Bills of exchange

The bill of exchange - or draft - is the’paper instrument the most common form of payment used in business-to-business relations in France. A deferred payment instrument par excellence, it enables a supplier to give its customer a written order to pay a specified sum of money on an agreed due date, while in the meantime mobilising the receivable with its bank. This age-old mechanism is still very much in evidence in B2B relationships, but its technicalities should not be underestimated: a missing reference invalidates the instrument, and a missed presentation deadline can result in the loss of all recourse.

This guide covers the entire cycle - from creation to incident management - with articles from the French Commercial Code, practical pitfalls and case law from the Cour de cassation. It covers commercial paper in their most structured form: those that commit all signatories jointly and severally.

What is a bill of exchange?

A three-player mechanism

The bill of exchange organises a triangular legal transaction. The shooter - usually the creditor, a supplier - gives the written order to the drawn - its debtor - the customer - to pay a specified sum on a date agreed in advance. beneficiary or bearer, who may be the drawer himself or a third party.

Behind this schema lie two pre-existing relationships. The first links the shooter to the target: it is the provision, This is the claim that the drawer has on his customer and which justifies the order to pay. The second links the beneficiary to the drawer: it is the value provided, The bill of exchange replaces these two flows with a single payment order. The bill of exchange replaces these two flows with a single payment order.

The letter may also link only two people, in particular when the drawer designates himself as the beneficiary, as authorised by article L. 511-2 of the French Commercial Code. This is often the case in banking practice.

A commercial deed in form

A bill of exchange is a commercial document in form, regardless of the parties. Article L. 110-1, 10° of the French Commercial Code states that "The law deems bills of exchange to be commercial transactions between all persons.. Whether they are traders or not, all signatories are performing a commercial act.

The consequences are immediate: any dispute arising from a bill of exchange will in principle be heard by the commercial court, the rules of commercial evidence will apply, and the joint and several liability of the signatories will apply. An individual who signs a bill of exchange does not become a merchant, but his or her commitment is governed by commercial law.

An important limitation: the French Consumer Code (article L. 314-21) prohibits and renders null and void bills of exchange taken out by private individuals as part of consumer credit. Bills of exchange are strictly reserved for business relationships.

What does it actually do?

The bill of exchange replaces two cash flows with a single payment order and secures inter-company credit. By granting the customer a payment period while allowing the supplier to mobilise its receivables, it reconciles the interests of both parties. Before the due date, the beneficiary can discount the bill of exchange with its bank - obtain the funds immediately in return for a commission - or pass it on to a creditor by endorsement. The mechanics of discounting is inextricably linked to that of the slave trade.

Its use has declined with the development of the assignment of trade receivables (Dailly Act) and the legal ceilings on inter-company payment periods introduced by the LME Act. However, in repeated commercial relationships between companies, particularly in the industrial and agri-food sectors, the draft remains a central tool for managing cash flow and financing working capital requirements.

The 8 compulsory items on bills of exchange

Cambiary law is dominated by rigorous formalism. Each successive bearer must be able to know, simply by reading the instrument, the exact extent of his or her rights and commitments. Article L. 511-1, I of the French Commercial Code lists eight items whose absence may invalidate the instrument.

A few practical details. The order to pay must be pure and simple - no conditions may be attached. If the amount appears both in figures and in words and there is a discrepancy, the amount in words prevails (article L. 511-4). The beneficiary must be named: a «bearer» draft is not valid under French law.

Penalties for omissions

Article L. 511-1, II is unequivocal: the defaulting title «not valid as a bill of exchange». The consequence is the loss of the protective regime of the law of exchange: no more automatic joint and several liability between signatories, no more unenforceability of defences against a holder acting in good faith, and a return to the limitation periods of ordinary law.

However, the law provides for three suppletive rules. The absence of a due date is deemed to be a due date at sight. The absence of a place of payment is replaced by the place indicated next to the name of the drawee. The absence of a place of creation is replaced by the place next to the drawer's name. For the other five indications - name, mandate to pay, name of the drawee, name of the beneficiary, signature of the drawer - omission in principle invalidates the instrument.

A document that is invalid as a bill of exchange does not necessarily lose all value. Depending on the particulars present, it may be reclassified as a promissory note, an acknowledgement of debt, or serve as prima facie evidence in writing. Under strict conditions, case law also allows an initially incomplete bill to be regularised before it is presented for payment, provided that this regularisation has been agreed between the parties.

