• The United Nations Convention on

International Bills of Exchange and

International Promissory Notes is the result of
a movement to establish a modern, self-
contained international legal regime that
would apply world-wide.
• At its very first session held in 1968, UNCITRAL decided
that, along with international sale of goods and
international commercial arbitration, international
payments should be given priority in its programme of
future work. It was thought to be necessary to support
the continued use of bills of exchange and promissory
notes for international payments despite the emergence
of new payment mechanisms. The new practices and
techniques, it was thought, would not displace the more
conventional usages, especially in the important role of
financing international transactions.
• From the outset the work undertaken by UNCITRAL in this area consisted of finding
ways to overcome the great many disparities between the various negotiable
instruments laws of the world. Previous attempts at unifying the law of negotiable
instruments had brought results only in a limited region or among countries of the
same legal tradition. For instance, the efforts undertaken at the Hague in 1910 and
1912 and under the League of Nations in 1930 and 1931 culminating in the
adoption of the Geneva Uniform Laws for Bills of Exchange, Promissory Notes and
Cheques had resulted in the harmonization of the negotiable instruments laws of
only part of the civil law world and, on the common law side, a similar
harmonization had flowed from the issuance of the Bills of Exchange Act 1882 of
the United Kingdom, on which the United States Negotiable Instruments Law
(superseded by article 3 of the Uniform Commercial Code) and the various Bills of
Exchange Acts of the Commonwealth countries had been modelled. But
notwithstanding these influences, considerable variation exists in the case law and
commercial practice even among countries of the same legal tradition.
• The first step taken by UNCITRAL was to consult with the International Institute
for the Unification of Private Law (UNIDROIT) which had previously addressed
the subject of unification of the law relating to negotiable instruments. At the
request of the Commission, UNIDROIT prepared a preliminary report on the
possibilities of extending the unification of the law of bills of exchange and
cheques. In the light of this report the Commission considered three possible
methods of promoting unification. These were, firstly: encouraging a wider
acceptance of the Geneva Conventions of 1930 and 1931; secondly, revising
the Geneva Conventions of 1930 and 1931 with a view to making them more
acceptable to countries following the Anglo-American system; and, lastly,
creating a new negotiable instruments law. The discussions showed that the
method most likely to succeed would be the creation of a new negotiable
instruments law. It was felt that merely revising the Geneva Conventions would
not make them acceptable to common law States.
• Before resolving to begin the preparation of a new negotiable
instruments law the Commission decided to conduct an extensive
enquiry to obtain the views and suggestions of Governments, banks
and trading institutions. The Commission prepared and distributed
an elaborate questionnaire and analysed the replies given by
respondents regarding the present methods and practice for making
and receiving international payments, the problems encountered in
settling international transactions by means of negotiable
instruments and the possible extent of new uniform law. From this
analysis it became clear that the only viable approach would be to
prepare a new set of rules that would be applicable to a special
negotiable instrument for optional use in international transactions.
• The secretariat of UNCITRAL first prepared a draft
Uniform Law on International Bills of Exchange and a
Commentary. The draft was later extended to
include international promissory notes. The draft
was revised over fourteen sessions of the Working
Group on International Negotiable Instruments and
three sessions of the Commission itself. At the fifth
session of the Working Group it was decided to set
forth the new provisions in the form of a convention
rather than a uniform law.
• The Convention as adopted aims at facilitating
international trade and finance. Throughout
the legislative process, attention was
constantly given to the comments and
observations of Governments, banks, trading
and other interested circles.
• The Convention does not purport to replace
existing domestic legislation. It presents for
optional use in international transactions a
comprehensive body of rules that are
theoretically and practically sound, being
derived from a coherent set of principles
fundamental to all known laws governing bills
of exchange and promissory notes.
 SALIENT FEATURES OF THE CONVENTION
• The Convention applies only to international bills of exchange and
international promissory notes when they comply with certain
requisites of form. In particular, the Convention applies only to
international instruments that bear in both their heading and their
text the words "International bill of exchange (UNCITRAL
Convention)" or "International promissory note (UNCITRAL
Convention)". The use of an instrument governed by the
Convention is thus entirely optional. Ratification or accession by a
State does not subject all international instruments issued in that
State to the legal regime of the Convention but merely opens the
door for bankers and merchants to opt for this new legal regime if
they deem it preferable in their professional judgment.
