Abstract: As affected by the downturn in the housing sector, the non-acceptance of electronic commercial drafts (“ECDs”) has become a prevalent issue. The drawer and the drawee of the ECDs are often the same entity. In the event an ECD is dishonored by non-acceptance, if the holder only requests the drawer or acceptor to pay the amount payable by the negotiable instrument, it is difficult to recover the amount in the end. In order to enhance of the efficiency of recourse, the holder often exercises the right of recourse against all prior parties of the negotiable instrument. After the right of recourse is exercised against a prior party and the prior party makes payment, it will then be granted the right of re-recourse in accordance with the provisions of Article 71 of the Law of the People’s Republic of China on Negotiable Instruments (“Negotiable Instruments Law”). This article will discuss the common legal issues on the right of re-recourse around negotiable instruments.
Key words: Negotiable Instruments, Right of Re-recourse, and Time Limits
Introduction to the case: On August 17, 2021, Company A, as the drawer, issued three negotiable electronic commercial acceptance drafts, each of which states that the drawee is Company B, and the acceptor is Company A. The sum said on each draft is RMB2,000,000, totaling RMB6,000,000. Their dates of maturity are August 17, 2022. These drafts state that promise by the drawer: please accept this draft and unconditionally make payment at the maturity of this draft; acceptance by the acceptor: this draft has been accepted, and payment will be paid unconditionally at the maturity of this draft. These drafts were successively negotiated to Company C, Company D and then Company E by endorsement. After the drafts became mature, the holder Company E gave the presentation for payment to the acceptor Company A, and the payment was refused. Now, these drafts are in the state of dishonor and recourse, and wait for payment. After the payment was refused, the holder Company E exercised the right of recourse against the prior party Company D by offline means, and Company D settled the debt with the house on September 21, 2022. Company E stated that it has lost the rights on the said negotiable instruments.
Court opinion: After settling the debt, the person against whom the right of recourse is exercised has the same right as the holder, and may exercise the right of re-recourse against other persons liable for the negotiable instruments. In the present case, after settling the debt, Company D exercised the right of re-recourse against the drawer Company A, the endorsers Company B and Company C, which is legally based. In accordance with the law, the person against whom the right of recourse is exercised may claim the entire settled amount plus interest, calculated at the rate prescribed by the People’s Bank of China on the said amount from the date when it made payment to the day when the said amount is reimbursed after seeking re-recourse. Therefore, three defendants shall pay Company D RMB6,000,000 payable by these electronic commercial acceptance drafts and interest thereon.
Q1: After the payment was rejected, the holder exercised the right of recourse against a prior party directly through litigation, not by online means. Does this impact the exercise of the right of re-recourse by the renewed recourser?
It is my opinion that the holder’s failure to exercise the right of recourse online will not impede the renewed recourser to exercise the right of recourse. Such debate arises from a partial interpretation of Article 5[1] of the Administrative Measures for Electronic Commercial Drafts Business (“ECD Measures”).
First, the ECD Measures are departmental regulations subordinate to the Negotiable Instruments Law. The Negotiable Instruments Law does not provide that the right of recourse must be exercised exclusively online, nor does it deem litigation-based recourse as invalid. Article 5 of the ECD Measures only regulates the business handling methods of ECDs. While the ECD Measures may be enacted based on legal authorization, they remain departmental regulations. In case of any conflict between the ECD Measures and the Negotiable Instruments Law, the latter shall prevail. However, the Negotiable Instruments Law does not provide that the right of recourse must be exercised online. Therefore, in the absence of clear legal provisions, the exercise of the right of recourse through litigation should be deemed effective.
Second, the ECD Measures themselves do not explicitly provide that the right of recourse on the draft must only be exercised online. The Section VIII of Chapter III of the ECD Measures does not mandate the right of recourse to be exercised exclusively through the ECD system. Also, Article 68.2 thereof provides that “the time limit for the holder’s right of re-recourse against other prior parties is three months from either the date of settlement or the commencement of a lawsuit”, which also states the option of litigation. It can be seen that the ECD Measures do not imply that the exercise of the right of recourse through litigation will be invalid.
As discussed earlier, the online exercise of recourse, as a formal requisite, does not impede the exercise of the right of recourse. The acquisition of the right of re-recourse is based on the provisions of Article 71 of the Negotiable Instruments Law[2], i.e. resulting from the exercise of recourse by the holder and the subsequent settlement by the person against whom the right of recourse is exercised. Therefore, the failure to exercise the right of recourse online will not affect the exercise of the right of re-recourse by the renewed recourser.
Q2: What amounts can be recovered by exercising the right of re-recourse?
