An enforceable notarized debt instrument refers to a legal document that is prepared and issued by a notary. The notary first examines an instrument that requires payment in cash, goods and/or negotiable securities, and if he finds that the rights and obligations therein are clear and that the instrument involves no dispute between the parties, at the request of the party/parties the notary will prepare a notarized document to certify that the instrument is enforceable. The most valuable function of the enforceable notarized debt instrument system is that the instrument becomes directly enforceable without the need for litigation proceedings, thereby conserving judicial resources. Nevertheless, the lack of a need for litigation proceedings is based on the assumption that the system proceeds smoothly. In practice a creditor or a debtor might still file a lawsuit for various reasons even though enforceable notarization has been performed on the debt instrument. Whether the court should accept a lawsuit under such circumstances has long remained an issue in dispute in the field, and the various local courts handle this issue differently.
In this circumstance the Supreme People’s Court provides, in its Reply to the Question of Whether a People’s Court Should Accept Lawsuits Involving Disputes Over the Content of Enforceable Notarized Debt Instruments (Fa Shi  No.17) that “a notarized debt instrument that involves payment and specifies that the debtor is willing to accept an enforcement undertaking shall be enforced in accordance with the law. If the creditor or the debtor objects to the content of the instrument and directly files a civil lawsuit with the court, the court shall not accept the case. However, if the content is indeed incorrect and the court decides not to enforce the instrument, the parties and persons having an interest in the notarized matters may file a civil lawsuit with the court.” Based on this interpretation, an enforceable notarized debt instrument is clearly endowed with the ability to avoid direct legal proceedings. Although the issuance of these judicial interpretations provides something of a reference and a basis for the court to handle applicable circumstances, the rationality of the interpretations is still an issue worthy of theoretical discussion.
In the author’s view, although it is reasonable to prohibit a debtor from directly filing a lawsuit over an enforceable notarized debt instrument based on his or her undertaking, the creditor and third parties should not be subject to such a restriction. No theoretical obstacle exists that would prevent permitting a creditor or a third party to directly file a lawsuit based on an enforceable notarized debt instrument. On the contrary, allowing direct lawsuits better protects the legitimate rights and interests of creditors.
I. Theoretical Justification for Directly Filing a Lawsuit Based on an Enforceable Notarized Debt Instrument
Several justifications for not permitting direct civil actions based on enforceable notarized debt instruments are generally accepted in academic circles: First of all, according to Article 238 of the P.R.C. Civil Procedure Law and Article 37 of the P.R.C. Notarization Law, enforceable notarized debt instruments have equal legal validity with effective court judgments or rulings and arbitral awards, all of which can be used as the basis for judicial enforcement. After conducting the enforceable notarization of a debt instrument, a party will have a basis for judicial enforcement. If the law again permits a civil action over to the content of the notarized debt instrument, a double basis for enforcement will be incurred, which would result in a civil law version of double jeopardy. In particular, if the court’s ruling is inconsistent with the rights and obligations prescribed in the notarized debt instrument, the two enforcement bases will contradict each other and thereby confuse the court’s enforcement procedure.
Secondly, the notarization of a debt instrument is a procedural option of the parties that renders the debt instrument enforceable by the notary office. The debtor undertakes to become directly subject to enforcement if he fails to perform or improperly performs the instrument’s debtor obligations, which undertaking represents a voluntary waiver of his right of defense. For the creditor, this option represents a procedural right of disposition – when he chooses to conduct enforceable notarization of a debt instrument, he also voluntarily waives his right to enforce his creditor’s rights through litigation. According to the modern theory of procedural law, the parties should be entitled both substantive and procedural rights of disposition within certain limits. Once the parties have reached agreement on the procedural option, they should honor their undertakings and the agreement should be protected by law. Finally, prohibiting the parties from directly filing lawsuits based on enforceable notarized debt instruments will help conserve judicial resources and enhance the efficiency of judicial procedure.
In the author’s view, all of the foregoing reasons are worth discussing. First of all, it is difficult to classify notarized debt instruments and court judgments and rulings or arbitral awards into the same category of legal authority from the point of view of either current applicable law or legal theory. Article 238.1 of the P.R.C. Civil Procedure Law provides that “Where a party fails to perform its obligations under a document that has been lawfully rendered enforceable by a notary public, the other party may apply to the competent People's Court for enforcement. The People's Court to which the application is made shall enforce the document.” A similar provision can be cited from the P.R.C. Notarization Law. Nevertheless, although the foregoing provision provides that an enforceable notarized debt instrument can be used as a basis for petitioning a court for enforcement, it does not endow the instrument with a legal validity equal to court judgments and rulings or arbitral awards. In fact, an enforceable notarized debt instrument is significantly different in nature – a notarized debt instrument is only an agreement prescribing the debtor-creditor relationship that is notarized for direct enforceability by the creditor if the debtor defaults -- it does not confirm whether or not the debtor has actually performed his contractual obligations. Court judgments and rulings and arbitral awards, on the other hand, confirm whether or not the debtor has breached the agreement. That is why a creditor cannot petition a court for enforcement with no evidence other than an enforceable notarized debt instrument -- he must also an enforcement certificate issued by the notary office that confirms the debtor’s non-performance. Only when these two documents are available will they serve as the basis for judicial enforcement. Consequently, an enforceable notarized debt instrument is obviously different from a court judgment and ruling and an arbitral award in terms of legal validity. Furthermore, Article 238.2 of the P.R.C. Civil Procedure Law (i.e., “Where a notarized debt instrument contains an error, the People's Court shall deny execution and serve the written ruling on both parties and the notary public.”) further reveals that a court ruling can rectify errors in a notarized debt instrument and is therefore endowed with broader legal authority. In summary, an analysis from the perspectives of legal nature and legal validity does not lead to the conclusion that an enforceable notarized debt instrument should categorically exclude direct litigation proceedings.
