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◇Learn the major types of bills of exchange acts．
◇Learn to make endorsement and acceptance．
◇Learn the movement of bills of exchange．
◇Learn the classification of bills of exchange．
◇Learn the differences between trader's bill and banker's bill， between clean bill and documentary bill．
◇Learn to calculate the net proceeds and discount interests．
Acts of a bill of exchange refer to the legal acts carried out to bear the obligations to a draft． Major acts consist of issue， endorsement，presentment， acceptance，payment，dishonor，notice of dishohor，protest， and right of recourse． Each act is initiated by different party to different party and to fulfill different purpose．
To issue a draft comprises two acts to be performed by the drawer． One is to draw and sign a draft， the other is to deliver it to the payee． Thus the liability of the bill is established and the bill has come into being．
When issuing a bill， the drawer must draw it in its complete form， containing all the essentials stipulated． The drawer must sign the bill as well． A bill without the drawer's signature or with a false signature is not a valid bill． The liability on a bill of exchange is by signature only： no person is liable upon a bill if he has not signed it． A bill can be made in the name of an individual or a company or by some other person under his authority． A bill so made engages the drawer under the primary liability to the bill．
To deliver means to transfer the draft from the drawer to the payee． Thus the payee is entitled to receive payments， who becomes the original holder of the bill and is the creditor to the bill．
Endorsement is made on the back of a bill of exchange． Endorsement comprises two acts： one is to sign on the back of the draft， the other is to deliver it to the endorsee ／ transferee．
Endorsement is an act of negotiation． A bill is negotiated when it is transferred from one person to another in such a manner as to constitute the transferee the holder of the bill． Only the holder， namely the payee ／ bearer and the endorsee can endorse a bill．
Endorsement is applicable when the bill is made out on the demonstrative order．The transfer of a demonstrative order bill is completed by endorsement and delivery．
Endorsement can be made in one of the following ways：
（1）Special endorsement （endorsement in full）． Special endorsement consists of the name and signature of the endorser and at the same time spells out the name of the transferee． It is also called the endorsement in full．
For example：
Pay to the order of B Co．， Shanghai ………… the endorsee
For A Co．， Shanghai………… the endorser
Signature （of the endorser）
The example shows the transfer of the bill from A Co．， Shanghai to B Co．，Shanghai．
A bill endorsed specially remains a demonstrative order bill． It can be further transferred by the endorsee through another endorsement and delivery． A series of consecutive special endorsements show a clear chain of endorsers and that of the endorsees．
（2）Blank endorsement （general endorsement）． Blank endorsement only consists of the name and signature of the endorser／ transferor and no endorsee ／ transferee is specified． It is also called a general endorsement．
For example：
For A Co．， Shanghai………… the endorser
Signature （of the endorser）
When a blank endorsement is made on a bill， it will transform the original bill from demonstrative order to a bearer order． If the bill is to be further transferred ，mere delivery is required． When a blank endorsement is followed by another blank one， the endorser of the subsequent endorsement will be deemed as the endorsee of the prior endorsement． Therefore， a series of blank endorsements can also be consecutive． The possessor of a bill with the last endorsement made in blank is the holder if there is no proof to indicate his title thereto is defective．
However， a blank endorsement can be changed to a special endorsement by adding above the endorser's name such wordings as“pay to” or“pay to the order”of the transferee．
（3）Restrictive endorsement． A restrictive endorsement bears such indications as“only”“not negotiable”“not transferable”“not to order” to prevent the further negotiation of the bill．
For example：
Pay to ABC Bank， Shanghai only ………… the endorsee
For A Co．， London………… the endorser
Signature （of the endorser）
Or
Pay to ABC Bank， Shanghai not negotiable ………… the endorsee
For A Co．， London………… the endorser
Signature （of the endorser）
Restrictive endorsement will transform the demonstrative order to a restrictive order． The endorsee can only claim payment against the bill and no further transfer is allowed．
（4）Endorsement for collection．“For collection” is an instruction to the endorsee to collect the sum specified in the bill for the endorser． Endorsement for collection requests the endorsee to deal with the bill as he is instructed but the title to the bill is not transferred to him．
For example：
For collection pay to Bank A， New York ………… the endorsee
ABC Co．， Shanghai………… the endorser
Signature （of the endorser）
Or
Pay to Bank A， New York for collection ………… the endorsee
ABC Co．， Shanghai………… the endorser
Signature （of the endorser）
As the transferee is not the owner of the bill so when the bill so endorsed， the bill cannot be further transferred．