• The Convention provides its own definitions of the terms "bill of
exchange" and "promissory note" and explicitly states the
conditions on which a bill of exchange or promissory note is
considered to be international. According to the Convention, a bill of
exchange is a written instrument which: a) contains an
unconditional order whereby the drawer directs the drawee to pay a
definite sum of money to the payee or to its order; b) is payable on
demand or at a definite time; c) is dated; and d) is signed by the
drawer. A promissory note is a written instrument which: a) contains
an unconditional promise whereby the maker undertakes to pay a
definite sum of money to the payee or to its order; b) is payable on
demand or at a definite time; c) is dated; d) is signed by the maker.
• In order to qualify as an international bill under the Convention a bill
of exchange must specify at least two of the places listed in article
2(1) of the Convention, and any two so specified places must be
situated in different States. The places listed are: the place where the
bill is drawn, the place indicated next to the signature of the drawer,
the place indicated next to the name of the drawee, the place
indicated next to the name of the payee, and the place of payment.
In its turn an international promissory note must specify at least two
of the places listed in article 2(2) of the Convention, whereby any two
so specified places must be situated in different States. The places
listed are: the place where the note is made, the place indicated next
to the signature of the maker, the place indicated next to the name of
the payee, and the place of payment
• There is one last requirement that an instrument fulfilling the above
criteria must meet in order to qualify as an international instrument
under the Convention: a certain place of importance situated in a
State that is a party to the Convention must also be specified in the
instrument. In the case of a bill of exchange, this will either be the
place of drawing or the place of payment. In the case of a
promissory note, this will be the place of payment. A State may
however declare, in becoming a party to the Convention, that its
courts will apply the Convention only if both the place indicated in
the instrument where the bill is drawn, or the note is made, and the
place of payment indicated in the instrument are situated in
Contracting States. This is the only reservation permitted under the
Convention.
• The legal rules provided by the Convention will apply even
where there has been an incorrect or false statement in respect
of a place indicated in an instrument. This rule continues the
common policy of domestic bills of exchange laws to the effect
that instruments are to be judged only by their texts - the
material appearing on their faces. It may also be justified on the
pragmatic ground that to have provided otherwise could have
cast doubts on the applicability of the rules and eventually
impaired the free circulation of international bills and notes.
The Convention leaves to domestic laws the question of
sanctions that may be imposed where such a false or incorrect
statement has been made in an instrument.
• Following the trend established by some domestic
legal systems, the Convention does not allow
negotiable instruments to be drawn on two or more
drawees or to be issued payable to bearer. Neither
restriction is significant in practice: nothing prevents
a payee or special endorsee from making an
instrument covered by the Convention payable to
bearer by endorsing it in blank; and multiple-drawee
instruments have proved to be quite rare and a
source of confusion when they do occur.
• The United Nations Convention on International Bills of Exchange and
International Promissory Notes does not address international
cheques. These have been the subject of a parallel project by
UNCITRAL, the latest result of which is a draft Convention. The
decision to draw up the uniform rules on international bills of
exchange and international promissory notes and the uniform rules
on international cheques as separate legal texts and not as a
consolidated text was taken mainly to accommodate the civil law
jurisdictions which have traditionally considered bills of exchange and
cheques as separate instruments fulfilling separate functions. Work
on the draft Convention on International Cheques was suspended in
1984, partly due to the fact that cheques were seen to play a less
important role in international payments
 Interpretation of the Convention
• An international body of rules aiming at the
unification of a certain field of law can fulfil its
ultimate purpose only if it is interpreted in a
sensible and consistent manner by all legal systems
applying it. Like many other international legal
texts, the Convention requires courts that interpret
it to have regard for its international character and
for the need to promote uniformity in its
application and the observance of good faith in
international transactions
• The goal of uniform interpretation is furthered
by a scheme called CLOUT (Case law on
UNCITRAL texts) under which the secretariat
publishes abstracts of court decisions or
arbitral awards that apply any of the
Conventions or Model Laws that emanate
from the work of UNCITRAL.
 Parties to BOE(notes)
• the drawer is the party that issues a bill of exchange –
the 'creditor';
• the beneficiary or payee is the party to which the bill
of exchange is payable;
• the drawee is the party to which the order to pay is
sent - 'the debtor'.
