Bills of exchange: operation and legal issues

Bills of exchange are a major instrument in commercial transactions. This negotiable debt instrument enables companies to obtain deferred payment of their invoices while offering the possibility of mobilising their receivables before the due date. Despite developments in payment methods, it remains a tool favoured by economic operators. Understanding how it works and its legal implications is essential for securing your commercial transactions.

What is a bill of exchange?

A bill of exchange, also known as a draft, is a document in which one person (the drawer) instructs another (the drawee) to pay a specified sum on a specified date to a third party (the beneficiary) or to his order.

It brings together three main players:

• The drawer: generally the seller of goods or the service provider
• The drawee: the debtor buyer or customer
• The beneficiary: the creditor who will receive the payment (often the drawer himself)

This triangular legal transaction is grafted onto a pre-existing commercial relationship between the drawer and the drawee. In practice, a supplier (drawer) who has granted his customer (drawee) an extension on payment issues a bill of exchange to formalise this debt and possibly to mobilise it.

By way of derogation from the classic scheme, article L. 511-2, paragraph 1 of the French Commercial Code authorises a bill of exchange to bring together only two persons, where the drawer is also the beneficiary.

Mandatory information on bills of exchange

Bills of exchange are subject to strict formalities. Article L. 511-1 of the French Commercial Code lists eight compulsory items of information:

1. The term "lettre de change" inserted in the text itself
2. Pure and simple mandate to pay a specific sum
3. The name of the drawee (the person who must pay)
4. Indication of maturity
5. Indication of the place of payment
6. The name of the beneficiary
7. The date and place where the letter was created
8. The signature of the drawer

If even one of these details is missing, the instrument will be disqualified as a bill of exchange. However, article L. 511-2 of the French Commercial Code provides for a number of presumptions to compensate for certain omissions. For example, in the absence of any special indication, the place designated next to the name of the drawee is deemed to be the place of payment.

This formalism is not just an administrative constraint. It constitutes an essential element of protection for the parties, in particular by giving the title its literal character, which authorises the bearer to rely solely on its appearance.

The provision: the central element of the bill of exchange

The advance represents the drawer's claim against the drawee, which justifies the issue of the bill of exchange. As stated in article L. 511-7 of the French Commercial Code, it is the drawer's responsibility to provide the provision to the drawee.

In French law, unlike in other legal systems, the provision plays a key role:

1. It is automatically transferred with the endorsement of the bill of exchange.
2. It gives the holder an exclusive right
3. It remains in force even in the event of insolvency proceedings against the drawer.

This mechanism offers considerable protection to the bearer, as the Court of Cassation has pointed out on several occasions. In practice, if the drawee does not honour the bill on the due date, the bearer can take direct action to obtain the provision.

However, it is important to note that before acceptance by the drawee, the provision is not set in stone. It may change depending on the commercial flows between the drawer and drawee, as you can read in our article on commercial paper: a complete guide for companies.

Circulation of bills of exchange

Negotiability is one of the fundamental characteristics of bills of exchange. It circulates mainly by endorsement, a technique by which the bearer transfers his rights to a third party by affixing his signature to the back of the document.

The endorsement transmits to the new holder :

• Ownership of the bill of exchange
• Rights under the title
• The provision attached to the draft

Article L. 511-8 of the French Commercial Code specifies that endorsement must be pure and simple. Any condition is deemed unwritten. Endorsements may be made in favour of the drawee, the drawer or any other debtor, all of whom may endorse the letter again.

The bearer benefits from enhanced protection under the principle of the unenforceability of defences, set out in article L. 511-12 of the French Commercial Code. This principle means that the debtor being sued cannot set up against the bearer in good faith any defences arising from its personal relationship with the drawer or previous bearers.

This rule encourages the circulation of bills of exchange by securing the position of the rightful bearer. However, certain exceptions apply, in particular in cases of bad faith on the part of the bearer or where the instrument has apparent defects.

Acceptance of the bill of exchange

Acceptance is the act by which the drawee expressly undertakes to pay the bill of exchange on the due date. Prior to acceptance, the drawee is not bound by the bill of exchange. It is the acceptance that makes the drawee the principal debtor of the bill.

Under article L. 511-15 of the French Commercial Code, acceptance must be written on the bill of exchange itself. The drawee then becomes the "drawee acceptor" and can no longer invoke against the bearer the defences that it could have raised against the drawee.

