Bills of exchange explained: how to create them and avoid the pitfalls

The bill of exchange, also known as a draft, remains a financial instrument commonly used in the French business world. Frequently used in commercial relations, it facilitates payments and organises credit between companies. However, its handling is technical and its precise rules are sometimes misunderstood. A simple error in drafting can have serious consequences.

This legal instrument is based on a mechanism generally involving three people and is subject to strict formalities dictated by the French Commercial Code. Understanding how to create a valid bill of exchange, what information it must contain and what the risks are in the event of failure to do so is therefore essential for any entrepreneur or financial manager. This article sets out these fundamental rules so that you canuse this tool safely.

What exactly is a bill of exchange?

Before detailing the rules of form, let's review the basics of this instrument.

A three-player mechanism

The bill of exchange organises a triangular legal transaction. One person, called the shooter (usually a creditor, such as a seller), gives the order to another person, the drawn (the debtor, as well as the buyer), to pay a certain sum of money, on a specified date, to a third person, the beneficiary (who may be the drawer himself or a third party designated by him).

This mechanism is based on pre-existing relationships:

1. The beneficiary is often a creditor of the drawer (this is the "value supplied", for example the delivery of goods for which the drawer has issued the bill in payment).
2. The drawer is himself a creditor of the drawee (this is the "provision", the debt that the drawee owes to the drawer and which justifies the drawer giving him the order to pay the beneficiary).

Bills of exchange may also only bring together two people, particularly when the drawer designates himself as the beneficiary, as provided for in article L. 511-2 of the French Commercial Code.

A commercial act by nature

A fundamental characteristic of the bill of exchange is its legal nature. According to article L. 110-1, 10° of the French Commercial Code, "The law deems bills of exchange to be commercial transactions between all persons.. This means that a bill of exchange is considered to be a commercial document by its very form, regardless of the status (merchant or not) of the persons signing it or the nature of the underlying transaction (civil or commercial).

This classification has important consequences. Firstly, any dispute relating to a bill of exchange falls, in principle, within the jurisdiction of the commercial courts. Secondly, the specific rules of commercial law apply, particularly as regards evidence and joint and several liability. Even a private individual signing a bill of exchange performs a commercial act, without becoming a trader.

However, there is an important limit to this commerciality by form: the French Consumer Code (article L. 314-21) prohibits and renders void bills of exchange (and promissory notes) taken out by private individuals as part of a consumer credit arrangement.

Why use a bill of exchange?

Despite the emergence of other payment and financing tools, the bill of exchange retains its advantages. It simplifies relationships by potentially replacing two separate payments (drawee to drawer, then drawer to payee) with a single flow. Above all, as it is generally not payable immediately, it is a widely used short-term credit instrument between suppliers and customers. The beneficiary can even circulate it by endorsing it to one of its own creditors before maturity.

However, its use has declined with the development of mechanisms such as the assignment of trade receivables (Dailly Act) and legislative efforts to reduce inter-company payment periods. Its technical nature requires particular attention.

Formal requirements: compulsory information

The law governing commercial instruments such as bills of exchange is characterised by rigorous formalism. This requirement is designed to ensure the legal certainty of transactions and to facilitate the rapid and reliable circulation of the instrument. The very appearance of the bill of exchange must enable each successive holder (the bearer) to know precisely the extent of the commitments made. Banks use pre-printed forms that comply with standards (NF K 11-030) to enable automated processing.

Article L. 511-1, I of the French Commercial Code lists eight items that must appear on the instrument for it to be valid as a bill of exchange. The omission of even one of these details may render the instrument as such null and void.

