Key differences between Bill of Exchange and Promissory Note

Bill of exchange

Bill of exchange is a written, legally binding financial instrument used in trade to ensure payment. It is an order issued by one party (the drawer) directing another party (the drawee) to pay a specified sum of money to a third party (the payee) or to the bearer, either on demand or at a predetermined future date. Commonly used in international trade, it facilitates credit transactions by offering security to the seller and time for the buyer. A bill of exchange requires acceptance by the drawee to become enforceable and is transferable by endorsement or delivery.

Characteristics of Bill of exchange:

1. Written Document

A bill of exchange must be a written instrument to be legally valid. It specifies the terms of payment clearly, ensuring there is no ambiguity or dispute about the obligations.

2. Unconditional Order to Pay

Unlike a promissory note, a bill of exchange represents an unconditional order issued by the drawer to the drawee to pay a specified sum of money to a third party or the bearer of the bill.

3. Parties Involved

A bill of exchange involves three main parties:

• Drawer: The person who creates and issues the bill.
• Drawee: The person directed to pay the amount.
• Payee: The individual or entity entitled to receive the payment.These roles may sometimes overlap depending on the transaction.

4. Specified Amount and Date

The bill clearly mentions the amount to be paid and the due date for payment. This specificity ensures transparency and avoids disputes between the parties.

5. Legal Enforceability

Governed by laws such as the Negotiable Instruments Act, 1881, a bill of exchange is a legally binding document. This enforceability provides assurance to all parties involved.

6. Acceptance by Drawee

A bill of exchange becomes valid and enforceable only when the drawee accepts it by signing. This acceptance signifies their consent to fulfill the payment obligation.

7. Negotiability

A bill of exchange is a negotiable instrument, meaning it can be transferred from one party to another through endorsement or delivery. This feature enhances its utility in trade and commerce.

8. Time or Sight Payment

The payment terms of a bill can either be at sight (on demand) or after a specified time period (time bill). This flexibility accommodates diverse trading needs.

Promissory Note

Promissory Note is a written, legally binding financial document in which one party (the maker) commits to paying a specified sum of money to another party (the payee) either on demand or at a future date. It serves as an acknowledgment of debt and outlines essential details such as the amount, payment terms, and maturity date. Promissory notes are commonly used in business transactions, loans, and financing agreements, offering flexibility and security to both parties. Unlike a bill of exchange, it does not require acceptance by the payee and is a direct obligation of the maker to pay.

Characteristics of Promissory Note:

• Written Document

Promissory note must be a written document to ensure clarity, authenticity, and enforceability. Verbal promises are not legally recognized in this context.

• Unconditional Promise to Pay

It contains an unconditional promise by the maker to pay the specified amount to the payee. There should be no contingencies or conditions attached to this promise.

• Parties Involved

The two main parties in a promissory note are the maker, who promises to pay, and the payee, who is entitled to receive the payment. Additional parties, such as endorsers, may be involved in transferable notes.

• Specified Amount

The promissory note must clearly state the amount to be paid. This ensures there is no ambiguity regarding the sum agreed upon between the parties.

• Payment Terms and Conditions

It outlines the terms of payment, including whether the payment is on demand or at a specific future date. Any applicable interest rates or repayment schedules must also be explicitly mentioned.

• Legal Enforceability

A promissory note is a legally enforceable document governed by relevant laws such as the Negotiable Instruments Act, 1881 in India. It ensures both parties adhere to the terms agreed upon.

• Negotiability

Promissory notes are typically negotiable, allowing the payee to transfer their rights to another party through endorsement or delivery. This feature enhances flexibility and usability in financial transactions.

• Simplicity of Execution

The note requires basic details like the date, amount, maker’s signature, and payee’s name, making it straightforward and simple to execute. The clarity of information minimizes disputes and misunderstandings.

Key differences between Bill of Exchange and Promissory Note