Acceptance offers the bearer several advantages:

• It transforms a simple promise to pay into a firm commitment by the drawee
• It eliminates the risk of payment refusal based on lack of provision
• It simplifies recourse in the event of non-payment

The drawer may make acceptance compulsory by inserting a "presentment for acceptance" clause in the letter. Conversely, he may prohibit acceptance by means of an appropriate clause, except for letters payable within a certain sight period.

Banking practice emphasises the importance of acceptance as a criterion for assessing the quality of risk when discounting. This aspect is also discussed in our article on promissory notes: using them to secure your receivables.

Thelevé bill of exchange: modernising the instrument

Faced with the constraints of processing bills of exchange manually, the banking system has developed the lettre de change-relevé (LCR), which exists in two forms:

1. Paper LCR: This is still a physical document, but is processed by computer to centralise information.
2. Magnetic CRL: This is a completely paperless version, available only as a computer record.

While the paper LCR is a genuine commercial paper that complies with the requirements of Article L. 511-1 of the French Commercial Code, the legal status of the magnetic LCR is more uncertain. Because it is not paper-based, it does not meet the formal requirements of traditional exchange law.

This legal difficulty should be resolved by Law No. 2024-537 of 13 June 2024 ("Attractiveness" Law), which introduces the concept of an electronic transferable document, as detailed in our article on the "Attractiveness" Law. dematerialisation of commercial paper: Attractivité 2024 law.

Defending the rights of the holder

In the event of non-payment on the due date, the bearer has recourse against the signatories of the bill of exchange. However, these remedies are subject to strict conditions:

1. Proof of non-payment by protest, a notarised deed drawn up by a bailiff
2. Respecting the legal time limits for exercising these remedies
3. The absence of a "free return" clause dispensing with the need for a protest

Article L. 511-41 of the French Commercial Code specifies that the bearer may exercise his rights of recourse against the endorsers, the drawer and other debtors:

• On the due date, if payment has not been made
• Before maturity, in certain specific cases (refusal of acceptance, insolvency proceedings, etc.)

These recourses benefit from the principle of joint and several liability set out in article L. 511-44: all signatories are jointly and severally liable towards the holder, who may take action against all the debtors individually or collectively, without observing the order in which they have committed themselves.

The rigour of these rules is explained by the need to maintain confidence in the circulation of commercial paper. Particular vigilance is required with regard to the time limits for action, on pain of forfeiture.

How to dispute a bill of exchange

A bill of exchange can be contested on several grounds:

Defect in form

Failure to comply with the mandatory information will result in the document being disqualified as a bill of exchange. However, even when disqualified, the document can still be used as an acknowledgement of debt subject to ordinary law.

No or insufficient provision

The non-accepting drawee may refuse payment on the grounds of lack of or insufficient funds. This defence is particularly relevant where the goods have not been delivered or are defective.

Vitiated consent

The signing of a bill of exchange does not exclude the application of the general rules relating to defects in consent (error, fraud, violence). However, these can only be invoked against a bearer acting in bad faith.

Fictional or of convenience character

As explained in our article on effects of convenience: legal risks and penaltiesIn the case of a bill of exchange issued without real cause or with the intention of deceiving third parties, it may be declared null and void.

In practice, the dispute must generally be raised in the context of legal proceedings, following a refusal to pay. The competent court is the Commercial Court when the bill of exchange is commercial in form or in the capacity of the parties.

The international aspect of the bill of exchange

International bills of exchange raise specific issues of conflict of laws. The Geneva Conventions of 1930 and 1931 attempted to harmonise the applicable rules, but not all countries have acceded to them.

These international aspects, which are particularly important in world trade, are developed in our article on conflicts of laws relating to commercial paper: a practical guide.

Faced with the complexity of the rules applicable to bills of exchange, particularly in an international context, the assistance of a lawyer in commercial paper law often proves decisive in securing your transactions and defending your interests.

Our firm can help you with all issues relating to bills of exchange: drafting, disputing, collection or preventive advice. Do not hesitate to contact us for a personalised analysis of your situation.

Sources

• French Commercial Code, articles L. 511-1 to L. 511-81
• Uniform Bills of Exchange and Promissory Notes Act (Geneva Conventions)
• Law no. 2024-537 of 13 June 2024 aimed at increasing business financing and the attractiveness of France
• RIPERT G. and ROBLOT R., Traité de droit des affaires, tome 2, LGDJ
• GIBIRILA D., Effet de commerce, Répertoire de droit commercial, Dalloz, January 2023