• Bearer: the person who is in possession of a bill of
exchange. He is also called the holder. The bearer and
the payee is usually the same person. Endorser: the
person who endorses a bill of exchange
 The concepts of "holder" and "protected
holder
• In its desire to win commercial acceptance and free circulation of
its instruments in international commerce, the Convention firmly
upholds the principle of negotiability.
• When dealing with the rights of the holder of an instrument and
the limitations of those rights by the claims and defences of others,
the drafters of the Convention were obliged to make a selection
between the radically distinct, and yet justifiable, approaches of
the civil and common law systems. The solution chosen was a
pragmatic two-tier system that distinguishes between a mere
holder and a "protected holder". The rights of the protected holder
are freed from the claims and defences of other persons to a
greater extent than are the rights vested in the ordinary holder.
• The solution, although similar in technique to the scheme found in
common law jurisdictions, is in fact a compromise since it borrows from
both the civil and common law approaches. For instance, under the
Convention, a person is not prevented from becoming a holder by the fact
that the instrument was obtained under circumstances, including
incapacity or fraud, duress or mistake of any kind, that would give rise to
a claim to, or a defence against liability on, the instrument. That regime
resembles the civil law much more than the common law on the issue.
Perhaps most important, a person who is in possession of an instrument
as an endorsee, or on which the last endorsement is in blank, and on
which there appears an uninterrupted series of endorsements, can be
awarded the protected holder status even though any endorsement
appearing on the instrument was forged or signed by an agent without
authority
• The Convention enlarges the protection of protected holders by
omitting any requirement that a protected holder has given value
for the instrument. Furthermore, the test that one must meet in
order to attain the protected holder status is easily passed, and
every holder is presumed to be a protected holder unless the
contrary is proved.
• Although not so well protected as a protected holder, a mere
holder is not totally unprotected from adverse claims and defences.
The holder in fact derives an appreciable degree of protection from
the rules contained in the Convention that allow certain types of
claims or defences only if the holder had knowledge of them or if it
was involved in a fraud or theft concerning the instrument.
• Under the Convention, the transfer of an instrument by a
protected holder vests in any subsequent holder the
rights to and on the instrument that the protected holder
had. This so-called "shelter rule" again favours the
negotiability of instruments. Its main value is to the
protected holder as transferor since it preserves the
value it invested in taking the instrument in the first
place. It is not possible, however, for a holder who is not
entitled to any protection to simply "wash" an
instrument by transferring it to a protected holder and
then taking it back
• The shelter rule is a doctrine in the
common law of property under which a
grantee who has received an interest in
property from a bona fide purchaser will also
be protected as a bona fide purchaser, even if
the grantee would not legally qualify for this
status.
 Shelter rule ?
• What if a note is missing an endorsement or there are
other problems with the negotiation of the note (e.g.,
the allonge is not properly affixed), such that the person
to whom the note was delivered and who is in
possession of the note is not a holder? In that scenario,
Section 3-301 of the Uniform Commercial Code (UCC)
recognizes that enforcement is not limited to holders and
that transferees may take shelter in the rights of the
transferor. Person Entitled to Enforce (PETE) the
instrument includes non-holders in possession with
rights of holder
• UCC Section 3-203(b) provides the rule known as the
shelter rule:
• Transfer of an instrument, whether or not the
transfer is a negotiation, vests in the transferee any
right of the transferor to enforce the instrument,
including any right as a holder in due course, but the
transferee cannot acquire rights of a holder in due
course by a transfer, directly or indirectly, from a
holder in due course if the transferee engaged in
fraud or illegality affecting the instrument.
• In other words, under UCC Section 3-203(b), the
buyer of the note takes “shelter” in the rights of the
seller. For example, suppose the payee sells the note
to a new owner, but fails to indorse the note (so no
“negotiation” takes place). The new owner is not a
“holder” (since there has not been an endorsement
by the payee), but the new owner takes shelter in
the holder status of its seller and thus is a PETE
according to both Section 3-301 (defining PETE) and
Section 3-203(b) (the shelter rule itself).
• “Transfer” is defined as delivery of an instrument “by a person
other than the issuer for the purpose of giving to the person
receiving delivery the right to enforce the instrument.”
