Perspective | Legal Risks of "Commercial Bill Payments" by Construction Contractors and Corresponding Mitigation Strategies

In China, the negotiable instruments referred to in the "Notes Law" are divided into three categories: bills of exchange, promissory notes, and checks. A bill of exchange is an instrument issued by the drawer, instructing the drawee to pay a specified amount unconditionally to the payee or holder either upon presentation or on a designated date. Bills of exchange are further categorized into bank drafts and commercial drafts. Commercial drafts, in turn, are classified as Commercial Acceptance Bill There are two types of bank-accepted bills: paper and electronic. The maximum payment term for paper commercial bills is 6 months, while the maximum payment term for electronic commercial bills is 1 year.

Many people think that bank drafts and Banker's Acceptance Bill It’s one thing, but in fact, the two differ significantly. Moreover, commercial acceptance bills and bank acceptance bills are worlds apart. The recent high-profile incidents of unpaid commercial bills in the real estate sector specifically refer to commercial acceptance bills. A bank acceptance bill is accepted by a bank, whereas a commercial acceptance bill is accepted by a payer other than a bank. In this context, the payer of a commercial bill serves as the acceptor. Simply put, a commercial acceptance bill relies on a company’s creditworthiness—it’s essentially an IOU issued by a business with a clearly defined payment deadline. On the other hand, a bank acceptance bill leverages the credit line extended by a bank to the issuing company, effectively turning the bank’s endorsement into a guaranteed form of payment. In essence, a bank acceptance bill is backed by the bank’s credibility, making it far more reliable than a commercial acceptance bill. As a result, delays in paying bank acceptance bills are extremely rare.

According to Article 25 of the "People's Republic of China Bills Law," lawsuits arising from bill disputes shall be under the jurisdiction of the people's court in the place where the bill is payable or where the defendant resides.

“Place of payment indicated on the instrument” refers to the place of payment specified on the instrument itself. If no place of payment is indicated on the instrument, it shall be the business location, residence, or habitual abode of the drawee or the paying agent for a bill of exchange.

(1) Distinguish between the right to request payment and the right of recourse within negotiable instrument rights.

The right to request payment refers to the right of a holder of a negotiable instrument to demand that the primary debtor or other obligor on the instrument pay the amount specified therein.

The right of recourse refers to the situation where a negotiable instrument is not paid upon maturity or before its maturity. Not Accepted When other statutory reasons exist, the holder of a negotiable instrument may, after duly completing the required preservation procedures as prescribed by law, request reimbursement of the instrument's face value, interest, and other legally mandated amounts from their immediate prior party.

The right to demand payment is the holder's first-order right, while the right of recourse is the holder's second-order right.

According to Article 53 of the "People's Republic of China Bills Law," the holder shall present the bill for payment within the prescribed time limit. For bills payable on a fixed date, or bills payable at a fixed period after issuance or sight, the holder must present the bill for payment to the acceptor within ten days from the due date. If the holder fails to present the bill for payment within the time limit specified in the preceding paragraph, the acceptor or payer shall still remain liable to pay the holder upon providing an explanation.

(2) Classification of Rights of Recourse

According to Article 65 of the "Administrative Measures for Electronic Commercial Bills Business," recourse is divided into refusal-to-pay recourse and Non-Recourse Recourse Non-payment recourse refers to the act of the holder requesting payment from the prior party after an electronic commercial bill is dishonored upon maturity.

Non-recourse claim refers to the act of the holder requesting payment from the prior party when any of the following circumstances exists: the acceptor has been legally declared bankrupt; or the acceptor has been ordered to cease business operations due to illegal activities.

Article 67: When pursuing recourse, the claimant shall provide proof of refusal to pay. In cases of refusal-to-pay recourse, the proof of refusal consists of the instrument details and the reason for refusal. In non-refusal-to-pay recourse cases, the proof of refusal comprises the instrument details along with relevant legal documents.

According to the above regulations, in disputes over rights of recourse, a "proof of refusal to pay" is the key evidence for exercising such rights.

(3) Handling of Recourse Rights

According to Article 68 of the "People's Republic of China Bills Law," the drawer, endorser, acceptor, and guarantor of a bill of exchange bear joint and several liability to the holder. The holder may exercise the right of recourse against any one, several, or all of these parties, without being required to follow the order in which the bill debtors are listed.

According to Article 66 of the "Administrative Measures for Electronic Commercial Bill Business," if a holder is refused payment before the bill's maturity date, they are not entitled to pursue recourse against previous parties. However, if the holder is refused payment within the presentation period for payment, they may seek recourse from all prior parties.