Presentment of bills of exchange is also terms as presentation． Presentment is to be made by the holder to the person designated as drawee for payment in the case of a sight bill and for acceptance and payment in the case of a time bill．
The holder should present the bill within reasonable time at the proper place specified on the bill． If no place is specified， the bill should be presented at the drawee or the acceptor's business office． If no business office is specified， the bill should be presented at the drawee or the acceptor's residence．
If a bill is drawn on a bank， there are three channels for presentment：
（1）Presenting the bill at the counter of the drawee bank．
（2）Presenting the bill through clearing house exchanged to the drawee bank．
（3） Inter branches and correspondents presenting bill by airmail ／ courier to the drawee bank．
If the bill is duly presented and is dishonored by the drawee， the holder will obtain an immediate right of recourse against all the prior parties till the drawer．
Acceptance of a bill is the signification by the drawee of a time bill of his assent to the order of the drawer． The drawee of a time bill has no liability on the bill until he signs the bill in such a way as to signify acceptance of liability to pay the money stated in the bill．
A valid acceptance requires two acts： one is to write the word “Accepted” on the face of a bill and signed by the drawee． The mere signature of the drawee，without additional words， is sufficient． The other is to return the accepted bill to the payee for him to present the bill again on maturity date． In the case that the bill is a time bill payable at a fixed time after sight， the accepting date is deemed to be the sight date from which the maturity date is worked out．
In order to be convenient， the accepting date and the due date are stated when acceptance is made． Figure 4.1 shows such an acceptance in complete form．
Figure 4.1 Acceptance in Complete Form
When the drawee has made acceptance， he is known as the acceptor and he becomes primary liable on the bill． When this happens， the drawer will be secondarily liable to the bill． In practice， an accepted bill can be transferred more easily than an unaccepted one because it has the definite undertaking of the acceptor to make payment on the due date．
Qualified acceptance is a variation of acceptance． Qualified acceptance means that the drawee adds a condition when he accepts the bill． Such an acceptance in express terms varies the effect of the bill as drawn， e．g． the amount payable， the time or place to effect payment， etc． can be changed． For example， a bill with a face value at USD 10 000 may be payable only at USD 9 700 when the drawee makes a qualified acceptance as shown in Figure 4.2．
Figure 4.2 Qualified Acceptance
Qualified acceptance is allowed because the drawee can choose whether to assent to the order to pay by the drawer． This means he can choose to agree， to disagree or to insist on having proof that certain conditions has been fulfilled before he accepts the bill． Qualified acceptance will not make a bill invalid if the bill itself is made unconditional at the time of issue． However， the holder may refuse to take a qualified acceptance， and， if he does so， he may treat the bill as dishonored by non－acceptance．
Payment to a bill can be performed by any debtor to the bill to its creditor． A simple payment may not discharge a bill． Discharge is a term to indicate the end of liability of any debtor to the bill， i．e． the drawee， the acceptor， the drawer or the endorsers， if any．
A bill will be discharged only when the payment is made in due course which includes the following four conditions：
（1） Payment should be made by or on behalf of the drawee or the acceptor and not by the drawer or any endorser． The payment made by the drawer or any endorser is not a final payment because he may claim payment from the drawee or the acceptor．
（2）Payment should be made on or after the maturity date of the bill and cannot be made in advance．
（3）Payment should be made to the holder and if the bill has been transferred．The drawee， if it is a bank， will check the endorsements or at least the sequence of the endorsements before making payment．
（4）Payment should be made in good faith， without knowing that the holder's title thereto is defective．
In short， payment in due course means payment made by the drawee or the acceptor at or after the maturity of the bill to the holder thereof in good faith． When payment is made in due course， it is the final payment and the bill is discharged．Discharge brings an end to the liability and to the movement of the bill．
Dishonor is a failure or refusal to make acceptance on or payment of a bill of exchange when presented to the drawee．
A bill of exchange may be dishonored either by non－acceptance or by non－payment． When a bill is only offered a qualified acceptance， the holder may take it or treat it as dishonored for non－acceptance． Other instances of dishonor may arise when the drawee's deliberate avoidance， his bankruptcy or even his death has made the acceptance or the payment impossible．
When a bill is dishonored， the right of recourse will be accrued to the holder at once． The holder may exercise his right of recourse against his prior endorsers and drawer for payment．