1. The denomination "bill of exchange This statement must be included in the body of the bill of exchange itself, in the language in which it was drafted. It serves to alert the signatories to the nature and rigour of the commitment they are making.
2. Pure and simple mandate to pay a specific sum This is the payment order given by the drawer to the drawee. This order must not be subject to any conditions. The amount must be clearly stated. If there is a difference between the sum in figures and the sum in words, the sum in words prevails. If several different sums are indicated (in figures or in words), the letter is only valid for the lowest sum, as specified in article L. 511-4 of the French Commercial Code.
3. The name of the person who must pay (the drawee) The identity of the drawee must be clearly indicated. This may be the patronymic or company name for a company. A trade name may suffice if it allows unambiguous identification.
4. Indication of maturity Date: This is the date on which payment must be made. It is essential because it determines the moment when the bearer must present the letter for payment and the starting point for a number of time limits (recourse, prescription). The French Commercial Code (article L. 511-22) authorises only four types of due date:
   • On sight payable as soon as it is presented (within a maximum of one year of its creation, unless the parties agree otherwise).
   • At a certain point in time payable after a certain period from the date of presentation for acceptance.
   • By a certain date payable after a certain period from the date of creation.
   • On a fixed day payable on a specific date indicated on the document. If no due date is indicated, the bill of exchange is considered to be payable on demand (article L. 511-1, III).
5. Indication of the place where payment is to be made This is necessary so that the bearer knows where to present the letter for payment. If the place is not indicated, the law provides a default rule: the place indicated next to the name of the drawee is deemed to be the place of payment and the drawee's domicile (article L. 511-1, IV).
6. The name of the person to whom or to whose order the payment is to be made (the beneficiary) The beneficiary must be named. A bill of exchange cannot be "bearer" or leave the name of the beneficiary blank when it is created (subject to the possibilities of subsequent regularisation, see below).
7. The date and place of creation The date of creation is fundamental for assessing the capacity of the drawer at the time of issue and for calculating certain time limits (presentation, limitation period). The place of creation is less important in domestic law, but remains mandatory. If the place is not indicated, the place designated next to the drawer's name is deemed to be the place of creation (article L. 511-1, V).
8. The signature of the person issuing the letter (the drawer) Signature: This is the expression of the shooter's initial commitment. This signature is absolutely essential. It may be handwritten or affixed "by any non-handwritten method" (stamp, etc.), in accordance with Article L. 511-1, I, 8° of the French Commercial Code. It must appear on the security itself, generally at the bottom of the front.

What happens in the event of an error or omission?

Scrupulous compliance with this information is essential.

The main penalty: the bill of exchange is null and void

Article L. 511-1, II of the French Commercial Code is clear: "A bill of exchange which lacks any of the particulars specified in I shall not be valid as a bill of exchange...".. The omission of even one of the compulsory details will render the deed null and void. as a bill of exchange.

The major consequence is the loss of the protective regime of the law of exchange: no more automatic joint and several liability of the signatories, no more unenforceability of exceptions against a bearer acting in good faith, application of the longer limitation periods under ordinary law, etc. Nullity may be raised by any interested party and even by a judge.

Exceptions: when the law saves the title

Fortunately, the law provides suppletive rules for three specific statements, thus avoiding systematic nullity:

• No maturity date: the bill is payable on demand.
• No place of payment: the place next to the drawee's name applies.
• No place of creation: the place next to the shooter's name applies.

In principle, omission of the other five items (name, mandate to pay, name of the drawee, name of the beneficiary, signature of the drawer) renders them null and void.

Possible conversion: a second life for the null act?

Even if the document is void as a bill of exchange, it does not necessarily lose all legal value. Depending on the particulars present and the circumstances, it may be reclassified:

• Visit promissory noteif it includes the compulsory information.
• Visit acknowledgement of debt on the part of the drawer or the drawee if he had accepted it.
• Visit prima facie evidence in writing as part of an action based on the initial commercial relationship.

Regularisation of incomplete drafts: a limited solution

Under strict conditions, case law allows an initially incomplete bill of exchange to be regularised. a posterioriIn other words, it must be completed before it is presented for payment. This generally presupposes an agreement (even tacit, arising from custom, for example) between the parties concerned (drawer, drawee, acceptor, bearer).

However, this is not always possible. Case law distinguishes between "substantial" information, the absence of which irrevocably vitiates the instrument (such as the drawer's signature), and information, the omission of which could be remedied (such as the name of the beneficiary, under certain conditions). Completing a draft without agreement or contrary to an agreement may constitute an improper regularisation, unenforceable against the person who did not consent to it.

