Litigation options when commercial bills default at maturity

In the world of commerce, it is not uncommon for companies to receive a commercial bill issued or endorsed by a remote holder, only to find that it cannot be honoured at maturity. In practice, there are different views on whether the bill bearer should choose to claim the right to recourse or creditor’s rights under contract, or whether any pre-relationship exists between the two claims.

The first view is that after the contractual debtor endorses the bill to the subsequent bearer and prompts for payment, the contractual debt should be deemed settled. Any failure of payment is not caused by the contractual debtor’s breach of contract, therefore the contractual debtor bears no liability.

The second view is that the bearer should at first exercise the right to recourse, and if such rights cannot be realised, he/she may resort to the contractual creditor’s right. Otherwise, it will cause certain obstacles for the circulation of the bill, which goes against the very purpose of the bill system.

The third view is that the bearer accepting the bill does not mean the contractual debt has been settled, and the right to recourse and the contractual creditor’s right arise and coexist at the same time. Thus, the holder may choose one right or the other, and only when one is fully realised can the other be considered truly forfeit.

A matter of choice

The third view is the mainstream in current practice. A contractual creditor’s right and the right to recourse are both created upon the bill’s default. They share a “co-opetition” relationship and the bearer may choose one of them. Take sale contracts, for example: the buyer’s main contractual obligation is to pay consideration for the subject matter, and endorsing the bill to the seller is a form of that payment. However, the endorsement is not necessarily equal to the seller receiving the consideration.

In addition, in the absence of mandatory legal provisions, if the court requires the bearer to give priority to the right to recourse, it may constitute a violation to the principle of party autonomy. Furthermore, even if the rejection of the bill is not caused by the contractual debtor, pursuant to article 593 of the Civil Code, the contractual debtor in breach of contract due to a third party shall also bear default liability. The bearer may request the contractual debtor to take back the bill and pay the consideration by other means on the ground that the contract is not performed as stipulated.

Choice of litigation

The contractual debtor can only be the counterparty of a contract, while the drawer, acceptor, endorser, guarantor and other parties with bill obligations are bill debtors. The bearer can exercise the right to recourse against one or more persons within the statutory period.

From the perspective of ensuring the realisation of rights and interests to the greatest extent, the bearer may determine one or more defendants of the recourse litigation with consideration of the solvency of each remote holder, court jurisdiction, litigation costs, security (if any) and other factors.

Generally speaking, it is not advisable to list all the remote holders as defendants. If the court litigation documents cannot be delivered smoothly, the litigation progress may be delayed.

The Minutes of the National Working Conference on the Trial of Civil and Commercial Cases by Courts clearly provide that, in bill disputes, courts should prudently examine the bill activities and basic legal relationship between the remote and subsequent holders, and strictly regulate the non-bill activities between them while upholding the lawful right of bill.

Courts should also highlight the fact that the right of bill is not applicable to non-bill activities. The prerequisite for the bearer to exercise the right of bill is to sign or seal the bill effectively. If the bearer did not obtain the bill through a bill activity, his/her rights should be asserted based on the contractual legal relationship. For example, if financial institutions handle bill rediscounting business without bill endorsement, then only a contractual relationship is established.

In addition, we should be alert for possible crimes committed by the drawer or the remote holder, such as bill fraud or illegal financing that the drawer may be suspected of, or illegal discounting undertaken by unqualified civil entities. Once it is deemed a case that is both criminal and civil, the civil litigation of bill disputes will be suspended or even rejected by the court.

The bearer should choose the legal relationship of the contract as soon as possible after discovering the bill default, request to return the bill to the remote holder and arrange the payment of consideration via other means.

Relief and defence

If the bearer exercises the right to recourse against the bill debtor after obtaining the consideration based on the legal contractual relationship, due to the non-caustic nature of bills, the bill debtor may not refuse to make payment on the grounds that the bearer’s creditor’s rights have been realised.

Meanwhile, since the contractual debtor has paid the “consideration” repeatedly, he/she has the right to demand the bearer to return the overcharged amount on the grounds of unjust enrichment. If the bearer asserts the contractual creditor’s rights after exercising the right to recourse and obtaining the amount at par value, then naturally the contractual debtor is entitled to refuse such payment.

Compared with bank bills, commercial bills are inherently riskier because their acceptors are companies. When choosing to collect commercial bills, companies should have some level of understanding of the bill acceptor’s recent business performance.

To the largest extent possible, companies are advised to go with commercial bills with large-scale listed companies or large state-owned enterprises as acceptors. If it so happens that the bearer realises that his/her commercial bills cannot be honoured at maturity, he/she should flexibly and decisively formulate a litigation strategy while considering the performance capabilities of the bill debtor and the contractual debtor, as well as the litigation costs.

Zhou Le is an associate at Tiantai Law Firm