When a bill is dishonored， the holder must give notice of dishonor to the drawer and all the endorsers for whom the holder may wish to make liable． The purpose of giving such notice is to inform the drawer and prior endorsers the default of acceptance or payment so that they may get ready to honor the payment．
There are two methods in which the notice of dishonor may reach the prior parties and the drawer． For the first method， the notice of dishonor must be given on the next business day after the dishonor of the draft by the holder to his direct prior party who shall do so in quick succession till the notice is given to the drawer．Any party failing to do so shall remain liable to the holder and lose his own right of recourse against all his prior endorsers and the drawer． For the second method， the holder gives the notice of dishonor to each endorser and the drawer separately to retain their liability thereon．
The first method is more convenient to the holder because he may have no knowledge of every endorser and he can be fairly certain that each endorser will pass on the notice．
If the drawer or the endorser states besides his name on the bill such wordings as“notice of dishonor excused”， it means that in the event the bill is dishonored，the holder can claim compensation from him without giving him a notice of dishonor．
Protest is a formal certificate given by a Notary party or other authorized person to evidence that a bill of exchange has been dishonored． The protest should be done on the very day or no later than the next business day from the day of dishonor．
After a bill is dishonored and a notice of dishonor is given， the holder hands the bill to a Notary party who will present it again to the drawee to obtain a legal proof of the act of dishonor． If it is dishonored again， the Notary party then will draw a protest and return it to the holder together with the dishonored bill， against which the holder may exercise his right of recourse against the prior parties till the drawer．
The protest fee is to be borne by the drawer and will be charged to him at the time when the claim is made． However， the drawer may indicate besides his name on the bill such wording as“protest waived” or“please do not protest if dishonored” so that he will not be responsible for the protest fee． In this case， the holder may claim payment from him without protest and if the holder still wants the Notary party to draw up a protest， he himself will pay the protest fee．
Right of recourse signifies the right of the holder to claim compensation from the drawer and the endorsers in the event that the bill has been dishonored． It is an act to the bill when the holder exercises this right． The compensation should include the amount payable on the bill with interest， the fees for giving the notice of dishonor and protest and other incurred expenses．
The holder exercises his right of recourse after he has completed the following procedures：
（1）Present the bill to the drawee for acceptance or payment and it is dishonored．
（2）Give notice of dishonor to his prior party and drawer in one business day following the day of dishonor．
（3）Make a protest for non－acceptance or non－payment in one business day following the day of dishonor．
When the drawer or any endorser writes on the bill such words as“without recourse”or“sans recourse”， he will be discharged of his liability on the bill． However， such wordings will affect the negotiability of the bill．
A bill of exchange moves through the acts from its issue to discharge． However， the routes of the movement vary on two important factors：
Firstly，whether or not the bill is negotiated ／ transferred．
Secondly，whether or not the bill is dishonored．
Figure 4.3 shows the basic movement of a bill when the bill is neither negotiated nor dishonored． The movement is simple and it only involves the 3 basic parties and 4 or 5 acts．
Figure 4.3 Basic Movement of Bills of Exchange
Figure 4.4 shows the movement of a bill when it is negotiated and dishonored．Therefore， this movement is more complicated than the first one． The whole process involves more parties and more acts before the bill can finally be discharged．
There can be other routes in the movement of a bill with more parties and more acts involved． It is important to note that any movement begins with the act of issue from the drawer and ends at the act of discharge from the payment of drawee or acceptor．
Figure 4.4 Complicated Movement of Bills of Exchange
A bill of exchange is classified according to the following criteria：
（1） Domestic bill or inland bill． When the three immediate parties， namely the drawer， drawee and payee reside in the same country， the bill is a domestic bill． Normally a domestic bill is drawn and payable in the same country．
（2）Foreign bill． When two of the three immediate parties reside in different countries， the bill is a foreign bill． Normally a foreign bill is drawn in one country and payable in another country．
（1）Sight bill． As its name implies， a sight bill is supposed to be paid when it is first seen by the drawee． It can be expressed as payable at sight， on demand or on presentation． When a bill specifies no time of payment， it is also considered to be a sight one．
