The Drawee's Examination Obligation

Negotiability is the essence of the negotiable instrument. For the reason that theproblems of asymmetric information objectively exist, the transaction information thata drawee can get is limited except those from the appearance of a negotiableinstrument. The negotiable instrument's improper payment is inevitable because adrawee can only determine the valid ity based on the integrity of the items recorded ina negotiable instrument, or determine that whether there is any flaw in the rightsarising out of a negotiable instrument and whether the holder is qualified for get theamount based on the uninterrupted series of endorsements of the negotiableinstrument. So what kind of examina tion obligation should be fulfilled in paymentthat can make a drawee be released from an obligation for re-payment?In the Chapter 1 of this article, the author extensively summa rizes differentdefinitions and characteristics of the payment in the academic circles and gives hisown opinion based on the process of payment. The author defines and analyzes thedefinition of the drawee and its obligations, and classifies the drawee's examina tionobligation into three kinds, namely: Forma l Examination Obligation, Substa ntia lExamination Obligation and Supplementary Examination Obligation. The author alsodefines the drawee's examina tion obligation as a diligent and prudent formalexamina tion obligation based on the provisions of Negotiable Instrument Law indifferent countries and related internationa l treaty and compares the examina tionobligation of a non-endorsable negotiable instrument with that of an endorsablenegotiable instrument. In Chapter 2 of this article, the author would like to begin with the problems ofasymmetric information in economics in order to identify the reason that a draweewill be released from the re-payment obligation if he/she fulfills the diligent andprudent formal examina tion obligation. Being a kind of negotiable securities andtransferred between different parties, a drawee's improper payment is inevitable dueto the imbala nce in transaction information when a holder makes his presentation forpayment pursua nt to the lega l proceedings. If the drawee is required to bear theresponsibility as a substantia l examina tion obligation which mea ns the drawee shouldstill be responsible for the lega l oblige e even improper payment occurs. In thesituation of"Adverse Selection", the most rationa l choice that a drawee ma y choose isrefusa l of payment which will obstruct the circulation of a negotiable instrument. Sothe examina tion obligation that a drawee should bear is only limited to the appearanceof a negotiable instrument.In the Chapter 3 of this article , the author analyzes the provisions on standards ofa drawee's examina tion obligation in China. The article 57 of the NegotiableInstrument Law in PRC stipulates the Forma l Examination Obligation, SupplementaryExamination Obligation and Liability for Fault of a drawee and its agent. TheProvisions of Issues Concerning the Trail of Cases of Negotiable Instrument Disputespromulga ted by the Supreme People's Court gives a extensive interpreta tion to"GrossNegligence"which has its assumption standards in the Regulation on Payment andSettlement promulga ted by the People's Bank of China. By this, a drawee's (or itsagent's) examina tion obligation has been transferred from a Forma l ExaminationObligation to a Supplementary Examination Obligation. On the basis of judging suchProvisions and its amend ments in practice, the author reached his conclusion: Adrawee should not be released from an obligation for re-payment if he/she paid theamount by fulfilled the formal examina tion obligation and check valid ID in a dueprocess without any abnorma lities found.