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Negotiable Instruments: Requirements of a Valid Bill of Exchange under the Bills of Exchange Act 1949
Case Scenario
Ali exports machinery from Malaysia to a company called Maha Syndicate. To secure payment, Ali draws three bills of exchange totaling RM69,750.28 stating:
“At 60 days after sight D/A on arrival of steamer, pay this first of exchange to the order of Amsterdamsche Bank NV Bijbank, Rotterdam for collection.”
Maha Syndicate accepts the bills by signing them.
Later, Maha Syndicate argues that the documents are not valid bills of exchange because payment appears to depend on the arrival of the steamer, making the order conditional.
The court must decide whether the bills are valid under the Bills of Exchange Act 1949.
Facts
Q1: Who drew the bills of exchange?
A: Ali (exporter).
Q2: Who accepted the bills?
A: Maha Syndicate.
Q3: What wording caused the dispute?
A: “D/A on arrival of steamer.”
Q4: What did Maha Syndicate argue?
A: Payment was conditional upon the arrival of the steamer.
Q5: What does “D/A” mean?
A: Documents against acceptance.
Q6: What did the court decide?
A: The bills were valid bills of exchange.
Held by the Court
The court held that:
✔ the bills were valid bills of exchange.
Section 3(1): Definition of a Bill of Exchange
Section 3(1) of the Bills of Exchange Act 1949 states:
“A bill of exchange is an unconditional order in writing, addressed by one person to another, signed by the person giving it, requiring the person to whom it is addressed to pay on demand or at a fixed or determinable future time a sum certain in money to, or to the order of, a specified person or to bearer.”
This means a valid bill must:
✔ be in writing,
✔ contain an unconditional order,
✔ be signed by the drawer,
✔ direct another person to pay,
✔ involve a sum certain in money, and
✔ be payable on demand or at a fixed/determinable future time.
Section 3(2): Additional Acts Make the Instrument Invalid
Section 3(2) states that:
an instrument is not a valid bill if it requires an act other than payment of money.
Invalid Example
“Pay RM10,000 and deliver 10 bags of rice.”
This is invalid because:
❌ not a bill of exchange.
Section 3(3): Unconditional Order Explained
Section 3(3) says an order remains unconditional even if it:
Example of Valid Unconditional Order
“Pay RM20,000 and debit Bala’s Maybank account.”
This remains valid because:
Conditional Orders
A bill becomes invalid if payment depends on an uncertain event.
Invalid Example
“Pay RM10,000 if my daughter gets married.”
This is conditional because:
❌ invalid bill.
Certain Future Events
Some future events are treated as sufficiently certain.
Valid Example
“Pay RM15,000 three days after my father’s death.”
Although the date is unknown:
✔ valid bill of exchange.
In Writing
A bill must be in writing.
Under the Interpretation Acts 1948 and 1967, writing includes:
✔ be printed or handwritten,
✔ be written in ink or pencil,
✔ even be written on unusual materials like cloth or wood.
However, in practice:
Example
In Arab Bank Ltd v Ross:
Addressed by One Person to Another
A bill must involve:
Parties
Party
Meaning
Drawer
Person creating the bill
Drawee
Person ordered to pay
Payee
Person receiving payment
Acceptor
Drawee after acceptance
Important Rule
A bank draft drawn by a bank on itself is generally not a bill under section 3(1).
However, section 5(2) allows the holder to treat it as:
✔ either a bill of exchange, or
✔ a promissory note.
Drawees
A bill may be addressed to:
✔ two or more drawees jointly,
but not:
❌ in the alternative, or
❌ in succession.
Invalid Example
“Payable by Ali or Bala.”
This creates uncertainty.
Signature Requirement
The drawer’s signature is essential.
Under section 23:
no person is liable unless they signed the bill.
Without signature:
❌ no liability arises.
Payment on Demand or Determinable Future Time
Under section 10(1), a bill is payable on demand if it says:
Example
Ordinary cheques are payable on demand because:
Determinable Future Time
Section 11 states payment may occur:
✔ at a fixed future date, or
✔ after a certain future event guaranteed to happen.
Valid Example
“Pay 30 days after my father’s death.”
