order bill． Different types of order will decide the negotiability of a bill and the way of negotiation． Negotiation is the process of ownership transfer， and it signifies the right of the payee ／ holder to transfer the bill to another person．
①Restrictive order． A restrictive order bill is payable to a specified person only． Typical expressions are shown as follows：
Pay to A Co．， Shanghai only．
Pay to A Co．， Shanghai not negotiable ／ not transferable ／ not to order．
Restrictive order bill is not negotiable． This means A Co．， Shanghai， the payee in the above example cannot transfer the bill to another person．
（2）Demonstrative order． A demonstrative or indicative order bill is payable to a specified person or some other person designated by him， without words prohibiting transfer or negotiation． Typical expressions are shown as follows：
Pay to A Co．， Shanghai．
Pay to the order of A Co．， Shanghai．
Pay to A Co．， Shanghai or order．
Pay to order．
Demonstrative order bill is negotiable． A Co．， Shanghai， the payee， in the above example can negotiate ／ transfer the bill to another person through endorsement and delivery． And the negotiability is made safe by endorsement． Consequently，demonstrative order bill has found wide application in international trade．
（3）Bearer order． A bearer order bill is a bill payable to bearer with no specified person as a payee thereon． Any person holds a bearer order bill will become the owner of the bill． Typical expressions are shown as follows：
Pay to bearer．
Pay to A Co．， Shanghai or bearer．
Note： The word “bearer” will make the bill bearer order no matter whether a specified party is stated with it．
A bearer order is also negotiable． It can be transferred by the bearer to another person through mere delivery and no endorsement is required． It enjoys full negotiability but it is not safe for the absence of endorsement．
Bills of exchange take such major parties as the drawer， the drawee， the payee， the endorser， the endorsee and the holder， each with different rights and obligations respectively and acting as creditors or debtors to a draft． Among these parties， the drawer， the drawee and the payee are the immediate parties and they are the basic parties to bills of exchange before they are transferred to another party．The endorse， endorsee and the holder are the other parties who are created after the negotiation of bills of exchange．
The drawer is the party who draws and signs bills of exchange on the drawee and delivers it to the payee．
The drawer is a debtor to the bills of exchange． Before a sight bill is paid and a time bill is accepted by the drawee， the drawer is primarily liable to the payee or holder of the instrument． In the event that the drawee dishonors the bill by non－payment or by non－acceptance， the drawer must redeem and pay the bill． However， when a time bill is accepted， the drawer's liability becomes secondary．
The drawee is the party on whom the bill is drawn and he is the party to honor the bill at the order of the drawer， i．e． to make acceptance and payment to the payee． The drawee is such named because the draft is drawn on him．
The drawee is another debtor to the bills of exchange． However， when the bill is presented to him， the drawee can make a choice whether to honor it （ agree to make acceptance and payment） or dishonor it （ refuse to make acceptance and payment）， because he cannot prevent any party to whom he owes no debt from drawing a draft on him． This means that before the drawee agrees to honor the draft， he is not yet a debtor to the bill， and if he agrees， he acknowledges his indebtedness to the bill and in the case of a time bill， he becomes an acceptor．
An acceptor is a special drawee． When a drawee signs his name on the face of a time draft indicating his promise of payment on a due date， he becomes an acceptor． This acceptance makes the acceptor assume primary liability to the bill． As a result， the drawer holds secondary liability to the bill as mentioned above．
The payee is the party to receive the payment because the bill is payable to him． The payee is the first creditor to the bill and the first legal owner of the instrument． He can either claim payment against the bill or transfer （negotiate） the draft to another party． If the bill is transferred， he is called the original holder／ transferer because the bill is taken away from him while the transferee， the person who takes the bill， becomes the new holder．
A bill of exchange is drawn by the drawer on the drawee payable to the payee．The basic meaning of the three immediate parties is that the drawer gives an order to the drawee， requiring it to make acceptance or payment to the payee． It should be noted that， on the one hand， it is possible for the drawer and the drawee of a bill to be the same person． On the other hand， it is also possible for the drawer and payee of a bill to be the same person．
When a bill of exchange is made out in demonstrative order or bearer order， it can be transferred from one holder to another． In doing so， the ownership of the bill is transferred from the previous holder to the subsequent party． This process of ownership transfer is called negotiation． During the course of negotiation， bills of exchange take other parties as well．
