A bill of exchange in the United Kingdom and other British common law countries where one person (the "payor" of "drawer") directs the holder of money (the "drawee") to pay it to a named person (the "payor"). In modern use, the most common form of a bill of exchange is a cheque. The equivalent American term is negotiable instrument.
As a rule, the payor can endorse a bill of exchange to make it payable to another person, or to the bearer.
Under the Law of the United Kingdom, a written instrument is a bill of exchange if it meets these criteria:
- It is an unconditional order in writing;
- It is addressed from one person to another;
- It is signed by the person who gave it;
- It requires the person to whom it is addressed to pay on demand, or at a time that is fixed or can be determined;
- It requires the payment of a certain fixed amount of money; and
- It is payable to a named person, or the bearer of the bill.
If the person to whom the bill of exchanged is addresse to pay is a banker, the bill is a check. If it is not addressed to another person at all, it is a promissory note.
The laws regarding Bills of Exchange are very complex and in most cases allow a holder in due course to enforce the bill of exchange as long as they took possession of it in a legal manner.
The use of Bills of Exchange goes back to at least the 17th century, and probably earlier. They were most likley developed to expedite transactions between English and continental merchants to avoid having them carry around large amounts of cash. A common transaction would be for a British merchant to deliver a bill in France for goods obtained in France, and the bill may have changed hands several times before it wound up in the hands of another British merchant who could return to collect it in England.
Transactions involving Bills of Exchange were developed through the law courts from the 17th to the 19th century, and in 1882 the rules were codified.