Death is certain.
Invalid Example
“Pay if I win the lottery.”
Winning may never happen.
Sum Certain in Money
A bill must involve:
✔ money only,
✔ a certain or calculable amount.
Under section 9(1), the amount remains certain even if:
Payable to Order or Bearer
A bill may be payable:
✔ to a named person (“order”), or
✔ to bearer.
Bearer Bill
A bearer bill:
“Pay bearer RM10,000.”
Order Bill
An order bill:
“Pay Ali or order RM10,000.”
Indorsement in Blank
An indorsement means signing the back of the bill.
If the holder signs without naming the next person:
Example
Ali signs the back without naming anyone.
Result:
✔ whoever possesses the bill may claim payment.
Non-Existent Payee
Sometimes the named payee does not actually exist.
In Clutton v Attenborough:
✔ the cheque became payable to bearer.
Inland and Foreign Bills
Inland Bill
Main Difference
When dishonoured:
Critical Analysis
The Bills of Exchange Act 1949 ensures:
✔ explanations connected to payment, and
❌ conditions affecting whether payment will happen.
This allows bills of exchange to:
Solution to the Case Scenario
✔ The bills in Co-operative Exportvereniging ‘Vecofa’ UA v Maha Syndicate were valid because:
✔ the documents satisfied the requirements of a valid bill of exchange under the Bills of Exchange Act 1949.
Case Scenario
Ali exports machinery from Malaysia to a company called Maha Syndicate. To secure payment, Ali draws three bills of exchange totaling RM69,750.28 stating:
“At 60 days after sight D/A on arrival of steamer, pay this first of exchange to the order of Amsterdamsche Bank NV Bijbank, Rotterdam for collection.”
Maha Syndicate accepts the bills by signing them.
Later, Maha Syndicate argues that the documents are not valid bills of exchange because payment appears to depend on the arrival of the steamer, making the order conditional.
The court must decide whether the bills are valid under the Bills of Exchange Act 1949.
Facts
Q1: Who drew the bills of exchange?
A: Ali (exporter).
Q2: Who accepted the bills?
A: Maha Syndicate.
Q3: What wording caused the dispute?
A: “D/A on arrival of steamer.”
Q4: What did Maha Syndicate argue?
A: Payment was conditional upon the arrival of the steamer.
Q5: What does “D/A” mean?
A: Documents against acceptance.
Q6: What did the court decide?
A: The bills were valid bills of exchange.
Held by the Court
The court held that:
- the important words were “D/A” (documents against acceptance),
- payment itself was not conditional upon the steamer arriving,
- the wording only explained the commercial arrangement.
✔ the bills were valid bills of exchange.
Section 3(1): Definition of a Bill of Exchange
Section 3(1) of the Bills of Exchange Act 1949 states:
“A bill of exchange is an unconditional order in writing, addressed by one person to another, signed by the person giving it, requiring the person to whom it is addressed to pay on demand or at a fixed or determinable future time a sum certain in money to, or to the order of, a specified person or to bearer.”
This means a valid bill must:
✔ be in writing,
✔ contain an unconditional order,
✔ be signed by the drawer,
✔ direct another person to pay,
✔ involve a sum certain in money, and
✔ be payable on demand or at a fixed/determinable future time.
Section 3(2): Additional Acts Make the Instrument Invalid
Section 3(2) states that:
an instrument is not a valid bill if it requires an act other than payment of money.
Invalid Example
“Pay RM10,000 and deliver 10 bags of rice.”
This is invalid because:
- payment of money is mixed with another obligation.
❌ not a bill of exchange.
Section 3(3): Unconditional Order Explained
Section 3(3) says an order remains unconditional even if it:
- mentions a particular account/fund for reimbursement, or
- mentions the transaction behind the bill.
Example of Valid Unconditional Order
“Pay RM20,000 and debit Bala’s Maybank account.”
This remains valid because:
- Bala must still pay,
- the account only explains where the money comes from.
Conditional Orders
A bill becomes invalid if payment depends on an uncertain event.
Invalid Example
“Pay RM10,000 if my daughter gets married.”
This is conditional because:
- marriage may never happen,
- payment may never become due.