Comment two to Section 3-203 states “transfer vests in the
transferee any right of the transferor to enforce the instrument
‘including any right as a holder in due course.’ If the transferee
is not a holder because the transferor did not endorse, the
transferee is nevertheless a person entitled to enforce the
instrument under Section 3-301 if the transferor was a holder
at the time of transfer. Although the transferee is not a holder,
under subsection (b) the transferee obtained the rights of the
transferor as holder.”
• While the UCC recognizes the rights of a transferee in
possession, the burden of proving “transfer” is on the
person holding the instrument, including proving the
validity of previous transfers as appropriate. According
to one court, “the transferee does not enjoy the
statutorily provided assumption of the right to enforce
the instrument that accompanies a negotiated
instrument.” The possessor of the note must prove
both the fact of delivery and the purpose of the
delivery to qualify as “person entitled to enforce.”
• In summary, whether or not endorsements
are complete, a person in possession of a note
may enforce the note upon showing that the
note was “transferred,” and may take shelter
in the rights of the transferor, including any
right as a holder in due course.
 Transfer warranties
• Article 45 of the Convention brings light to an area that is dealt with in
different ways in the existing principal legal systems. Moreover, it brings
into the realm of negotiable instruments law a principle that is left to the
general law of sales or contracts in civil law jurisdictions.
• The rule provides that, unless otherwise agreed, a person who transfers an
instrument, by endorsement and delivery or by mere delivery, makes
certain implied representations concerning the quality of the instrument
and its lack of knowledge of any fact which could impair the right of the
transferee to payment of the instrument against the primary obligor upon
it. These representations as to quality consist of a warranty that the
instrument does not bear any forged or unauthorized signature, and has
not been materially altered. Liability of the transferor under the article is
incurred only if the transferee took the instrument without knowledge of
the matter giving rise to such liability.
• The liability provided for here is in part weaker
and in part stronger than the one incurred by
an endorser. It is weaker in that it does not
guarantee payment of the instrument and is
available only for the benefit of the immediate
transferee; it is stronger in that a transferee
may recover, even before maturity, the amount
paid by it to the transferor, independently of
any presentment, dishonour or protest.
 Guarantees and avals
• The provisions of the Convention dealing with
the liability of the guarantor comprise one of
the most attractive features of the text. The
Convention subtly recognizes both the aval, or
the Geneva type of guarantee, and the other,
weaker type of guarantee known in common
law jurisdictions.
• Article 46 of the Convention provides that payment of an instrument
may be guaranteed either before or after acceptance, as to the whole or
part of its amount, for the account of a party or the drawee. A guarantee
may be given by any person, who may or may not already be a party. A
guarantee is expressed by the words "guaranteed", "aval", "good as aval"
or words of similar import, accompanied by the signature of the
guarantor, or effected by a signature alone on the front of an instrument.
In fact, any signature alone on the front of an instrument, other than
that of the maker, the drawer or the drawee, is a guarantee. The words
by which a guarantee is expressed determine the nature of the
obligation undertaken by the guarantor. In the absence of some notation
specifying the party for whom a guarantee is given, the rules of the
Convention interpret it as a guarantee for the drawee, acceptor or maker.
• The crucial difference between the two types of guarantees
recognized by the Convention ultimately lies in the defences
that a guarantor may set up against a holder or a protected
holder. They differ, depending upon the words used to express
the guarantee (i.e. "guaranteed" produces a different result
than "aval") and whether the guarantor is a financial
institution. A guarantor that is a bank or other financial
institution and which expresses its guarantee by a signature
alone is considered to have contracted the stronger type of
guarantee or "aval"; a guarantor that is not a bank or other
financial institution and which does the same is considered to
have contracted the weaker type of guarantee.
 Other novel provisions of practical
importance
• Instruments with floating rates of interest
– The Convention permits instruments to bear interest at a variable rate
without loss of negotiability. Where the technique used is in accordance
with the requirements of the Convention, the sum payable is deemed to
be a definite sum despite the variable rate of interest. For the protection
of debtors, the Convention permits rates to vary only in accordance with
provisions stipulated in the instrument and in relation to one or more
reference rates published or otherwise publicly available. As a further
protection, the reference may not be subject, directly or indirectly, to
unilateral determination by a person who is named in the instrument at
the time the bill is drawn or the note is made, unless the person is
named only in the reference rate provisions. There may also be
stipulated limits to the permissible variations in the interest rate.
• Rates of exchange outside instrument
– The Convention also permits reference to a rate of
foreign exchange outside an instrument, e.g. a bank
exchange rate in a particular place at a certain date, in
calculating the amount payable under the instrument.
