Chapter 10 Negotiable instrument lawChapter 10 Negotiable instrument law

1 1 Overview

2 2 Issue of the negotiable instruments

3 3 Endorsement

4 4 Acceptance

5 5 Guarantee

6 6 Payment

7 7 Dishonor and right of recourse

8 8 Protection of lost-instrument holders

9 9 Statute of limitations

1 Overview

1.1 Concept

• Means of payment • Constitute independent contract embodying a payment

obligation and distinct from that of other contracts or

transactions by virtue of which such instruments are issued

Parties to bill of exchangeParties to bill of exchange

ADrawer

BPayee

Endorser

CEndorseeEndorser

DEndorsee

Bearer

EGuarantor Right-holder

Secondary debtor

PDrawee

Primary debtor

Parties to promissory noteParties to promissory note

ADrawer

BPayee

Endorser

CEndorseeEndorser

DEndorsee

Bearer

EGuarantor Right-holder

Secondary debtor

Primary debtor

Parties to chequeParties to cheque

ADrawer

BPayee

Endorser

CEndorseeEndorser

DEndorsee

Bearer

Right-holder

Secondary debtor

P (Banks)Drawee

Negotiable instrument relations in bill of exchange and Negotiable instrument relations in bill of exchange and chequecheque

ADrawer

BPayee

Endorser

CEndorseeEndorser

DEndorsee

Bearer

PDrawee

Negotiable instrument relation

Non-negotiable instrument relation

Negotiable instrument relations in promissory note Negotiable instrument relations in promissory note

ADrawer

BPayee

Endorser

CEndorseeEndorser

DEndorsee

Bearer

Negotiable instrument relation

Non-negotiable instrument relation

Illustration:Illustration: Hefei Branch ordered to make payment Hefei Branch ordered to make payment On 2 March 1989 Hefei Co signed a supply contract with Hua Lan De Co in respect of video equipment, by which Hua Lan De Co was to supply Hefei Co with 3000 sets of video equipment at RMB 17.07 million. The sum was to be settled by bill of exchange to be accepted by a bank 180 days after the issue of the bill. Two bills would be issued. A bill representing RMB 8.5 million was to be issued to the supplier upon joint confirmation of delivery of the video tape recorders by the representatives of the banks for both parties at Suzhou Television Factory. Another one representing the balance would be issued upon notice by the supplier to the buyer of the availability of goods later in the same month. The second bill should be delivered by the buyer in person at a place to be specified by the supplier. On 15 March 1989 Hefei Branch, as per Hefei Co's instruction issued a bill of exchange for the amount of RMB 8.5 million (No.0042815) to be drawn on an account No.0103010001707 with the date of maturity being 15 September 1989. The bill was handed over to Hua Lan De Co when Hefei Co accepted the goods.  On 15 April 1989 owing to goods quality Hefei Co, Hua Lan De Co, Hefei Branch and Luohu Branch (the bank of Hua Lan De Co) signed a supplementary agreement by which Hefei Branch on the effective date of the agreement was to issue a bill of exchange representing RMB 8.57 million left in the custody of Luohu Branch, which was to supervise Hua Lan De Co's performance of the prior contract. Unless Hua Lan De Co delivered goods on time,

Luohu Branch could not discount or mortgage the bill, and the Branch would hand over the bill which was effective from the date of issue to Hua Lan De Co upon its timely delivery. Failure by Hua Lan De Co to deliver would be breach of the contract, and Luohu Branch would return the bill to Hefei Branch. In case of any quality problem in the course of sale, Hefei Co would return the defective goods and Luohu Branch would deduct a corresponding sum from the RMB 8.5 million represented by the bill. Upon receipt of evidence of delivery from Hefei Co the bill might be accepted.  Before the agreement, Hefei Co had authorized Hefei Branch to issue two bills of exchange on 11 April 1989 each representing RMB 4.285 million, handed over to Luohu Branch on the date of signing the supplementary agreement. On 18 April Hua Lan De Co supplied Guangzhou Installation Unit of Hefei Co with 1,500 Telefrankt television sets. On 21 April 1989 Hua Lan De Co applied to Luohu Branch for discount on exchange the bill No.0042815. Luohu Branch approved the application and on the same day applied for rediscount of the bill at Shenzhen SEZ branch of the Bank of China. The following day Luohu Branch signed a discount on exchange contract with the Trade Business Department of Hua Lan De Co and prepared a discount certificate with the Trade Business Department as the applicant. Luohu Branch prepared another discount certificate with Hua Lan De Co as the applicant. Luohu Branch deducted the interest on the sum from the date of discount to the date of maturity from the payment in respect of the discount on exchange, and credited the account No.0103010002887 of Hua Lan De Co with the balance RMB 7984985. Hua Lan De Co also endorsed the bill of exchange No.0042815.