Optional information for adapting the title

In addition to the compulsory terms, the parties can insert clauses to adapt the contract to their needs. The direct debit clause (article L. 511-2, paragraph 4) designates a bank as the place of payment, which facilitates interbank payments and is the most common practice. The free of charge« or »free return« clause» (article L. 511-43) exempts the bearer from having a protest drawn up in the event of non-payment in order to preserve his rights of recourse - it does not, however, exempt him from presenting the draft within the time limit. The not to order« clause» (article L. 511-8, paragraph 2) prohibits transmission by endorsement: the instrument can then only circulate by ordinary assignment of debt, with all the exceptions that this allows the debtor.

From creation to payment: the draft cycle

The provision: the drawer's claim on the drawee

The provision is the claim that the drawer has on the drawee and which justifies the issue of the bill. Unlike cheques, the provision in a bill of exchange does not have to exist at the time of issue: it must exist on the due date, the date on which payment will be required. This feature is fundamental to cash management: a supplier may issue a bill of exchange at the time of delivery, even though the price is not yet due.

Acceptance by the drawee creates a presumption of provision. However, in the direct relationship between the drawer and the drawee acceptor, the presumption may be rebutted by evidence to the contrary (Cass. com., 2 July 1974, no. 73-12.450). On the other hand, with regard to a bearer acting in good faith, the defence of lack of provision is unenforceable - unless the bearer has acted knowingly in fraud of the drawee's rights (Cass. com., 18 Oct. 1994, no. 92-17.309).

Acceptance: the drawee's irrevocable commitment

Acceptance is the act by which the drawee undertakes to pay the bill on the due date. It is evidenced by the word «accepted» or simply by the drawee's signature on the front of the bill. Once it has been affixed, it is irrevocable: the drawee who has accepted can no longer withdraw by deleting his signature before presentation for payment.

In principle, presentation on acceptance is optional for the bearer. It becomes compulsory in three cases: for bills with a certain sight period (the period runs from acceptance or protest in the absence of acceptance); when the drawer has expressly stipulated it on the bill; and when a clause «against acceptance» appears in the underlying commercial contract.

In practice, it is always preferable to have the draft signed by the customer before handing it over to the bank. An unaccepted draft only binds the drawer and endorsers, not the drawee - which considerably reduces the security of the instrument.

LCR (lettre de change relevé): the dematerialised version

La bill of exchange statement (LCR), standardised by the CFONB (Comité français d'organisation et de normalisation bancaires), is the electronic version of the bill of exchange. The drawer fills in a standardised file that is sent to his bank, which transmits it electronically to the drawee's bank. On the due date, the bill is debited automatically via the interbank system.

The LCR has the same legal effects as a paper draft, but considerably simplifies operational management: no physical circulation of the document, no postal delays, automatic collection on the due date. In the event of non-payment, the bank sends a letter of non-payment which serves as a protest for the preservation of recourse.

Today, LCRs account for the vast majority of commercial paper processed in France. Companies that continue to use paper drafts are exposed to longer processing times and risks of loss or alteration of the document.

Guarantees and circulation of the draft

Endorsement: transfer or guarantee

Bills of exchange are transferable by endorsement - the signature on the back of the document, together with the name of the beneficiary. This is one of the major features of the law of bills of exchange: with each endorsement, the successive bearer acquires a right of his own to the instrument, independent of any exceptions that the drawee might raise against previous bearers.

There are two main forms of endorsement. Translative endorsement transfers ownership of the claim to the endorsee, who becomes the new rightful holder with all the related rights. Endorsement of power of attorney (or «by power of attorney») instructs the endorser to cash the bill on behalf of the endorser - this is the mechanism used in bank discounting.

The Court of Cassation points out that the status of legitimate bearer presupposes a regular series of endorsements: an endorsement affixed after the protest does not confer this status, and the alleged bearer is then subject to the debtor's objections (Cass. com., 24 Nov. 1983, no. 82-13.674). Similarly, a clause «not to order» expressly stipulated in the instrument precludes any transmission by endorsement: acceptance by the drawee does not constitute agreement to a subsequent endorsement (Cass. com., 9 Apr. 2013, no. 12-14.133).

Downstream: the collateral guarantor

A guarantee is the most important form of collateral security. A third party - the guarantor - undertakes to pay the bill if the guaranteed debtor fails to do so. It is evidenced by the words «bon pour aval» ("good for guarantee") followed by the signature on the document or on an allonge, indicating the person guaranteed.