Here as well, the sum payable under an instrument is
deemed to be a definite sum even though the
instrument states that it is to be paid according to a
rate of exchange indicated in the instrument or to be
determined as directed by the instrument.
• Instruments payable in instalments
• The Convention allows instruments that are
subject to it to be made payable by
instalments at successive dates. They may also
contain an "acceleration clause", i.e. a
stipulation that upon default in payment of
any instalment the entire unpaid balance
becomes immediately due.
• Instruments denominated and payable in a monetary unit of account
– The Convention creates a regime in which instruments may be made payable
in units of value other than the official currencies of nation States. This is
accomplished by the definition of the terms "money" and "currency", which,
in addition to referring to normal mediums of exchange adopted by
Governments as their official currency, include a monetary unit of account
which is established by an intergovernmental institution or by agreement
between two or more States, e.g. the Special Drawing Right (SDR) of the
International Monetary Fund, the European Currency Unit (ECU) and the
Unit of Account of the Preferential Trade Area for Eastern and Southern
African States (UAPTA). The Convention also contains a useful new rule
selecting a currency of payment where the monetary unit of account in
which an instrument is payable is not transferable between the person liable
to pay the instrument and the person receiving the payment
• Foreign currency obligations
– The Convention attempts to avoid the controversies that can arise with
instruments drawn or made in a currency other than that of the place
where payment is to be made. The text provides that, except for the
cases where the drawer or maker of an instrument has indicated that it
must be paid in a specified currency other than the currency in which the
sum payable is expressed, payment must be made in the latter currency.
Where applicable, this rule will prevent a debtor from discharging its
obligation by payment in another currency, e.g. a local one. It should be
of assistance by providing greater certainty in cases involving currency
value fluctuations. In an effort to avoid infringing on exchange control
regulations and other provisions relating to the protection of the
currency of a State, the Convention provides a number of modifying rules
to apply in exceptional circumstances.
• Signature not in handwriting
– Here as well the Convention attempts to adapt the
law to new technology by providing that the word
"signature" includes not only a handwritten
signature, but also a facsimile or an equivalent
authentication effected by any other means.
• Rules on lost instruments
– New rules are provided concerning lost
instruments. In particular, a party from whom
payment of a lost instrument is claimed may
require the person claiming payment to give
security in order to indemnify it for any loss which
it may suffer by reason of the subsequent
payment of the lost instrument.
• Short form of protest
– The Convention relaxes the highly precise rules which are found in
common law jurisdictions on protest. It also provides new
common rules for Geneva States that lack regulation concerning
the procedures for effecting protest. Under the new regime,
unless an instrument stipulates that protest must be made,
protest may be replaced by a declaration written on the
instrument and signed and dated by the drawee or the acceptor
or the maker, or, in the case of an instrument domiciled with a
named person for payment, by that named person. The
declaration must be to the effect that acceptance or payment is
refused. The Convention also extends to four business days the
period that is usually allowed to make protest.
• Uniform period of prescription
– The Convention provides a single period of
prescription or limitation of actions. It is set at
four years for almost all actions arising on an
instrument under the Convention. The only
exception is that, where a party pays an
instrument on which another was primarily liable,
the party's action for reimbursement (recourse) is
barred after one year.
• Drawing of instruments "without recourse”
– The Convention contains a rule that should
facilitate the practice of forfeiting. Under the new
rule, the drawer of a bill may exclude or limit its
own liability for acceptance or for payment by an
express stipulation on the bill, e.g. by drawing the
bill "without recourse". This stipulation will be
effective only if another party is or becomes liable
on the bill.
 Final clauses
• The final clauses contain the usual provisions designating the Secretary-
General of the United Nations as depositary for the Convention. The
Convention was open for signature until 30 June 1990 and remains
subject to ratification, acceptance or approval by the signatory States. It
is open for accession by all States which are not signatory States as from
the date it was open for signature. According to article 89(1), the
Convention enters into force on the first day of the month following the
expiration of twelve months after the date of deposit of the tenth
instrument of ratification, acceptance, approval or accession. The Arabic,
Chinese, English, French, Russian and Spanish texts of the Convention
are equally authentic. The final clauses also contain provisions dealing
with the implementation of the Convention in States having two or more
territorial units where different legal systems apply.