In July 1989 based on the dispute of performing the supply contract Hefei Co sued Hua L

an De Co at the Hefei Intermediate People's Court. On 15 August the Hefei court as per H

efei Co's application ordered that Hefei Branch must stop payment for the bill of exchang

e amounting to RMB 17.07 million. On 20th August Hefei Branch sent a letter to Luohu Br

anch informing the latter that Hefei Branch would not reimburse payment on the discount

ed bill. On 11 September Luohu Branch replied that it had settled the discount on exchang

e before receiving Hefei Branch's letter, thus it was too late to stop payment. Luohu Branc

h requested Hefei Branch to accept the bill of exchange No.0042815, but rejected by Hefei

Branch. Thus Luohu Branch sued Hefei Branch at the Shenzhen Intermediate People's Co

urt claiming Hefei Branch’s unconditional honor of the discounted bill representing RMB

8.5 million. The trial court of Shenzhen held that the dispute between Hefei Co and Hua L

an De Co on supply contract involving different legal relationships was beyond the scope o

f the present case, and the grounds of defense raised by Hefei Branch were not valid. It th

us ordered that Hefei Branch should pay Luohu Branch RMB 8.5 million in respect of the

discounted bill of exchange plus interest at the rate 0.01% per day. The appellate court in

Guangdong upheld this decision when appealed by the Hefei Branch.

1.2 Classification

1.2.1 Types of negotiable instruments

1.2.1.1 Bill of exchange

(1) unconditional

(2) a written order

(3) signed by the drawer

(4) addressed to the drawee

(5) pay a specified sum of money

(6) pay either on demand, or at a determinable future time

1.2.1.2 Promissory note (1) an unconditional promise(2) made in writing(3) signed by the maker of the note(4) pay a specified sum of money(5) addressed to the payee or the bearer(6) pay on demand

1.2.1.3 Cheque (1) a bill(2) payable on demand(3) for a specified sum of money(4) always drawn against a bank or other non-bank financial institutions(5) unconditional

1.2.2 Comparison

Comparison among bill of exchange, promissory note and cheque Comparison among bill of exchange, promissory note and cheque

Bill of exchange Promissory

note Cheque

Nature Entrusted payment Self payment Entrusted payment

Basic parties Drawer, drawee, payee Drawer & payee

Drawer, drawee, payee

Payer’s qualification

No restriction Drawer Banks

Primary debtor Acceptor Drawer No

Maturity On demand

Determinable future time On demand On demand

Acceptance √ ╳ ╳

2 Issue of the negotiable instruments

2.1 Drawer’s qualification

• Bill of exchange: drawer must have genuine payment relationship with the payer who has reliable funds to pay for the sum specified in it.

• Bill of exchange without consideration: prohibited.  • Promissory note: drawer must have reliable funds to p

ay for the sum specified in the note • Cheque: drawer must use his genuine name to open the bank account reliable credibility and deposit certain amount of money in that account

2.2 Formalities

Formalities of the negotiable instrumentsFormalities of the negotiable instruments

Draft Promissory note Cheque

PBOC’s uniform format √ √ √

Words indicating specific type Draft Promissory note Cheque

Unconditional payment √ √ √

Sum certain √ √ √

Drawee’s name √ √

Payee’s name √ √

Issuance date √ √ √

Drawer’s signature √ √ √

2.3 Default rules

2.3.1 Draft General presumptions: (1) payable at sight(2) place of payment: business premises, domicile or habitual residence of drawee(3) place of issue is business premises, domicile or habitual residence of drawer

2.3.2 Promissory note General presumptions: (1) place of payment: business premises, domicile or habitual residence of drawer(2) place of issue: business premises, domicile or habitual residence of drawer

2.3.3 Cheque General presumption: (1) place of payment: business premises of drawee(2) place of issue:business premises, domicile or habitual residence of drawer

3 Endorsement

3.1 Negotiability • Assignment is distinguished from ordinary assignments:(1) negotiable instruments may be assigned from one bearer to another

without any notice on payer about each new holder(2) assignee may sometimes acquire better right to sue on the

instrument than his predecessor had (3) bearer may sue in his own name any other party liable on the

instruments without joining any of the remaining parties

• 7 requirements for negotiability: (1) order or promise must be in writing (2) obligation must be for a money payment(3) sum on the face of the instruments must be for a certain fixed sum(4) order or promise must be unconditional (5) instruments must be payable upon demand or at determinable future time (6) complete sum, not just a part must be negotiated (7) instruments must be signed by payer or drawer

3.2 Endorsement

• Must be on the reverse side of the instruments, or allonge

• First endorser on the allonge must sign or affix seal on the adhesion area between the instrument and allonge.

• Should be successive • Once endorsed, endorser shall ensure the instrument in

the hands of the subsequent bearer is accepted or paid. If dishonored, endorser shall reimburse bearer stated amount and relevant expenses.

• Any exclusion clause designed to exempt endorser’s liability: null and void.

4 Acceptance

• Acceptance: only applies to bill of exchange.

• Presentation: precondition for acceptance by drawee, except for sight draft

• Payer should decide whether to accept such draft within three days from the receipt of it.

• If accepted, indicate the date of acceptance and such express words as "acceptance" on the face of the draft, and affix the signature or seal on it.

• Draft payable at a fixed date after sight: date of payment must be indicated on it.