（2）Time bill． It is a bill payable at a fixed or determinable future time． It is further classified into payable at a fixed future time， at a fixed future time after date， after sight or after the happening of a certain event which is sure to happen．
（1）Restrictive order bill． It is a bill payable to a specified person only． No negotiation is allowed．
（2）Demonstrative order bill． It is a bill payable to a specified person or his order． Negotiation is allowed and the bill is transferred by endorsement and delivery．
（3）Bearer order bill． It is a bill payable to bearer． Negotiation is allowed and the bill is transferred by mere delivery， no endorsement is required．
（1）Banker's draft or bank draft． It is a draft drawn by a bank on another bank or on its head ／ branch office． When a time banker's draft is accepted by the drawee bank， it is called a banker's acceptance bill． This kind of bill is most preferable in international settlement because it has a bank's undertaking to the bill．
（2）Commercial bill ／ trader's bill． It is a draft drawn by a trader on another trader or a banker． When a time bill drawn on another trader is accepted by this trader， it is called a trader's acceptance bill． If a time bill drawn on a bank is accepted by this bank， it is called a banker's acceptance bill．
（1）Clean bill． Clean bill has no relevant shipping documents attached and is normally used alone in the settlement process． Shipping documents belong to commercial documents and the most popular type in international trade and settlement is bills of lading．
Clean bill may be drawn for many purposes， among which are the collection of payment for services， personal remittance and the transactions that arise in international trade but for which no shipping documents exist． However， clean bill can also be used in international goods．
（2 ） Documentary bill． Documentary bill should be accompanied by the relevant shipping documents in the settlement process to complete an export transaction． Documentary bill is very popular in international goods transaction．
Clean bill and documentary bill may look the same in form． The way to distinguish one from the other is to see whether it is used alone or with shipping documents attached in the settlement process．
In conclusion， it should also be noted that the classification of a bill of exchange is not clear－cut． In fact， any bill of exchange used in international trade is a combination of five types． For example， a bill can be a foreign time banker's acceptance bill payable to a specified person only， though being clean or documentary depends on the way it is used in a particular settlement process．
A holder can get financed through discounting the bills of exchange where he can receive payments in advance before its maturity date．
Discounting a bill of exchange means that a holder of an accepted bill sells the bill to a financial institution at a price less than its face value before it reaches its maturity．
The financial institution performing discounting business is referred to as discount house． The present value the holder receives is the net proceeds． And the balance between the face value of the bill and the net proceeds is the discount interest．
The purpose of the holder to discount the bill is to obtain funds before the due date． In this way his turnover can be speeded up and he is thus financed． On the other hand， the financial institution will also make a profit by discounting bills of exchange and his profit is represented by the discount interest which is what the holder pays in order to be financed．
Figure 4.5 shows the procedure of discounting bills of exchange． When it is completed， the holder is financed and the financial institution makes a profit．
Figure 4.5 Discounting Procedure
（1）The drawer draws a time bill on the drawee and delivers it to the payee ／holder．
（2）The payee presents the bill to the drawee for acceptance．
（3）The drawee accepts the bill and returns it to the payee．
（4）Before due， the payee as the original holder discounts （sells） the accepted time bill to a discount house．
（5）The discount house discounts （buys） this bill and pays the net proceeds to the payee． The discount house becomes the new holder．
（6 ） At maturity， the discount house presents the bill for payment to the drawee．
（7）The drawee pays the face value to the discount house．
The discount interest and the net proceeds will be calculated according to the following formulas：
Discount interest ＝（ Face value × Discounting days × discounting rate） ÷360 （365） days
Net proceeds ＝ Face value － Discount interest
Net proceeds ＝ Face value ×［1 － Discounting days÷360 （365） days × discounting rate］
In the formulas， discounting days are the number of days from the date of discounting to the maturity date． Discounting rate is a percentage set by the financial institution for discounting．
An Example：
A bill for USD 10 000 is payable at 90 days sight． The bill is accepted on June 20，2023 and the holder decides to discount it on June 30，2023.If the discount rate is 10％ and a year is based on 360 days， work out the discount interest and net proceeds．
The Calculation：
When the holder discounts it on June 30， the number of days left to maturity date is 90 －10 ＝ 80 days． So discounting days would be 80 days．
Discounting interest ＝（10 000 × 80 × 10％）÷ 360 ＝ USD 222.22