If a holder's payment request is rejected because it was made after the presentation period, the holder may still seek recourse against all prior parties if a valid payment request was already issued within the presentation period. However, if no payment request was sent during the presentation period, the holder can only pursue recourse against the drawer and the acceptor.

According to the above laws and regulations, the holder of the instrument may exercise the right of recourse against any one, several, or all of the persons who previously held it.

(4) Statute of Limitations for Recovery

Article 17 of the "People's Republic of China Bills Law" states that the rights of a holder against the drawer and acceptor of a bill shall expire two years from the date the bill matures. For bills of exchange and promissory notes payable on sight, the period is also two years from the date of issue. Additionally, the holder's right to recourse against prior parties begins six months from the date of refusal of acceptance or refusal of payment. The holder's right to further recourse against prior parties, meanwhile, lapses three months from either the date of settlement or the date legal action is initiated.

The construction units encounter the following types of "commercial bill payments": The first is an explicit "commercial bill payment," where the contract explicitly stipulates that project payments will be made via commercial bills. The second is an implicit "commercial bill payment," which occurs when the contract doesn’t specifically mention "commercial bill payment" but instead includes clauses like "the contractor agrees to accept all payment methods offered by the employer." During contract execution, the employer then directly pays the construction unit using commercial bills based on this agreement. The third is a forced "commercial bill payment," which typically falls into two scenarios: One scenario arises when, during construction or after project settlement, the employer temporarily lacks funds for payment but expects cash inflows within a certain period. In such cases, the employer proposes paying with commercial bills, and once the bills mature, the construction unit can redeem them directly—effectively treating the commercial bill as a form of "credit instrument." The other scenario occurs when the employer genuinely cannot afford to pay but happens to hold commercial bills issued by another entity. In this situation, the employer endorses these bills to the construction unit, using them as a legitimate means to settle the project payment.

Acceptance risk specifically manifests as the acceptor's failure to make payment upon maturity. After a commercial acceptance bill comes due, if the company acting as the acceptor faces bankruptcy, insolvency, or lacks sufficient cash, the bill cannot be actually paid, leaving the holder’s rights under the instrument unprotected.

The risk of non-acceptance for commercial bills is significant. Commercial acceptance bills rely entirely on the creditworthiness of the issuing company, making them highly risky—especially those issued by enterprises that lack financial strength. Therefore, construction companies must exercise extreme caution when accepting commercial bills as payment for project funds from their clients. Before proceeding, they should thoroughly assess the creditworthiness and payment capacity of the accepting company to prevent the unfortunate scenario of a bill being dishonored.

Currently, companies can initiate electronic commercial acceptance bill services simply by possessing an organization code and having opened a RMB bank settlement account. The participating institutions only need to verify the authenticity of basic information such as the customer's name and organization code. However, there is insufficient in-depth analysis and scrutiny of the company's operational status, financial condition, and creditworthiness. As a result, bills can be issued at any time—without requiring the upload of contracts, invoices, or other supporting documents, nor necessitating collateral or guarantees—making it even easier to trigger "empty check" risks.

According to Article 41 of the "Judicial Interpretation (I) on Construction Project Contracts": "The contractor shall exercise the priority right to payment for construction project costs within a reasonable period, but in no case shall this period exceed 18 months, calculated from the date when the employer is obligated to pay the construction project costs." Now, imagine that after settlement, the project owner opts to pay the project fees via commercial bills. In this scenario, the construction company would likely lose its priority right to payment—here's why:

First, commercial bills themselves have a fixed payment period, with a maximum of one year. When you add the settlement period to this, the total often exceeds six months. If the commercial bill cannot be honored upon maturity, by the time the construction company seeks payment from the project owner, the deadline for exercising its priority claim rights will already have passed. According to Article 87 of the "Measures on Payment and Settlement," the payment term for commercial drafts cannot exceed six months. Meanwhile, Article 13 of the "Administrative Measures for Electronic Commercial Draft Business" specifies that the payment term for electronic commercial drafts, calculated from the date of issuance to the maturity date, must not exceed one year. Today, electronic commercial drafts have become increasingly common.

Second, once the project owner pays the construction fees via commercial bills, and unless otherwise specified, the payment for the project is deemed complete. As a result, the original creditor-debtor relationship arising from unpaid project funds between the construction company and the project owner transforms into a bill-related arrangement. If the commercial bill fails to be honored upon maturity, the construction company can only hold the project owner accountable for the bill's non-acceptance—and cannot, under the construction contract, demand payment directly from the project owner. Consequently, the company also loses its priority right to claim compensation.