The guarantor is liable in the same way as the person for whom he has given a guarantee (article L. 511-21 of the French Commercial Code). The guarantor's liability is autonomous: even if the guarantor's undertaking is null and void for a reason other than a formal defect, the guarantee remains valid. It is the equivalent of a joint and several guarantee, with the difference that the guarantor cannot invoke the benefit of discussion or any exception based on fundamental relationships.

In practice, the guarantee is widely used in relations with debtors whose creditworthiness is uncertain, or when the bank discounting the bill requires additional security.

Due date and presentation for payment

The four types of authorised maturity

Article L. 511-22 of the French Commercial Code authorises only four forms of maturity. Any other form is null and void.

• On a fixed day A specific calendar date is written on the title. This is the most common form.
• By a certain date payment is due after a period calculated from the creation date (e.g. «90 days from date»).
• At a certain point in time the period runs from the date of presentation for acceptance, or of the protest in the absence of acceptance.
• On sight the bill is payable on presentation to the drawee, within a maximum period of one year from the date of its creation (article L. 511-23).

If the due date falls on a public holiday, payment may only be demanded on the next working day (article L. 511-79). A fundamental principle: the debtor of a bill of exchange may not obtain a judicial payment extension - grace periods are excluded (article L. 511-81).

Presentation for payment: an active obligation on the part of the bearer

Unlike an ordinary debt, the bearer of a bill of exchange must actively present the instrument for payment. In the case of a fixed-date, time-dated or sight draft, presentation must be made on the due date itself or on one of the next two business days (article L. 511-26). Sight drafts must be presented within one year of their creation.

Presentation is made at the place of payment indicated on the bill - the drawee's domicile or the domicile of the direct debit third party (generally the bank). For LCRs, interbank teletransmission is equivalent to presentation for payment.

The pitfall of negligence on the part of the wearer

This is one of the most costly traps in the law of bills of exchange. The bearer who fails to present the draft within the legal time limit loses his rights of recourse against the endorsers and against shooter who has provided provision (article L. 511-49). He retains his rights of action against the accepting drawee - who remains liable even without protest - and against the drawer who has failed to provide a deposit.

In practice: if the discounting bank presents the bill late and thereby loses recourse against the endorsers, it is liable to the drawer - unless it can demonstrate an unforeseeable event constituting force majeure (Cass. com., 12 June 1979, no. 77-14.980).

In the event of non-payment: protest, recourse and joint and several liability

The protest: officially recording the refusal

The protest is the act by which a commissioner of justice officially notes that payment has been refused - or that acceptance has been refused. The protest for non-payment must be drawn up within ten working days of the due date; the protest in the absence of acceptance, before the expiry of the period for presentation for acceptance. Failure to pay by the due date triggers this procedure.

The drawee's name is then entered in the public protest file kept by the commercial court registry - a concrete and potentially serious consequence for the debtor's Banque de France rating and commercial reputation. A company director registered in the protest file will see his or her ability to obtain extended payment terms from suppliers and bank financing considerably reduced.

The «no cost» or «no cost return» clause (article L. 511-43) exempts the bearer from having a protest drawn up in order to exercise its rights of recourse. Where it is pre-printed on the draft, the drawer's signature alone is sufficient to validate it - a second specific signature under the clause is not required (Cass. com., 2 Nov. 2016, no. 15-12.399).

Currency remedies: joint and several liability of signatories

This is the great strength of the bill of exchange compared with ordinary means of payment. All the signatories to the bill of exchange - drawer, endorsers, guarantors - are jointly and severally liable towards the rightful bearer. The latter may act against all of them simultaneously or successively, without order of preference, for the amount of the bill plus interest, protest costs and collection costs.

The unenforceability of defences is the rule in the law of exchange: the bearer in good faith receives a right of his own to the instrument, independent of the defects affecting the relationship between the previous signatories. A drawee who has paid a debt to the drawer cannot enforce that payment against the bearer of the discounting bank. The only exception is a bearer who has acquired the instrument with full knowledge of the facts and in fraud of the debtor's rights (Cass. com., 18 Oct. 1994, no. 92-17.309).

The prescription period

The limitation periods under the law of exchange are short and mandatory - they cannot be extended by the court.

• 3 years from the due date for actions by the bearer against the accepting drawee (article L. 511-78 of the French Commercial Code).
• 1 year from the protest date (or the due date in the case of a «no cost» clause) for the bearer's actions against the endorsers and against the drawer.
• 6 months from the date of payment for recourse actions by the endorsers against each other and against the drawer.

