Chapter 10 Negotiable instrument law

1 Overview
2 Issue of the negotiable instruments
3 Endorsement
4 Acceptance
5 Guarantee
6 Payment
7 Dishonor and right of recourse
8 Protection of lost-instrument holders
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 exchange

A B C D
Drawer Payee Endorsee Endorsee
Endorser Endorser Bearer

P
Drawee E
Guarantor Right-holder
Secondary
debtor
Primary
debtor
 Parties to promissory note

A B C D
Drawer Payee Endorsee Endorsee
Endorser Endorser Bearer

E
Guarantor Right-holder

Primary Secondary
debtor debtor
 Parties to cheque

A B C D
Drawer Payee Endorsee Endorsee
Endorser Endorser Bearer

P (Banks)
Drawee
Right-holder

Secondary
debtor
 Negotiable instrument relations in bill of exchange and
cheque

A B C D
Drawer Payee Endorsee Endorsee
Endorser Endorser Bearer

Negotiable instrument relation

P
Drawee Non-negotiable instrument relation
 Negotiable instrument relations in promissory note

A B C D
Drawer Payee Endorsee Endorsee
Endorser Endorser Bearer

Negotiable instrument relation

Non-negotiable instrument relation

Illustration: 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
Lan De Co at the Hefei Intermediate People's Court. On 15 August the Hefei court as per
Hefei Co's application ordered that Hefei Branch must stop payment for the bill of
exchange amounting to RMB 17.07 million. On 20 th August Hefei Branch sent a letter to
Luohu Branch informing the latter that Hefei Branch would not reimburse payment on
the discounted bill. On 11 September Luohu Branch replied that it had settled the
discount on exchange before receiving Hefei Branch's letter, thus it was too late to stop
payment. Luohu Branch 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 Court 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 Lan De Co on supply contract involving different
legal relationships was beyond the scope of the present case, and the grounds of defense
raised by Hefei Branch were not valid. It thus 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

Promissory
Bill of exchange Cheque
note
Nature Entrusted payment Self payment Entrusted payment
Drawer & Drawer, drawee,
Basic parties Drawer, drawee, payee
payee payee
Payer’s
No restriction Drawer Banks
qualification
Primary debtor Acceptor Drawer No
On demand
Maturity On demand On demand
Determinable future time
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 pay
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 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: Zhaoyang Branch liable for unreasonable
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 dishonor

Occurrence Certificate
Upon maturity Non-payment Certificate of refusal
Prior to maturity Non-acceptance Certificate of refusal
Drawee or acceptor’s death or Bankruptcy order
disappearance Administrative decision
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 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