5 Guarantee

• Applies to: draft and promissory note • Guarantor must indicate:

(1) having such words as “guarantee”

(2) name and domicile of the guarantor

(3) name of the principal debtor

(4) date of guarantee

(5) signature or seal of the guarantor

6 Payment

6.1 Presentation of the instrument by bearer • Draft: payer should make payment upon maturity date after acceptance • Sight draft: bearer should request payer to do so within 1 month from the

date of issue • Time draft: bearer should do so within 10 days after the date of maturity

of the fixed day or fixed period after the date of issue or presentation

• Promissory note: time for the payment is 2 months• Cheque: bearer shall do so within 10 days from the date of issue (same place)

6.2 Effect of payment and liabilities for wrongful payment

• Payer’s obligations: • examine continuity of the endorsement on the instrument • check identity and other valid documents of parties presenting the instrument • make full make full payment

• No partial payment is allowed • Drawee must act faithfully and may not dishonor the instrument without reasonable cause

Illustration:Illustration: Zhaoyang Branch liable for unreasonableZhaoyang Branch liable for unreasonable cheque payment rejection cheque payment rejection

On 9 April 1993 a Beijing based Supply Station agreed to refund Yanqi Co’s investment of RMB 780000 by crossed cheque with “account payee only.” Yanqi Co deposited the crossed cheque to its own bank account on the same day. On 10 April the cheque was dishonored by Zhaoyang Branch, the bank of the Supply Station based on “cheque bounced for insufficient fund". In fact the Supply Station’s current account balance was RMB 880000 on that day sufficient to clear such cheque. At noon of 12 April 1993, Yanqi Co found that the cheque was dishonored, and later obtained from its own bank the dishonored cheque and an advice for Bounced Cheque. In the afternoon by showing the dishonored cheque Yanqi Co demanded payment from the Supply Station again, which sent an account clerk to Zhaoyang Branch to settle the payment. Its balance then was only RMB 410000, thus insufficient to clear the cheque. Only on 15 April 1993 when there was RMB 820000 in its current account, Zhaoyang Branch settled the payment, and Yanqi Co received RMB 780000 on 17 April 1993.

In the process of clearing the cheque Yanqi Co believed that the Supply Station's cheque for RMB 780000 would be settled in time. Not knowing that the cheque had been dishonored, Yanqi Co had issued two crossed cheques for RMB 340000 on 10 April and RMB 170000 on 12 April 1993 respectively. Since Yanqi Co's current account balance had merely RMB 110000 insufficient to settle such cheques, which were dishonored on 12 and 13 April and a fine of RMB 25500 was imposed by Yanqi Co's bank. As a result Yanqi Co sued Zhaoyang Branch claiming compensation caused by the fine imposed by the bank. The cause for doing so was that Zhaoyang Branch dishonored the Supply Station's crossed cheque improperly while there was sufficient fund in the current account. The alleged reason of "Cheque Bounced for Insufficient Fund" was not genuine. Since the refund could not be transferred into its current account in time, Yanqi Co could not clear the cheques in relation to purchase of goods and a fine was imposed by its own bank. The trial court rejected Yanqi Co’s claim, which appealed to the intermediate court. After mediation conducted by the appellate court, the Zhaoyang Branch agreed to pay the Yanqi Co damages of RMB 19180, which was affirmed by the appellate court.

7 Dishonor and right of recourse

7.1 Occurrence dishonor

Occurrence and certificate of dishonorOccurrence and certificate of dishonor

Occurrence Certificate

Upon maturity Non-payment Certificate of refusal

Prior to maturity Non-acceptance Certificate of refusal

Bankruptcy order

Administrative decision Drawee or acceptor’s death or disappearance

Drawee or acceptor’s bankruptcy

Drawee or acceptor’s closure

7.2 Notice of dishonor

• Bearer shall inform the previous parties:• within 3 days from receipt of certificate of dishonor or

rejection of acceptance

• Upon receipt of such notice by the predecessor, he shall inform his next immediate predecessor within 3 days. • Notice: contain major written items of the instrument and explanation for rejection

7.3 Effects

• Drawer, endorser, acceptor and guarantor: jointly and severally liable to bearer

• Bearer does not have to follow sequence of debtors on instrument.

• Bearer may recourse against any or all of them.

• Specific request includes: (1) full amount of the debt dishonored(2) interest on the such amount according to interest rate formulated by the PBOC from the maturity or presentation date to date of payment(3) expenses incurred in obtaining written evidence of rejection of the instrument and issuing rejection notices

8 Protection of lost-instrument holders

• If lost before payment is due, lost-instrument holder may notify drawee to suspend payment.

 

• Within 3 days of giving the notice for suspension of payment or after the loss of the instrument, lost-instrument holder may apply to court for publication of public notice for assertion of claims

• Holder other than the lost-instrument holder comes forward to claim the rights during the foregoing withholding period, the litigation method shall be utilized

9 Statute of limitations

Statute of limitationsStatute of limitations

Limitation period Running from

Bearer’s rights against drawer & acceptor 2 years Maturity date

Sight draft and promissory note 2 years Issuance date

Cheque’s bearer against drawer 6 months Issuance date

Bearer’s recourse against predecessor 6 months Date of rejection

Right of re-recourse against predecessors 3 months Payment date or date being sued