The cambium prescription is distinct from the commercial prescription of common law. It can only be interrupted under the conditions of ordinary law (summons to court, acknowledgement of debt by the debtor). A signatory who fails to have the instrument returned to him by paying for it runs the risk of having to pay a second time if the instrument continues to circulate (Cass. com., 11 Jan. 1972, no. 70-10.166).

Stop payment

Unlike cheques, opposition to payment of a bill of exchange is limited to two cases: loss or theft of the document. The debtor cannot oppose payment on the grounds of a dispute with the creditor over the fundamental contract - this is precisely what the law on bills of exchange is designed to prevent. Any abusive objection gives rise to liability on the part of the person making it.

Bills of exchange, promissory notes and cheques: the essential differences

The main difference between the bill of exchange and the promissory note In a bill of exchange, the creditor takes the initiative and gives an order to his debtor; in a promissory note, the debtor himself undertakes to pay, in the form of an acknowledgement of debt under a bill of exchange. This distinction has practical implications: in the event of a dispute over the fundamental relationship, the bill of exchange offers greater protection to the creditor, as exceptions are not enforceable from the moment of acceptance. The decisive advantage of the bill of exchange over the bank cheque is that the sum of money owed does not have to be funded immediately, making it the deferred payment method par excellence in B2B commercial relationships.

Frequently asked questions

What is the difference between a bill of exchange and a promissory note?

A bill of exchange involves three parties: the drawer (creditor) instructs the drawee (debtor) to pay the beneficiary. The promissory note involves only two: the subscriber (debtor) undertakes directly to pay the beneficiary. In the bill of exchange, the initiative comes from the creditor; in the promissory note, it comes from the debtor himself, in the form of a promise to pay.

What is the difference between a bill of exchange and a cheque?

Cheques require funds to exist on the day of issue and are payable immediately on demand. Bills of exchange require only that funds be available on the due date - this is what makes them a credit instrument. Unlike some bills of exchange, cheques cannot bear interest. In practice: the bill of exchange is a means of deferring payment, the cheque a means of immediate payment.

What is the guarantee of a bill of exchange?

An aval is a guarantee given by a third party who undertakes to pay the bill if the principal debtor fails to do so. It is evidenced by the words «bon pour aval» ("good for aval") followed by the signature on the document. The guarantor is bound in the same way as the person for whom he has given his guarantee. His liability is autonomous: even if the principal undertaking is null and void (unless there is a formal defect), the endorsement remains valid. This is the equivalent of a joint and several guarantee.

What happens if the bill of exchange is not paid on the due date?

The bearer must first record the refusal to pay by means of a protest - a document drawn up by a court official within ten working days of the due date - unless a «no cost» clause is included on the document. He may then take legal action against all the signatories (drawer, endorsers, guarantors), who are jointly and severally liable. The limitation period is three years against the accepting drawee and one year against the other signatories from the date of the protest. The drawee's name is entered in the public protest file.

Does the provision have to exist at the time of issue?

No. Unlike cheques, the provision - the drawer's claim on the drawee - must exist on the due date, not at the time of issue. This feature is at the heart of the draft's credit function. On the other hand, acceptance by the drawee creates a presumption of provision. This presumption can be rebutted in the direct relationship between the drawer and the drawee, but cannot be invoked against a bearer acting in good faith.

What is a lettre de change relevé (LCR)?

The LCR is the dematerialised version of the bill of exchange, standardised by the CFONB and transmitted electronically between banks. It has the same legal effect as a paper draft. The drawer fills in a file that is sent to his bank; on the due date, the bill is debited automatically. In the event of non-payment, a letter of default replaces the traditional protest. Today, LCRs account for the bulk of commercial bills processed in France.

Legal sources

Applicable texts

• Commercial Code, art. L. 511-1 to L. 511-81 - Bill of exchange
• French Commercial Code, art. L. 110-1, 10° - Commercial deeds by form
• Consumer Code, art. L. 314-21 - LC ban on consumer credit
• French Commercial Code, art. L. 512-1 to L. 512-8 - Promissory note

Case law

• Cass. com., 18 Oct. 1994, no. 92-17.309 - Lack of provision enforceable against a bearer acting in bad faith
• Cass. com., 9 Apr. 2013, no. 12-14.133 - «Not to order» clause: endorsement excluded by express mention
• Cass. com., 2 Nov. 2016, no. 15-12.399 - Pre-printed «no charge» clause: drawer's signature sufficient
• Cass. com., 24 Nov. 1983, no. 82-13.674 - Legitimate holder status: regular sequence of endorsements
• Cass. com., 12 June 1979, no. 77-14.980 - Late protest attributable to the bank: force majeure