A Study Of Legal Issues Pertaining To The Pledge Of Negotiable Instruments

Negotiable instruments are ordinarily used in business transactions,since they are reliable and expedient means of dealing with large sums of money and minimize the risks inherent in using cash,such as the increased possibility of theft.Apart from being used in place of money,negotiable instruments are also used as means of obtaining credit.With the development of our country's market economy,negotiable instruments play a more and more important role,and cases of the pledge of negotiable instruments increase,which helps the economic prosperity of the country in return.The essence of the pledge of negotiable instruments is that the instruments are used as security for the repayment of a debt in order to secure the creditor's claim. In the mainland,the pledge of negotiable instruments is governed by Negotiable Instruments Law of the People's Republic of China,Guaranty Law of the People's Republic of China,and Property Law of the People's Republic of China.The provisions of the Negotiable Instruments Law,the Guaranty Law,and the Property Law are uncoordinated over issues of the pledge of negotiable instruments,which often provokes controversy between individuals who seek judicial resolution of their grievances,which also causes confusion in judicial practice.It has far-reaching significance to correctly understand and apply the Negotiable Instruments Law and to improve the legislation on the pledge of negotiable instruments.This thesis is based on our country's legislation.According to the legislative purpose of the Negotiable Instruments Law,and the characteristics of negotiable instruments, together with the relevant theory of Guaranty Law and Property Law,this thesis focuses on analyzing the legislation on negotiable instruments and the legal nature of the pledge act of negotiable instruments.This thesis also analyzes the establishment of the pledge of negotiable instruments,the pledge of an instrument with a statement that tries to prohibit further transfer of the instrument,the re-endorsement on a pledged instrument(i.e.the re-pledge of a pledged instrument through endorsement and the transfer of a pledged instrument through endorsement).This thesis analyzes some legal ambiguities and omissions in the existing laws,and put forward my own views.There is five parts in the thesis.The first part of the thesis provides an overview of the conflict under different pieces of legislation and judicial interpretations on the pledge of negotiable instruments,and then clarifies the relationship among pieces of legislation governing the pledge of negotiable instruments,especially between the Negotiable Instruments Law together with its judicial interpretations and other pieces of legislation together with their judicial interpretations.In my opinion,that:The legal nature of negotiable instruments is,first of all,that a negotiable instrument is a kind of securities.One of the most significant aspects of commercial paper is that it is negotiable,which means that it can be freely transferred from one party to another.Transfer of a negotiable instrument is accomplished by endorsement and delivery,and the transfer gives the new holder the right to enforce fulfillment in his own name.The terms commercial paper and negotiable instrument can be used interchangeably.Commercial law is the special law of civil law.Civil law and commercial law constitute private law.The Negotiable Instruments Law is a part of commercial law, so the Negotiable Instruments Law has different personality from civil law.In terms of the way of legal thinking,the way of legal thinking for negotiable instruments is a unique way of thinking.We can summarize the following principles for the way of legal thinking for negotiable instruments,namely:the principle of dynamic security protection,the principle that the interpretation of commercial paper should be based on the appearance of the commercial paper only,for example,a holder of a commercial paper can only rely upon the face of the document to establish and fix his right to payment,the principle that commercial paper should be interpreted as legally valid as far as possible,the principle of objective interpretation of commercial paper.To promote the circulation of commercial paper is the highest principle adopted by legislation.In the existing civil legislation in the mainland,the General Principles of the Civil Law is the basic law,and the Property Law is an important part of the existing civil law system.The Negotiable Instruments Law belongs to commercial law.China adopts the system of "combination of civil and commercial codes",therefore the Negotiable Instruments Law is a special law of civil law.In terms of the application of the law,when there is conflict between different pieces of legislation concerning the same issue,in accordance with the principles of "a special law is superior to the general law" and "the new law is better than the old law",therefore the Property Law is superior to the General Principles of the Civil Law,and the Property Law is superior to the Guaranty Law,and the Negotiable Instruments Law is superior to the Property Law,the Guaranty Law and the General Principles of the Civil Law.We can learn from other nations on the legislative arrangements for the pledge of negotiable instruments.It should be noted that in those nations that have Civil Codes,it is the Civil Code(or the Commercial Code) that makes general provisions, in which there are generalities which is applicable to the general rights,and special rules which is applicable to a specific pledge of right.Then the legislation on negotiable instruments makes specific provisions concerning the pledge of negotiable instruments,which is based on general provisions of the Civil Code(or the Commercial Code).The Civil Code(or the Commercial Code) and the legislation on negotiable instruments are consistent with each other logically.The second part of the thesis analyzes the legal nature of the pledge act of negotiable instruments.In my opinion,the pledge act of negotiable instruments is a kind of acts on commercial paper.There are legal characteristics for the pledge of negotiable instruments as follows:1.the pledge of negotiable instruments is a