Disputes arising from payment with negotiable instruments

Company A and company B entered into a subcontract for a project. The signature section of the subcontract was stamped with the seal of company B’s project department and signed by its representative, Mr Wang. In the course of the work, company B issued construction site visas bearing its seal and the signature of Mr Wang on a number of occasions and paid the project money on a number of occasions with cheques bearing its finance seal and the signature of Mr Wang, drawn on China Merchants Bank.

After completion of the works, company B issued post-dated cheques in the amounts of RMB150,000 (US$23,000) and RMB140,000 drawn on a certain bank. Company A, as the negotiated instrument holder, could not apply to the bank to cash the cheques on the dates it received them, and when it went to the bank after the maturity date indicated on the cheques to cash them, the bank refused to honour and pay them because there were insufficient funds in company B’s account. After several unsuccessful attempts to contact company B, company A took it to court, requesting a judgment ordering company B to pay RMB290,000 – the amount of the negotiable instruments.

Focus of the dispute

The distinguishing point of this case lies in the negotiable instrument issuer denying that the seal and signature on the cheques were genuine, and denying that there existed an underlying instrument relationship between it and the negotiable instrument holder. There were two points of dispute in this case: (1) whether the disputed cheques were valid negotiable instruments; and (2) whether there existed an underlying instrument relationship between company A and company B. For (1), company A asserted that the disputed negotiable instruments were genuine and valid, whereas company B argued that the seals and signatures on the disputed negotiable instruments were forged and the person who signed them was not a member of its staff, and that it had never opened a general account with the payment bank for the disputed negotiable instruments.

For (2), company A asserted that there existed a genuine contractual relationship between it and the negotiable instrument issuer. Company B argued that it did not have any business dealings with company A, and that the execution and performance of the works contract were the personal acts of the forger of the negotiable instruments, and had no connection to company B.

Validity of negotiable instruments

The key to substantiating whether the disputed negotiable instruments were lawful lay in whether the signature and seal on the negotiable instruments were forged by a third party. The second paragraph of article 9 of the Provisions of the Supreme People’s Court on Several Issues Concerning the Trial of Disputes Involving Negotiable Instruments specifies that a negotiable instrument holder that institutes a legal action in a people’s court is under obligation to provide the disputed payment instrument. If there is suspicion that the issuance, acceptance, payment or endorsement and transfer of the negotiable instrument involves an illegal act – such as deceit, theft, coercion, intimidation, violence, etc. – the negotiable instrument holder bears the burden of proving the lawfulness of the negotiable instrument.

As evidence for the rights in the negotiable instruments, company A submitted to the court the disputed negotiable instruments and the cheque dishonour notices from the bank. On the other hand, company B provided a notarial certificate evidencing its seal impression and the sample of its legal representative’s signature, and its bank accounts information. With the objective of refuting company B’s arguments and establishing the lawfulness of the negotiable instruments, company A applied to the court for the investigation of, and collection of evidence from, the bank in question.

The bank provided general account information and transaction details pertaining to the disputed negotiable instruments. It produced evidence that, at the time of opening of the account, it had reviewed the originals of such documents as company B’s business licence, and the ID document of its legal representative, and notified company B of the opening of the general account in question, that the signature and seal on the disputed negotiable instruments were fully consistent with the samples left with the bank, and that settlements had occurred through that account until the acceptance of the case. Accordingly, the disputed negotiable instruments were formally lawful and the evidence provided by company B was insufficient to show that its signature and seal were forged.

Underlying relationship

The key to evidencing an underlying instrument relationship lies in whether a contractual relationship exists between the parties. Pursuant to article 10 of the Law on Negotiable Instruments, and article 10 of the Provisions of the Supreme People’s Court on Several Issues Concerning the Trial of Disputes Involving Negotiable Instruments, in connection with the securing of a negotiable instrument, consideration must be paid and the negotiated instrument holder is required to provide relevant evidence showing that the specified obligations were performed.

As evidence for this, company A provided the works contract, the site visas, the final acceptance note, and the bank deposit receipts. Company B denied the works contract, claiming that the signature and seal on it were also forged, and claimed that no contractual relationship existed. As evidence that the subcontract was lawfully executed, company A provided a contract entered into by company B and a company C, the owner, published by the Shanghai Municipal Construction Industry Management Office.

The contract had undergone a conventional bid invitation and submission procedure, and been reviewed and placed on the record by the bid invitation and submission office of a certain district of Shanghai municipality. Company A had reason to believe that company B’s signature and seal were genuine and valid. Furthermore, it had executed the subcontract with it, the works had been completed and accepted, and company B had paid project money through the disputed negotiable instrument account on several occasions. Accordingly, the above-mentioned evidence provided by company A comprised an evidentiary chain substantiating the fact of the subcontracted works.

The key to the adducement of evidence in negotiable instrument recourse right disputes lies in the validity of the negotiable instrument and the underlying relationship. Following the trial, the court held that company A, as the negotiable instrument holder, was able to prove the validity of the negotiable instruments and the establishment of the underlying relationship, and rendered a judgment ordering company B to bear the liabilities associated with the negotiable instruments.

Song Zhongchun is a senior partner with City Development Law Firm in Shanghai