Instruments of Foreign Exchange

We have used many terms in this chapter relating to foreign bills or "instruments" of exchange which we have not paused to define or describe: drafts, acceptances, letters of credit, demand or spot exchange, futures, and so on.

Foreign bills of exchange--drafts, traveler's checks, money orders--are negotiable instruments and in general have in this country the same legal definition and position possessed by purely domestic bills. They are made payable to bearer or to a named party and can be moved by endorsement from hand to hand just as freely as the endorsement of the first or "order" endorser permits. The general terminology with which we are familiar in the field of domestic negotiable instruments carries over into foreign bills. The exporter or other maker of a draft is the drawer and the drawee is the importer or any other party on whom the draft is drawn. The drawee usually becomes the payer and the drawer, on receiving payment, becomes the payee.

The Liabilities Arising Out of Foreign Bills of Exchange

So far as our laws are concerned, the liabilities are those typical of all drafts. But there are always two laws to be taken into account in the case of foreign bills of exchange, our own and those of the foreign country involved.

If an exporter sells and delivers goods to a foreign buyer or importer, he has a legal claim on the importer for the payment of the agreed price on the agreed date. The sale may be made on a draft basis. If so, the exporter will draw a sight or time draft on the importer "ordering" him to pay the agreed amount, but he cannot force the importer to "accept" the draft. Consequently, the drawer of a draft is primarily liable under it to anyone who buys it in good faith, until the drawee becomes primarily liable by accepting the draft. Even then the drawer continues secondarily liable, should the drawee default. The only exception to this rule is in those cases where (as, for example, under some authorities to purchase a bank will discount a draft "without recourse" to the drawer should the drawee default on maturity.If an importer who is drawee under a draft either refuses to accept it or refuses to pay it, the exporter has two legal routes open to him. He may, under the laws of most countries, protest the nonacceptance or nonpayment of the draft; or he may sue on the basis of the underlying sales contract. Some exporters believe that protest for nonacceptance is valueless, since even after a draft is protested for nonacceptance the drawer can sue only on the basis of the sales contract. Where an accepted draft is protested for nonpayment, however, the drawer may institute legal proceedings against the acceptor on the basis of the dishonored obligation. There are thus some advantages in protesting for nonpayment, and many exporters instruct the collecting bank to protest all drafts for nonpayment. The majority do not do so, and this for two chief reasons:

(1) they do not believe legal action in foreign countries is advisable;

(2) they believe that more often than not foreign buyers are provoked by protest proceedings and may be more successfully persuaded to pay by other means.