Secondly, from the perspective of agreement between the parties, once the debtor has undertaken to be subject to enforcement if he fails to sufficiently perform his contractual obligations, his undertaking will be binding on him and it is therefore not manifestly unreasonable for the debtor to be forbidden from directly filing a lawsuit based on an enforceable notarized debt instrument. However, since a notarized debt instrument does not usually provide that the creditor waives the right to file a lawsuit or any similar representation, this reasoning does not apply to the creditor. The main reason why a creditor would demand that the debtor undertake enforcement liability by having a notary issue an enforceable notarized debt instrument is that in most cases the creditor’s rights are more effectively protected through compulsory enforcement in the event of debtor default. Indeed, this is the fundamental appeal of the enforceable notarization mechanism. Consequently, the resort to an enforceable notarized debt instrument is one of the creditor’s rights rather a mere exercise of a procedural option. If a direct application for enforcement is no longer the most effective way to protect the creditor’s rights, the creditor can waive it. If the creditor is forced to resort to compulsory enforcement even when it is not in his interest to do so, a mechanism designed to protect creditors’ rights will instead operate as a constraint, a result that defeats the original purpose of this mechanism.
Thirdly, although it is true that prohibiting parties from directly filing lawsuits based on enforceable notarized debt instruments will help conserve judicial resources and enhance procedural efficiency, these benefits should be subordinated to the precondition that the protection of rights owners should not be hampered thereby, because protecting the parties’ rights and interests is obviously more important than conserving judicial resources. If the so-called “conservation of judicial resources” is accomplished by sacrificing right owners’ rights and interests, its rationality is questionable at best.
II. The Necessity of Permitting Direct Lawsuits Based on Enforceable Notarized Debt Instruments
As discussed above, although it is reasonable to prohibit debtors from directly filing lawsuits based on enforceable notarized debt instruments, the same restriction on creditors’ rights is questionable. According to a judge on the Supreme People’s Court, in past judicial practice most lawsuits filed directly by creditors based on notarized debt instruments are filed because the deadline for applying for enforcement has expired but the statute of limitations hasn’t yet expired. Under these circumstances, if the creditor is permitted to file a separate lawsuit then a theoretical conflict will occur, the creditor’s rights will be over-protected and consequently the creditor will have no incentive to enforce his creditor’s rights as soon as possible. It was in this context that the judicial interpretations provided that neither a creditor nor a debtor can directly file a lawsuit based on an enforceable notarized debt instrument.
In the author’s opinion, considering the context in which the judicial interpretations were issued, it was reasonable to prohibit parties from misusing the right of action to file lawsuits on notarized debt instruments, since it was such a common phenomenon at that time. However, since the amended P.R.C. Civil Procedure Law already extends the time limit for applying for enforcement to two years and applies certain provisions on the suspension and discontinuance of the statute of limitations, the enforcement deadline and the statute of limitations have been harmonized under procedural law, and the strategy of “exploiting the loophole” no longer applies. Because of this, when discussing whether a creditor should be permitted to directly file a lawsuit based on an enforceable notarized debt instrument, a major concern should be whether litigation proceedings can: (1) help the creditor enforce his rights to some extent; or (2) solve a dilemma encountered during the compulsory enforcement procedure. The author finds it necessary to permit creditors to directly file lawsuits over enforceable notarized debt instruments at least under the following circumstances:
- The notary office procrastinates and fails to issue the enforcement certificate in time. If the debtor fails to fully perform his obligations, the creditor will have to apply to the notary office for an enforcement certificate, and only when the creditor has acquired both an enforceable notarized debt instrument and an enforcement certificate will he be able to petition the competent People’s Court for compulsory enforcement. However, since Article 55 of the Notarization Procedure Rules provides that an enforcement certificate must be issued within the statutory time limit for enforcement, if the notary office procrastinates then the creditor might have to wait two years or more and consequently the intended benefit of efficiency will be lost. In addition, since no remedy is provided for delayed issuance of an enforcement certificate, if the notary office does not decide whether or not the enforcement certificate should be issued until after the expiration of the enforcement deadline and if the creditor is not permitted to file a separate lawsuit, enforcement of the creditor’s rights and interests would be adversely affected.