❌ invalid bill.
Certain Future Events
Some future events are treated as sufficiently certain.
Valid Example
“Pay RM15,000 three days after my father’s death.”
Although the date is unknown:
- death is certain to happen,
- payment will definitely become due eventually.
✔ valid bill of exchange.
In Writing
A bill must be in writing.
Under the Interpretation Acts 1948 and 1967, writing includes:
- handwriting,
- printing,
- typing,
- photography,
- electronic storage or transmission.
✔ be printed or handwritten,
✔ be written in ink or pencil,
✔ even be written on unusual materials like cloth or wood.
However, in practice:
- standard paper forms are used,
- pencil is discouraged because of forgery risks.
Example
In Arab Bank Ltd v Ross:
- the cheque was written in Arabic,
- and was still valid.
Addressed by One Person to Another
A bill must involve:
- one person giving the order (drawer),
- another person receiving the order (drawee).
Parties
Party
Meaning
Drawer
Person creating the bill
Drawee
Person ordered to pay
Payee
Person receiving payment
Acceptor
Drawee after acceptance
Important Rule
A bank draft drawn by a bank on itself is generally not a bill under section 3(1).
However, section 5(2) allows the holder to treat it as:
✔ either a bill of exchange, or
✔ a promissory note.
Drawees
A bill may be addressed to:
✔ two or more drawees jointly,
but not:
❌ in the alternative, or
❌ in succession.
Invalid Example
“Payable by Ali or Bala.”
This creates uncertainty.
Signature Requirement
The drawer’s signature is essential.
Under section 23:
no person is liable unless they signed the bill.
Without signature:
❌ no liability arises.
Payment on Demand or Determinable Future Time
Under section 10(1), a bill is payable on demand if it says:
- “on demand,”
- “at sight,”
- “on presentation,”
or states no payment date.
Example
Ordinary cheques are payable on demand because:
- no future payment date is stated.
Determinable Future Time
Section 11 states payment may occur:
✔ at a fixed future date, or
✔ after a certain future event guaranteed to happen.
Valid Example
“Pay 30 days after my father’s death.”
Death is certain.
Invalid Example
“Pay if I win the lottery.”
Winning may never happen.
Sum Certain in Money
A bill must involve:
✔ money only,
✔ a certain or calculable amount.
Under section 9(1), the amount remains certain even if:
- interest is added,
- payment is by instalments,
- exchange rates are involved.
Payable to Order or Bearer
A bill may be payable:
✔ to a named person (“order”), or
✔ to bearer.
Bearer Bill
A bearer bill:
- may be transferred by delivery alone.
“Pay bearer RM10,000.”
Order Bill
An order bill:
- names a specific person,
- usually requires endorsement and delivery.
“Pay Ali or order RM10,000.”
Indorsement in Blank
An indorsement means signing the back of the bill.
If the holder signs without naming the next person:
- it becomes an indorsement in blank,
- the bill becomes payable to bearer.
Example
Ali signs the back without naming anyone.
Result:
✔ whoever possesses the bill may claim payment.
Non-Existent Payee
Sometimes the named payee does not actually exist.
In Clutton v Attenborough:
- a cheque was made payable to “George Brett,”
- but no such person existed.
✔ the cheque became payable to bearer.
Inland and Foreign Bills
Inland Bill
- drawn and payable in Malaysia.
- involves international elements.
Main Difference
When dishonoured:
- foreign bills usually must be protested,
- inland bills usually do not require protest.
Critical Analysis
The Bills of Exchange Act 1949 ensures:
- certainty,
- negotiability,
- commercial reliability.
✔ explanations connected to payment, and
❌ conditions affecting whether payment will happen.
This allows bills of exchange to:
- circulate like money,
- support trade and commerce,
- remain legally enforceable.
Solution to the Case Scenario
✔ The bills in Co-operative Exportvereniging ‘Vecofa’ UA v Maha Syndicate were valid because:
- payment was not truly conditional,
- “D/A on arrival of steamer” merely described the commercial arrangement.
✔ the documents satisfied the requirements of a valid bill of exchange under the Bills of Exchange Act 1949.
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