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.

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