In accordance with the provisions of Article 71 of the Negotiable Instruments Law, the renewed recourser may request other persons liable for the draft to pay the following amount and expenses: 1. the entire amount it has settled; 2. interest, calculated at the rate prescribed by the People’s Bank of China, on the said amount from the date when it made payment to the day when the said amount is reimbursed after seeking re-recourse; and 3. the expenses for the giving of notices.
I. The said items (2) and (3) thereof clearly provide for and separately list the specific amounts, which are less likely to be overlooked. This article suggests that we should focus on the “the entire amount it has settled” in the item (1). The “entire amount” should be the principal of the negotiable instrument plus interests already paid to prior parties by the renewed recourser (“Recourse Interest”). The Recourse Interest is calculated at the quoted rate of the one-year loan market issued by the National Interbank Funding Center, based on the principal of the negotiable instrument, from the day next to the date of maturity of the negotiable instrument until the date of settlement by the renewed recourser. Generally, the Recourse Interest has a clear amount and is likely to be supported by the court. For example, the Intermediate People’s Court of Zhengzhou City rendered the Judgment (2021) Yu 01 Min Chu No. 658, which reads that: “In this case, Company A claims an amount of RMB2,000,000 payable by the negotiable instrument and interest thereon amounting to RMB209,922.22 paid by it through enforcement proceedings, totaling RMB2,209,922.22, which does not exceed the scope of legal right of recourse and is therefore supported by this court”. The said Judgment explicitly supports the renewed recourser’s claim for interest amounting to RMB209,922.22 paid by it to the prior party. If, due to the inability of the drawer or the acceptor to accept the draft, the holder exercises the right of recourse against any prior party and requests the prior party to pay the interest, and after the renewed recourser makes payment, the interest cannot be further recovered, then the renewed recourser is not at fault, but assumes the interest from the date of acceptance to the date of settlement, which is contrary to the principle of fairness. Therefore, it is necessary to protect the right of the renewed recourser and allow the renewed recourser to recover the interest already paid by it from prior parties.
II. Can the renewed recourser recover the court costs paid by it from prior parties if the holder exercises the right of recourse through litigation?
In recent years, courts across regions have reached a consensus that they will no longer support the renewed recoursers’ recovery of the courts costs from prior parties. For instance, the Intermediate People’s Court of Qingdao City made corrections to the Judgment of the first instance in the Judgment (2022) Lu 02 Min Zhong No. 3578, which reads that:“ In accordance with the provisions of Article 71 of the Law of the People’s Republic of China on Negotiable Instruments, the scope of the right of re-recourse does not cover the court costs of the case. Therefore, the first-instance court’s decision that the appellant should pay the court costs of RMB6,100 to the appellee was inappropriate, and this court corrects it”. The Judgment of first instance supported the appellee’s claim for court costs, but the Judgment of second instance directly corrected it and provided a clear response.
Similarly, in one of the ten typical commercial trial cases published by the Guizhou High People’s Court in 2023, namely, Changzheng Company vs Xintou Company, Xinxin Company, Aviation Company, and Baosheng Company with respect to the dispute over the right of recourse, its adjudication gist is: the court costs do not fall within the scope of the right of re-recourse exercised based on the relationship of a negotiable instrument. The “settled” in the phrase “the entire amount it has settled” generally refers to the fulfillment of obligations by the debtor to the creditor. However, the court costs significantly differ from obligations payable to the creditor. Hence, Changzheng Company’s claim for the court costs in the re-recourse case was not supported.
Courts costs are fees that parties shall pay to the people’s court for initiating legal proceedings in accordance with the law. These court costs are not the face value nor the amount payable by the negotiable instrument claimed by parties in effective judgments. Court costs fall outside the purview of the Negotiable Instruments Law. Therefore, court costs cannot be recovered from prior parties.
Q3: How the starting time point of the time limits for the right of re-recourse is understood if the holder exercises the right of recourse through litigation?
In accordance with the provisions of items (1) and (4) of Paragraph I of Article 17 of the Negotiable Instruments Law, and Articles 12 and 17[4] of the Regulations of the Supreme People’s Court on Several Issues Concerning the Trial of Cases Involving the Disputes over Negotiable Instruments, the time limits vary based on the different persons against whom the right of exercise is exercised. The time limit is two years from the date of maturity of the negotiable instrument for the holder to exercise the right of re-recourse against the drawer and the acceptor, six months from the date of non-acceptance or non-payment for the holder’s right of recourse against other prior parties, and three months from the date of settlement or commencement of a lawsuit for the holder’s right of re-recourse against the prior parties. If the renewed recourser exercises the right of re-recourse and settles the debt through litigation by the holder, there will have two dates, i.e. the date of commencement of a lawsuit and the date of settlement.
