Distinguish between bill of exchange and promissory note?


Question: Distinguish between bill of exchange and promissory note?

A bill of exchange and a promissory note are both negotiable instruments, but they have some key differences.

A bill of exchange is an unconditional order in writing addressed by one person (the drawer) to another (the drawee), signed by the drawer, requiring the drawee to pay a sum of money to a specified person (the payee) or to his or her order.

A promissory note is an unconditional promise in writing made by one person (the maker) to another (the payee), signed by the maker, engaging to pay to the payee, on demand or at a fixed or determinable future time, a sum of money certain in money.

Here is a table that summarizes the key differences between a bill of exchange and a promissory note:

FeatureBill of exchangePromissory note
Parties involvedDrawer, drawee, payeeMaker, payee
Type of instrumentOrder instrumentPromise instrument
AcceptanceRequiredNot required
Liability of drawerPrimary and absoluteSecondary and conditional
NoticeRequired to be served on all the parties involved in case of dishonorNot required to be served on the maker in case of dishonor
CopiesCan have copiesCannot have copies

In general, bills of exchange are more commonly used in international trade, while promissory notes are more commonly used in domestic trade.

Here are some examples of how bills of exchange and promissory notes are used:

  • Bill of exchange: A company in India exports goods to a company in the United States. The Indian company draws a bill of exchange on the US company, ordering it to pay the Indian company a certain sum of money on a specific date. The Indian company then sends the bill of exchange to the US company for acceptance. Once the US company accepts the bill of exchange, it becomes legally obligated to pay the Indian company on the specified date.
  • Promissory note: A company in India borrows money from a bank. The company signs a promissory note, promising to repay the bank the loan amount on a specific date. The bank can then use the promissory note to collect the debt from the company if it defaults.

I hope this helps to distinguish between a bill of exchange and a promissory note.

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