It is originally the payee or the holder who signs his name on the back of a bill for the purpose of negotiation． The endorser is a debtor to the bill and the payee is the first endorser． When the payee becomes the endorser， he transforms himself from a creditor to a debtor because he obligates himself that he will be liable to the endorsee and his subsequent parties．
For example， an endorser may make a promise to his endorsee as follows：“If you， the holder of this instrument， make proper presentation for acceptance and for payment and is dishonored， I will pay the face amount of the bill upon your proper notice to me．” In the process of negotiation， there may be a list of first endorser，second endorser， third endorser and so forth and the list can go on．
The endorsee is the party to whom the instrument is transferred． He is a creditor to the bills of exchange and becomes the new holder of the instrument． An endorsee can also become an endorser if he wishes to transfer the instrument to another party by signing his name on its back． And by doing so， he transforms himself into a debtor．
If the process of negotiation creates a sequence of endorsers， similarly， it will also bring about a series of endorsees． Figure 3.3 shows a process of negotiation．When the bill is transferred from A to B and B to C and from the standpoint of C，A and B are his prior parties． If C continues to transfer the bill to D and D to E，then D and E become his subsequent parties．
Figure 3.3 Negotiation Process of Bills of Exchange
The holder is a party who is in possession of the instrument． He is a creditor to a bill． A holder can be the payee ／ bearer or the endorsee． The payee will always be the original holder． A person holding a forged bill or one who has stolen a bill payable to the order of another is not a holder， but a wrongful possessor． Only the legal possessor can become the holder． Their relationship will be shown in Figure 3.4．
Figure 3.4 Possessor and Holder to Bills of Exchange
As a creditor， the holder has the following perfect title to the bill：
（1）To duly present the instrument for acceptance or payments．
（2）To transfer a bill to other persons．
（3）To endorse a bill．
（4）To give notice of dishonor to the prior party．
（5）To exercise right of recourse against the prior party．
（6）To sue in his own name．
（7）To duplicate the lost bill．
（8）To cross check or banker's demand draft， and to deliver it to a bank for collection．
In summary， the creditors to a bill are the payee ／ bearer， the endorsee（ s） and the holder． The debtors to a bill can be the drawer， the drawee， the acceptor and endorser（s） who hold the liability to make payments． Their order of liability is as follows：
Before acceptance：①drawer；②the first endorser；③the second endorser...
After acceptance：①acceptor；②drawer；③the first endorser；④the second endorser...
1.Financial Instruments takes____basic parties．
A． 2 or 3
B． 3 or 4
C． 4 or 5
D． 5 or 6
2.A draft is drawn_____the drawee_____the drawee _____the payee．
A． by， payable to， to
B． on， to， payable to
C． on， payable to， by
D． by， on， payable to
3.A bill payable____is／ are time bill．
A． two weeks after the wedding date of Susan White
B． at．．． sight
C． on presentation
D． one month after sight
4.A bill payable to____takes demonstrative order．
A． Mr． C．H． Wang or bearer
B． Bank X， Chengdu only
C． Bank Y．， Shanghai or order
D． order
5.That____is／ are correct about bills of exchange．
A． bills of exchange take 2 immediate parties
B． bills of exchange represent a payment order
C． the drawee of bills of exchange must be a bank
D． bills of exchange can be sight bills and time bills
1.A draft is an unconditional order whereby the____demands the _____to pay to the____．
2.Complete and valid bills of exchange contain all the____when they are drawn．
3.When a bill issued on 30， March， 2023 is payable on 12， April 2023， it is a____bill according to tenor．
4.Order of liability after acceptance of a negotiated bill is as follows： the _____takes the primary liability， the____takes the secondary liability and the____takes the third liability．
5.The____can be the payee or the bearer of the bill， or the endorsee who is in possession of it．
Refer to the blank draft form below：
1.Match the number with the information given below：
（1）Issuing date： 23 July 2023．
（2）Amount： USD 35 461.50．
（3）Tenor： 90 days （after）sight．
（4）Drawer： George Anderson Inc．， New York．
（5）Drawee： Irving Trust Company， New York．
（6）Payee： Brown and Thomas Inc． London or order．
2.Who is the first legal owner of the draft？
3.Can the draft be transferred？ If yes， specify the endorser． If no， give your reasons．
On 8 March 2023， a sight draft at USD 10 000 was issued by Hong Fa Trading Co． Ltd， Shanghai on Bank XYZ， Chengdu payable to Bo Da Trading Co． Ltd，Chengdu． On 12 March 2023， Bo Da Trading Co． Ltd， Chengdu presented the draft to Bank XYZ， Chengdu for payment and the draft was dishonored． Bo Da Trading Co． Ltd， Chengdu then immediately informed the Hong Fa Trading Co．Ltd， Shanghai of the dishonor and demanded payment from Hong Fa Trading Co．Ltd， Shanghai． However， Hong Fa Trading Co． Ltd， Shanghai refused to make payment to Bo Da Trading Co． Ltd， Chengdu on account of its being the drawer not the drawee of the draft．
Questions：
1.What responsibilities should Hong Fa Trading Co． Ltd， Shanghai take up as the drawer of the draft？
2.What can Bo Da Trading Co． Ltd， Chengdu do to make Hong Fa Trading Co． Ltd， Shanghai take up its responsibilities？
3.How to prevent the abuse of power？