The connecting term “or” between “date of settlement” and “date of commencement of a lawsuit” in item (4) of Paragraph I of Article 17 of Negotiable Instruments Law presents a choice relationship. However, courts hold different views on how to choose between such options. For instance, Shanghai Financial Court rendered the Judgement (2023) Hu 74 Min Zhong No. 650, which read that: “Regarding the third key point at issue, in accordance with the provisions of the item (4): three months from the date of settlement or the commencement of a lawsuit for the holder’s right of re-recourse against the prior parties, Company A can choose to exercise the right of re-recourse against its prior parties within three months after settling the amount payable by the negotiable instrument and the interest thereon with B’s business department, and its right of re-recourse is not lost.” In such case, five months had passed since the holder filed the lawsuit. If the date of commencement of the lawsuit is taken as the starting time point, the person against whom the exercise of recourse is exercised would have lost the right of re-recourse before settling the amount payable by the negotiable instrument. The court explicitly pointed out in the Judgment that the person against whom the right of recourse is exercised can choose to use the date of settlement as the starting time point, thereby safeguarding its right of re-recourse.
However, the Intermediate People’s Court of Nantong City held a different opinion on the same issue, as evidenced by the Judgment (2021) Su 06 Min Zhong No. 2090 rendered by it. Its core viewpoint is: the item (4) of Paragraph I of Article 17 of the Negotiable Instruments Law provides two parallel starting time points for the time limit of exercise by the holder of the right of re-recourse against prior parties, including date of settlement and the date of commencement of a lawsuit. The “settlement” includes voluntary and involuntary payment. The “commencement of a lawsuit” implies that the holder is not voluntarily but passively settling the debt. Since “commencement of a lawsuit” and “settlement” are provided as two parallel choices in the same clause, the said “settlement” should be understood as the “voluntary settlement” in contrast to the involuntary settlement implied by the “commencement of a lawsuit”. If the aforementioned “settlement” is understood to include involuntary settlement, then the involuntary settlement may start from any time, and the resulting time limit for exercise of the right of re-recourse will in fact not be subject to any time limitations. However, this interpretation is contrary to the legislative intent of the Negotiable Instruments Law for shorter time limits for the rights on the negotiable instrument and could even lead to the holder being negligent in the exercise of the right on the negotiable instrument.
In short, the court hold that if the holder exercises the right of recourse through litigation, the starting time point for the renewed recourser to exercise the right of re-recourse shall be fixed at the date of commencement of the lawsuit. This opinion differs significantly from that of Shanghai Financial Court, but it is also reasonable. Therefore, this article suggests that it be advisable to exercise the right of re-recourse as early as possible in practice to void losing such right.
Conclusion: The right of re-recourse has a relatively short time limit and involves numerous amounts. If a company’s payment request is rejected or it is recovered by its its subsequent party, the company should take prompt action to avoid unnecessary losses resulting from the expiration of the time limit or unclear amounts.
References to legal provisions:
[1] Article 5 of the the Administrative Measures for Electronic Commercial Drafts Business , which provides that the issue, acceptance, endorsement, guarantee, presentation for payment, resource and other business of ECDs must be gone through the ECD system.
[2] Article 71 of the Law of the People’s Republic of China on Negotiable Instruments, which provides that when the person against whom the right of recourse is exercised has settled the debt in accordance with the provisions of the preceding Article, it may exercise the right of re-recourse against other persons liable for the drafts and request them to pay the following amount and expenses: (1) the entire amount it has paid; (2) interest, calculated at the rate prescribed by the People’s Bank of China, on the said amount from the date when it made payment to the day when the said amount is reimbursed after seeking re-recourse; and (3) the expenses for the giving of notices.
[3] Article 71 of the Law of the People’s Republic of China on Negotiable Instruments, which provides that the rights on a negotiable instrument lapse, unless exercised within the following time limits: (1) two years from the date of maturity of the negotiable instrument for the holder against the drawer or acceptor; two years from the date of issue of a draft or a promissory note payable at sight for the holder against the drawer or acceptor; (2) six months from the date of issue of a cheque for the holder against the drawer; (3) six months from the date of non-acceptance or non-payment fro the holder’s right of recourse against the prior parties; or (4) three months from the date of settlement or the date of commencement of a lawsuit for the holder’s right of re-course against the prior parties.
[4] Article 12 of the Regulations of the Supreme People’s Court on Several Issues Concerning the Trial of Cases Involving the Disputes over Negotiable Instruments, which provides that: the holder’s rights against the drawer and the acceptor as provided in items (1) and (2) of the Negotiable Instruments Law include the right of claim for payment and the right of recourse; and Article 17 thereof, which reads that the holder’s right of recourse against the prior parties as provided in items (3) and (4) of the Negotiable Instruments Law does not include the right of recourse against the drawer to the negotiable instrument.