The reasons why commercial bills are difficult to cash in are as follows: First, commercial bills come with a fixed payment period, requiring construction companies to wait until the bill matures before they can redeem it. Second, downstream enterprises of construction firms—such as subcontractors—typically refuse to accept commercial bills as payment for project costs. In other words, it’s challenging for construction companies to endorse these bills to their own suppliers or partners. Finally, if a construction company finds it hard to arrange discounting before the bill’s maturity date, the reason is straightforward: commercial bill discounting refers to the process where the holder presents an unexpired commercial bill to a bank in exchange for immediate cash. The bank then purchases the outstanding receivable note, deducts interest based on the time remaining until maturity, and pays the discounted amount back to the bill-holder. However, in practice, obtaining a discount for commercial bills is often difficult, as many banks simply do not offer this service. Moreover, even when discounting is possible, it usually requires that the acceptor’s account holds sufficient funds—and the fees charged for such transactions tend to be quite high.

Once a bill of exchange is lost and the holder fails to take timely remedial measures, it may result in the loss of the right to enforce the instrument, leading to financial losses (such as the inability to recover funds corresponding to the face value of the bill).

The most direct and effective way to handle payments via commercial acceptance bills is for the construction unit to simply refuse payment by such bills if no agreement has been made. Additionally, when dealing with the project owner, the construction unit should promptly take legal action, including filing lawsuits or applying for asset preservation measures, to safeguard its rights.

In reality, the client and the construction company are not on equal footing, making it difficult for the construction company to adopt this strategy to mitigate risks. However, under certain conditions, the construction company does have the right not to accept "commercial bill payments."

First, there is no agreed-upon scenario for payment via commercial bills. In other words, if the contract does not specify that project payments will be made using commercial bills, the construction company has the right to refuse if the project owner proposes settling the payment with commercial bills.

Second, there are cases where the commercial bills are vaguely specified in the agreement. Specifically, the contract stipulates that project payments will be made via commercial bills, but it fails to clearly identify the issuer and acceptor of these bills. According to Articles 510 and 511 of the Civil Code, if the issuer or acceptor of the commercial bills provided by the construction entity is a company with poor creditworthiness—rather than the construction entity itself—the construction contractor has the right to refuse to accept such bills and may instead demand that the construction entity make direct payment of the project funds.

Third, situations where the acceptor loses commercial credit. In other words, if the commercial bills already issued by the construction entity cannot be accepted, or if other circumstances arise that lead to a loss of commercial credibility—such as being listed as a discredited person subject to enforcement, or falling under any of the four scenarios outlined in Article 527 of the Civil Code: severe deterioration of business conditions; transferring assets or siphoning off funds to evade debts; loss of commercial reputation; or any other situation indicating an imminent or actual inability to fulfill contractual obligations.

Here, setting the right conditions is crucial—of course, this also tests the negotiating skills of the construction company. Accepting commercial bills under certain conditions means that while the contract doesn’t specify payment via commercial bills, the construction company has no choice but to agree to them under specific circumstances, either to protect its own interests or to prevent a complete breakdown in the relationship between the project owner and the contractor. In such cases, the construction company can take the following measures to mitigate risks:

One of the measures is to cover funding costs. During contract execution, the construction entity proposed settling project payments via commercial bills, largely because they were unable to make timely payments. From the perspective of contract fulfillment, this clearly constitutes a breach of contract by the construction entity, forcing the construction company to advance funds for the project instead. As the party upholding the contract, the construction company is entitled to request that the construction entity reimburse the funding costs it has borne. As everyone knows, the cost of commercial bills typically consists of two components: first, the funding cost—specifically, the interest or other charges incurred by the construction company while holding the bill before its maturity date; and second, the discounting cost, which involves clarifying who bears the expense of discounting the bill. If the holder discounts the bill before maturity, they must pay a certain discount fee. To mitigate these risks, it’s advisable to: 1) Whenever possible, insist that the counterparty issue a sight bill with immediate payment upon presentation, thereby minimizing the need for acceptance procedures and avoiding discounting risks altogether. 2) For commercial bills with longer payment terms, explicitly stipulate in the transaction contract who will bear the discounting costs—ideally, making the issuer responsible for covering these expenses—to safeguard against potential increases in funding costs due to discounting. In principle, when accepting commercial bills, the construction company should require the client to provide either a guarantee of endorsement or an acceptance confirmation letter, ensuring that the company can successfully discount the bills after receipt.

The second measure is to amend the contract terms. During this process, the project owner proposed settling the project payment with commercial bills, typically because the owner lacks immediate cash to pay and is thus dependent on the construction company. Taking advantage of this situation, the construction company can request changes to clauses in the contract that are unfavorable to itself, thereby mitigating the risks associated with commercial bill payments.

