The bill of exchange − or ‘draft’ as it is more commonly referred to − is a convenient method of collecting debts internationally, with a special status recognized in many jurisdictions.
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.
Drafts have a special legal status. They are ‘negotiable instruments’ unless specifically stated not to be. Negotiable means much more than merely transferable from one person to another.
A draft stands alone from any contract that might have caused it to be written. Therefore, a holder of a draft who takes it in good faith and for value takes it free from any defect in the title to it of the person from whom the holder took it. The commercial effect of this is, for example, that a bank that holds a draft and expects to collect money from the acceptor when due, can sue the acceptor, or anyone else whose signature is on the bill of exchange, for non-payment irrespective of any contractual disputes there
may be relating to the underlying goods or services
Drafts may be payable on demand (known in a trade transaction as ‘at sight’), or at some future date (known as a ‘term draft’ or a ‘usance draft’). A sight draft is payable on presentation to the drawee and therefore the issue of acceptance does not arise.
A term draft or usance draft gives the drawee time for payment. A bank handling a draft on behalf of the seller will first obtain the drawer’s acceptance and may then:
◆ hold it until maturity, present it for payment and then remit the funds to the seller ,
◆ ‘Discount’ it, by paying the seller immediately the face value less a
discount to represent interest for the period between the date of payment and the maturity date.
At maturity, the draft will be presented for payment to the drawee or acceptor, or the bank nominated to pay on the acceptor’s behalf. A draft accepted by a bank, and returned to a presenter, will normally be presented to them direct or through a correspondent bank. In documentary credits it is common for a draft to be held by the bank (drawee) on whom it is drawn.