kind of pledge of rights.2.The object of the pledge of negotiable instruments is a specific property right other than ownership,and the specific property right must be transferable.3.The pledge of negotiable instruments is effected by effective endorsement and delivery.4.An instrument with an endorsement for pledge if a proof by itself for the legal rights of a holder.5.During the period of pledge,the pledge holder is in possession of the instrument.The pledgor may redeem the instrument when he pays off the debt.If not,and when the debt is due,the pledge holder may foreclose on the instrument.Even if the debt is not due yet,the pledge holder may also satisfy his claim by realizing his right of the pledge of the instrument on/after the maturity date of the instrument.In both cases mentioned above,the amount of the instrument will be paid to the pledge holder(endorsee).6. The amount of the instrument must be paid in full even if the amount is larger than the pledge holder's claim.The pledge holder(endorsee) may collect the amount of money for the satisfaction of his claim,and return the remaining to the pledgor.7.If payment is unjustifiably refused by the individual who has primary liability,the pledge holder(endorsee) may exercise his right of recourse to recover against any prior party liable on the instrument for transfer of the rights under the instrument by negotiation,including the pledgor(endorser).The contract of putting the negotiable instruments in pledge acts as the cause of the pledge of negotiable instruments.While the latter is governed by the Negotiable Instruments Law,the former is governed by the Property Law.As we all know that the right to the performance of a negotiable instrument is not linked to its material cause.In other words,the validity of the act on commercial paper is separated from its cause,which means the rights to payment do not rely on the validity of the underlying contract giving rise to the debt.Therefore,according to the Negotiable Instruments Law,legal flaws of the contract do not affect the legal effect of the pledge act of negotiable instruments.The third part of the thesis analyzes the establishment of the pledge of negotiable instruments and its legal effect.An endorsement is the process of signing the back of an instrument,thereby imparting the rights that the signer had in the paper to another person.As long as a pledgor(endorser) writes down "pledged" and his signature on the back of an instrument,the pledge of the negotiable instrument takes effect immediately upon delivery to the pledge holder(endorsee).The validity of the underlying contract does not affect the validity of the pledge act of negotiable instruments.According to the Negotiable Instruments Law,negotiation enables the transferee to become the party to the contract,and to enforce the contract in his own name,and the bona fide holder for value of a negotiable instrument takes it free from defenses to the claim on the note.If payment is unjustifiably refused by the individual who has primary liability when the pledge holder(endorsee) tries to realize his right of the pledge of the negotiable instrument,the pledge holder (endorsee) may exercise his right of recourse to recover against any prior party liable on the instrument for transfer of the rights under the instrument by negotiation, including the pledgor(endorser).We cannot distinguish between the endorsement for transfer and the endorsement for pledge if words like "pledged" is not stated. Entering into a contract on the pledge of negotiable instruments without endorsing on the back of the instruments is not under the Negotiable Instruments Law.Under the Property Law,a pledge holder gets the right of the pledge upon delivery of the instrument,and must provide the pledge contract or other supporting documents to prove his right to the instrument when he exercises the right.Under the Circumstances,the pledge holder's claim to the instrument is just a kind of ordinary civil rights,and he can seek relief under civil law.The pledge holder,though bona fide and for value,takes it for the most part subject to personal defenses in favor of a prior party,therefore the pledge holder cannot hold better title than the party he obtains it from.The pledge of negotiable instruments is effected by endorsement and delivery.Hence an endorsement which establishes the pledge of a negotiable instrument is an element for putting the pledge into effect rather than against a subsequent endorser.The fourth part of the thesis analyzes the pledge of an instrument with a statement that tries to prohibit further transfer of the instrument.In my opinion,an endorsement that tries to prohibit further transfer of an instrument will not succeed, and it is still completely negotiable upon its endorsement by an endorsee.Hence the pledge of negotiable instruments can be effected by endorsement and delivery.In this case,the endorser who records the statement that attempts to prevent subsequent transfer of the document is not legally responsible to pay to his indirect subsequent party if payment is unjustifiably refused by the individual who has primary liability. Negotiability is terminated when the issuer of an instrument records a statement that prohibits further transfer of the instrument.Thus the instrument cannot be transferred by endorsement and delivery.Hence the pledge of negotiable instruments cannot be effected by endorsement and delivery.However the pledge of the instrument can be effected by an ordinary contract under civil law.In this case,a notice needs to be given to the issuer of the instrument,and permission must be obtained from the issuer.The fifth part of the thesis analyzes the re-endorsement on a pledged instrument (i.e.the re-pledge of a pledged instrument through endorsement and the transfer of a pledged instrument through endorsement).In my opinion,the re-pledge of a pledged instrument should be allowed by legislation in order to take full advantage of the exchange value of the negotiable instrument and to facilitate capital financing.This is consistent with the nature of negotiable instruments and the legislative intent of the Negotiable Instruments Law.In my opinion,the transfer of a pledged instrument through endorsement should be deemed null and void.