In order to fully understand the basic difference between cheque and bills of exchange, it is good to start with a formal definition of each instrument including some of the basic characteristics.
Bill of exchange
A bill exchange (called ‘draft’ in some jurisdictions) can be defined as “any instrument drawn on drawee that orders the drawee to pay a certain sum of money usually to a third party (the payee) on demand or at a definite future time “
Section 5 of the Indian Negotiable instrument act of 1881 also defines it similarly in the following way:
“A Bill of exchange is an instrument in writing containing an unconditional order, signed by maker, directing a certain person to pay sum of money only to, or to the order of a certain person or to the bearer of the instrument” Black’s law dictionary also defines a Bill of exchange as “An unconditional written order signed by one person (the Drawer) directing another person (the drawee or payer) to pay a certain sum of money on demand or at a definite time to third person (the payee) or order.”
A chaque (in America written as ‘check’) is a bill of exchange drawn by a drawer ordering the drawee bank or financial institution to pay a certain amount of money to the holder on demand. A similar definition is given in section 6 of the Indian negotiable instruments act of 1881 which reads;
“A cheque is a bill if exchange drawn upon a specified banker and payable on demand.”
Lastly black’s law dictionary defines it as “A bill of exchange signed by the maker or drawer drawn on a bank, payable on demand, and unlimited in negotiability”
Even though the commercial code does not give a formal definition of a cheque it could be defined as a bill of exchange drawn on a specified banker and not expressed to be payable otherwise on demand.
From the above definitions we could list the following points as the basic characteristics of cheque.
A) A cheque is a bill of exchange
B) It is always drawn up on a bank, (Art 829 of the commercial code)
C) It is always payable on demand (Art 854 of the commercial code)
A cheque is a bill of exchange because in both cases the drawer gives a signed, unconditional order to the drawee to pay a certain sum of money to a certain person or to the order of that person or to the bearer of the instrument.
Difference between cheque and bills of exchange
The points of difference between a cheque and a bill of exchange are summarized hereunder:-
(1) A cheque is always drawn on a bank whereas a bill of exchange can be drawn on any other person.
A drawee (i.e. the one who who receives order from the drawer and makes payment to the lawful beneficiary or holder) of a bank is always a bank or a financial institution. The term financial institution may for instance refer to micro finance institutions. Hence, any transactions using cheque as a medium of payment could not be conceived of without the involvement of a banker as a drawee. On the other hand, business could have its own version of a cheque without the need for banks as a drawee. Any company and even an individual could act as a drwaee in case of bills of exchange. This has its own advantage given its effect in making business transaction very simple.
(2) A cheque is always payable on demand, where as a bill of exchange may be payable on demand or at a definition period of time in the future. Any commercial instrument with specifying the time of payment is void. Bills of exchange and cheques are used mainly as a mode of payement for an underlying business transaction. Hence, any one who receives any of these instruments has to be sure as to when he will be able to present and demand payment from the drawee. In case of cheque, the time of payement is always on demand. This is to mean that the holder a cheque is entitled to demand payment as soon as he the instrument fro the drawer or another holder. He need not wait any time to get paid. That is one of the prime advantages of a cheque.
Bills of exchange could be paid on demand or it could be paid at a definite future time depending on how the drawer has written the time clause. So just like cheque it could be paid on demand. So what is the difference then? The difference is that cheque has only one time of payment i.e. on demand. Unlike bills of exchange, it could not have a different time of payment other than on demand.
(3) A cheque can be crossed, but a bill of exchange can not be crossed.
Click here to read more on crossing of cheques.