The third measure is to require the provision of a guarantee. During the process, if the construction entity proposes paying the project costs using commercial bills, the construction company should verify the creditworthiness of the construction entity. If the verification reveals that the construction entity has poor credit standing, the construction company should request the entity to provide a guarantee or enlist a third party as guarantor—this ensures that the commercial bills can be honored or that the project funds can be recovered through alternative means.

The fourth measure is to agree on the liability for breach in case commercial bills cannot be honored. When the project owner proposes to pay the project funds using commercial bills, the construction company should negotiate with the project owner to clearly define the liability for breach if the commercial bills fail to be accepted. This liability consists of two key components: first, if the commercial bills cannot be honored, the project owner must pay interest for the delayed payment; second, if the commercial bills remain dishonored, the construction company has the right to demand that the project owner continue making the full payment for the project work.

Additionally, when preparing to accept commercial bills of exchange, construction companies can conduct a comprehensive assessment of the acceptor’s financial and credit standing. Alternatively, they may start by investigating other enterprises that already collaborate with the acceptor, before ultimately deciding whether or not to accept the acceptor’s commercial bill. Furthermore, companies should enhance their employees’ expertise in handling bills of exchange as well as their ability to detect counterfeits. By refining training and evaluation systems, organizations can fundamentally improve staff professionalism, enabling employees to accurately assess and decide whether to accept commercial bills. Moreover, this professional approach allows them to thoroughly evaluate the acceptor’s business credibility and payment capacity, thereby minimizing the company’s financial risks.

The so-called transfer of commercial bill risk essentially refers to a scenario where, when contractually agreeing to pay project costs via commercial bills, the construction company should plan ahead and incorporate a clause into the subcontractor bidding process—specifically, stipulating that subcontractors' payments will be made through commercial bills. This allows the construction company to pass the commercial bill directly to the subcontractors, effectively shifting the associated risks onto them.

If the drawer and acceptor of the commercial bill are not the construction entity but rather an affiliated company of the construction entity, the construction contractor should agree with the construction entity that, in the event the commercial bill cannot be accepted, the contractor has the right to either request the construction entity to continue paying the project funds or demand that the acceptor continue honoring the bill.

Under current legal provisions, the period for exercising the right to priority payment does not exceed 18 months, starting from the date when the project owner is obligated to pay the construction project cost. This provision is designed to safeguard the priority payment rights of construction contractors.

(1) Shorten the payment term for commercial bills. The construction unit has six months from the date when the employer is obligated to pay the project funds to exercise its priority right of compensation. However, since the payment term of the commercial bill is agreed upon by the project owner and the construction unit, if the bill’s payment period is shorter than six months—if the bill cannot be honored but the agreement stipulates that the project owner must still continue paying the project funds in such cases—the construction unit can still assert its priority right of compensation.

(2) The agreed maturity date of the commercial bill shall be deemed the date when the project payment is due. Consequently, the construction entity’s obligation to pay the project funds will be deferred. This arrangement ensures that, even if the commercial bill cannot be honored, the construction company retains the right to demand payment from the construction entity and continues to enjoy priority in receiving compensation.

(3) Agreed-upon arrangements stipulate that payment of project funds will continue even if the commercial bill cannot be honored. One reason why the construction company loses its priority right to claim payment after accepting the commercial bill is that, by doing so, the construction entity has already fulfilled its obligation to pay the project costs. As a result, the relationship between the construction company and the construction entity shifts to a purely negotiable instrument-based arrangement. Therefore, when accepting the commercial bill, the construction company should clearly agree with the construction entity that, in the event the bill cannot be honored, the entity must resume paying the project funds. This ensures that the construction company retains its right to exercise priority claims for reimbursement.

The parties involved in the delivery and receipt of accepted bills should establish a strict handover system to ensure the secure transfer of documents, preventing disputes over whether the delivery and receipt processes have been completed. Additionally, this system will help avoid situations where bills are lost or stolen due to improper handling during the handover process. Relevant personnel must also enhance their ability to identify genuine bills, thereby avoiding the acceptance of counterfeit, altered, or cloned bills in daily operations—issues that could lead to significant financial losses for the company. For bills with improperly executed signatures or seals, they should be directly rejected, and the issuer should be promptly requested to reissue the document with correct credentials.

According to Article 15 of the Negotiable Instruments Law, if a negotiable instrument is lost, the holder may promptly notify the payer to suspend payment, or, within three days after notifying the suspension of payment—or directly after the loss occurs—file an application with the People’s Court for public notice and urging payment in accordance with the law, or initiate legal proceedings in the People’s Court as a means of seeking redress.

P.S.: Typical Cases