Alteration of a statement after signature

What happens if an entry is modified after that some have signed? Article L. 511-77 of the French Commercial Code provides the answer: "signatories subsequent to this alteration are bound by the terms of the altered text; earlier signatories are bound by the terms of the original text".. Each signatory is bound only by the text as it existed at the time of signing.

Optional information: adapting the bill of exchange

In addition to the mandatory information, the parties may insert various optional clauses to adapt the effects of the bill of exchange to their needs, provided that they do not contravene the essential rules of exchange law. These clauses may be added at inception or during circulation (in which case they are only binding on subsequent signatories).

Among the most common:

• Direct debit clause (article L. 511-2, paragraph 4): This specifies that the bill is payable at the domicile of a third party (often a bank) and not at the domicile of the drawee. This facilitates bank payments.
• The "free of charge" or "free return" clause (article L. 511-43): It exempts the bearer from having a protest drawn up in the event of non-payment or non-acceptance in order to preserve his recourse. However, it does not exempt the bearer from presenting the draft for payment.
• The "not to order" clause (article L. 511-8, paragraph 2): It prohibits the transmission of bills of exchange by endorsement. The instrument can then only circulate by way of an ordinary assignment of debt.
• The value clause provided This indicates the nature of the beneficiary's claim on the drawer (e.g. "value in goods").
• The "no guarantee" clause The drawer may waive the acceptance guarantee, but never the payment guarantee (article L. 511-6, paragraph 2).
• The interest clause Possible only for letters payable on demand or within a certain time (article L. 511-3).

Basic conditions: capacity and power

In addition to the formal requirements, the validity of the commitment made on a bill of exchange depends on the capacity and authority of the signatories.

The ability to issue or sign a bill of exchange

As signing a bill of exchange is a commercial act, in principle you need to have commercial capacity to make a valid commitment.

• Minors : Whether they are emancipated or not, minors may not sign bills of exchange (except with very specific and recent judicial authorisation for emancipated minors who are traders). Their signature renders their commitment null and void.
• Protected adults : The rules vary according to the type of protection (safeguard de justice, curatorship, guardianship). Assistance or representation by the curator or guardian may be required, or may not be sufficient.
• Consumers : As mentioned above, the issue or endorsement of a bill of exchange is prohibited and void in the context of consumer credit.

Important information Visit principle of independent signatures (article L. 511-5) means that the nullity of the undertaking of a signatory (for incapacity, for example) does not affect the validity of the undertakings of the other signatories on the same security.

Acting on behalf of others: representation and drawing on one's own resources

A bill of exchange is often signed by one person acting on behalf of another.

• Drawing by proxy : One person (the agent) signs the draft, clearly indicating that he is acting in the name and on behalf of another (the principal). In principle, a special mandate is required. If the agent acts without authority or exceeds his powers, he is personally bound by the exchange undertaking (article L. 511-5, para. 3). The theory of apparent authority may sometimes apply.
• The draw for : Here, the drawer (known as the "account drawer") acts on the instructions of a "principal", but without disclosing this representation on the instrument. The drawee appears as the creator of the draft and makes a personal commitment to the third-party bearers. The principal, although not the signatory, must provide the deposit (article L. 511-2, para. 3 and L. 511-7, para. 1). This mechanism is used for reasons of discretion or to facilitate collection by an intermediary (e.g. a bank).

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Creating a bill of exchange requires a great deal of precision if it is to be effective and secure. Missing or incorrect wording can have serious consequences. To ensure the security of your commercial transactions, understand the implications of each clause and managing the unexpected, our firm can advise you.

Sources

• Commercial Code, in particular articles L. 110-1, L. 511-1 to L. 511-8, L. 511-15, L. 511-22, L. 511-43, L. 511-77.
• Consumer Code, in particular article L. 314-21.
• Civil Code, in particular articles 1342-9, 1353, 1359.