- The creditor cannot produce evidence proving the debtor’s inadequate performance of his obligations. When the creditor applies to the notary office for the enforcement certificate, he is required to provide evidence that he has performed his obligations under the notarized debt instrument and that the debtor has not performed his obligations or has not fully performed them. In practice, however, a number of factors might prevent a creditor from independently acquiring the evidence he needs. Moreover, the notary office is not obligated to investigate or collect evidence. Since at this point the case has not entered litigation, the creditor cannot petition the court for investigation and evidence collection, and ultimately the notary office will have no choice but to refuse to issue the enforcement certificate on the grounds of inadequate evidence. In this scenario, if the parties are forced to resort to the compulsory enforcement, the only consequence will be a waste of time and an additional obstacle to the enforcement of the creditor’s rights. A more reasonable strategy would be to permit the creditor to directly file a lawsuit and petition the court for assistance in evidence collection.
- The debtor seems likely to conceal or transfer his property, makingit necessary to preserve it. In practice, it is common for a debtor to deliberately conceal or transfer his property to evade the liability. As a countermeasure the creditor usually petitions the court for property preservation during litigation. However, since the notary office has no authority to institute property preservation measures, while the issuance of the enforcement certificate is still pending the debtor is likely to conceal or transfer his property. Alternatively, his property may have even been frozen, sealed or seized by another court at an earlier point. This situation would undoubtedly result in extremely high risk and uncertainty for the creditor’s enforcement efforts.
The issued enforcement certificate is defective.
In rare cases an enforcement certificate issued by a notary office is defective. The defect may have been attributable to the notary office, e.g. incorrect information in the enforcement certificate; or it may have been attributable to the parties themselves, e.g. incorrect information in the debt instrument or a subsequent creditor-debtor relationship based on the same underlying facts. In this circumstance, under the judicial interpretations the parties must first petition the court for a ruling on non-enforcement before a separate lawsuit can be filed. In other words, once a defect appears in an enforcement certificate, the creditor is prevented from timely enforcement of his rights. A better alternative would be to permit the creditor to skip the enforcement certificate application process altogether and file a lawsuit directly with the court.
A third party has an interest in the notarized debt instrument.
A third party may have an interest in a notarized debt instrument on a certain occasions. A typical example of this would be a third-party creditor of the creditor named in the notarized debt instrument. If the named creditor is reluctant to enforce his creditor’s rights, the third-party creditor is not entitled to apply for an enforcement certificate since he is not a party to the notarized debt instrument. The judicial interpretations do not explicitly provide whether the third party can directly file a lawsuit. If the third party not allowed to directly file a lawsuit over the enforceable notarized debt instrument, he obviously cannot protect his rights in that scenario.
In conclusion, the author holds that although it is reasonable to prohibit a debtor from directly filing a lawsuit over an enforceable notarized debt instrument, such a restriction should not be imposed on the creditor or third parties, since permitting them to directly file a lawsuit under certain circumstances is not problematic from a theoretical legal perspective. Furthermore, since the previous loophole in the statute of limitations no longer exists, the necessity of permitting a direct lawsuit is more obvious than ever. For avoidance of the so-called “double jeopardy” it is advisable to stipulate that if the creditor has already filed a lawsuit over an enforceable notarized debt instrument, he must not be permitted to apply for an enforcement certificate if he hasn’t already applied for one. If an application for an enforcement certificate has been submitted but a certificate has not yet been issued, the notary office should refuse to issue the certificate; and if the enforcement certificate has already been issued the creditor should be deemed to have waived it. In other words, an enforcement certificate should not be used as a basis for petitioning the court for compulsory enforcement. The above-described arrangement would better harmonize with Article 14 of the Guidance for the Preparation of Enforceable Notarized Debt Instruments and the Issuance of Enforcement Certificates and other similar provisions.
Another issue that arises is whether allowing creditors and third parties to directly file lawsuits over enforceable notarized debt instruments will lead to a waste of judicial resources or a challenge to the existence of the system of enforceable notarization. The author holds that since a direct petition for compulsory enforcement is endowed with higher inherent efficiency than litigation proceedings, in most cases the optimal strategy from a more economic and reasonable perspective would be to apply for an enforcement certificate and then use it to petition the court for compulsory enforcement. Since cases where the creditor or a third party chooses to directly file a lawsuit over an enforceable notarized debt instrument will inevitably account for a very small portion of cases, they will in no way challenge the role of the system of enforceable notarization or result in a waste of judicial resources. On the other hand, forcing the parties to first go through the compulsory enforcement procedure before filing a lawsuit will only inconvenience the rights holders in the enforcement of their rights, even though it may only occur in a small portion of cases that must be resolved using the litigation approach. This situation runs counter to the original purpose of the system of enforceable notarization. In this scenario, allowing the parties to directly file a lawsuit over a notarized debt instrument would not result in any abuse of the right of action or a waste of judicial resources – rather, it would provide a necessary remedy for the rights holders to protect their rights and interests.