Net proceeds ＝ 10 000 －222.22 ＝ USD 9 777.78
The example shows that the holder will get USD 9 777.78 when he discounts the bill on June 30，2023.The discount house will receive USD 10 000 when he presents the bill to the drawee for payment on its due date． Therefore， the discounting house has made a profit at USD 222.22．
From the point of view of negotiation of bills of exchange， the discount house acts as an endorsee who receives the bill from the endorser （ the original payee ／holder）． However， the negotiation occurs for the special purpose of providing finance to the endorser through discounting． Normally， if no further negotiation occurs， the discount house becomes the new holder of the bill．
As a holder， the discount house bears the risk of non－payment at maturity．For this reason， the creditworthiness of the acceptor is of great concern to him．Generally speaking， the creditworthiness of a banker is more reliable than that of a trader and a big， first－class bank is better than a small one． As a result， a first－class banker's accepted bill is more preferable and acceptable than a trader's acceptance bill in the discounting market．
Again as a holder， in the event that the drawee defaults the bill by non－payment， the discount house will obtain the right of recourse against his prior endorser and the drawer． When this happens， the financed funds received by the original payee may be called back．
1.After the bill is drawn， the drawer should deliver／ give the bill to____．
A． the payee
B． the drawee
C． the endorser
D． the acceptor
2.Endorsement is applicable when the bill is made out on the____．
A． restrictive order
B． demonstrative order
C． indicative order
D． bearer order
3.When____is／ are made， the title to the bill is not transferred to the endorsee．
A． blank endorsement
B． special endorsement
C． endorsement for collection
D． restrictive endorsement
4.Payment in due course requires that payment is made____．
A． in good faith
B． by the drawee
C． to the holder
D． before maturity date
5.A banker's acceptance bill can be a____and____bill before acceptance．
A． sight， trader's bill
B． time， trader's bill
C． sight， banker's bill
D． time， banker's bill
1.A sight bill must duly be presented for____while a time bill for____ first and then for____on due date．
2.For a bill issued on 31 Jan． 2023 and accepted on 2 Feb． 2023， if the tenor is made as one month after date， the due date is____； or， if the tenor is made as one month after sight， the due date is____．
3.The debtors to bills of exchange are____，____， the acceptor， and the____while the creditors are____， bearer，____and____．
4.____，____and____are to be carried out before the holder can exercises his right of recourse．
5.The present value the holder receives after the bill is discounted is termed as____， which is equal to the face value minus____．
1.Refer to the information in Figure 4.6．
Figure 4.6
（1）Make a complete acceptance on the left－hand space on 11 May 2023．
（2）If the payee wants to transfer the bill to Overseas Union Bank， Singapore in blank endorsement， make such endorsement．
（3） Having made blank endorsement， the bill is sent to Overseas Union Bank， Singapore who wants to covert the blank endorsement to a restrictive one to themselves， make such endorsement．
2.A bill for USD 100 000 is payable at 120 days sight． The bill is drawn， accepted and discounted on 6 Oct 2023.If the discounting rate is at 9％ per annum and the year contains 365 basic days． Write out the formulas and calculate the discount interest and net proceeds．
Company YG， Bangkok imported 2 000 metric tons of cement from Company RD， Chengdu at USD 500 000.Upon arrival of the commodity， Company YG，Bangkok issued drafts at 2 months after sight on itself payable to the order of Company RD， Chengdu for the same contract value． The drafts were also accepted on the issuing date．
10 days later， Company RD， Chengdu imported a batch of timber at USD 455 000 from Company JX， Hanoi． In order to clear its debt， Company RD，Chengdu made endorsement and transferred the drafts to JX Company， Hanoi， with the balance of USD 45 000 settled by bank transfer．
Later， however， disputes occurred between Company YG， Bangkok and Company RD， Chengdu on the fact that Company YG， Bangkok found that 1 ／3 of the goods were inferior in quality．
On due date， JX Company， Hanoi presented the drafts to Company YG，Bangkok for payment， but the drafts were dishonored． The reasons of dishonor given by Company YG， Bangkok to JX Company， Hanoi were of the inferior quality of the cement the former had received from Company RD， Chengdu．
Question： Is it proper and right for Company YG， Bangkok to dishonor the drafts by non－payment？ Give your reasons to support your opinion．
Refer to the following sentence in the act of “discharge”：
Payment should be made in good faith， without knowing that the holder's title thereto is defective．
Questions：
（1）Translate the sentence into Chinese， pointing out the translation skill applied in the translation of “good faith”．
（2）Which of the following Five Ethical Norms from Confucianism，“仁、义、礼、智、信” can be used to translate “good faith”？
（3）Think deeply about the act of “ discharge”， do some research and offer your opinion in the understanding of and confidence in our culture．