Article

Factual Summary: Issuer issued a transferrable commercial LC for US$3,924,150 in favor of Original Beneficiary. The documents required under the original LC included three copies of executed commercial invoices, three copies of the packing list, a certificate of origin, 2/3 clear and shipped bill of lading covering a port-to-port shipment, a certificate, and a letter to the beneficiary from Metro Duesseldorf to be signed and sealed by Metro Duesseldorf. A sample letter was provided as a model for compliance.

At the request of Beneficiary, Transferring Bank effected partial transfers of the original LC, issuing three transferred credits in favor of Transferee Beneficiary, for a total amount of US$2,602,393.

At the request of Original Beneficiary, Transferring Bank forwarded a request to Issuer to amend the credit and delete the requirement of the letter. Although the amendment was not yet made, the documents required under the transferred LCs excluded the requirement of the letter from Metro Duesseldorf. Transferring Bank indicated in the "Additional Conditions" of the transferred LCs that Transferring Bank would make payment to Transferee Beneficiary only when funds were received from Issuer on the expiry date.

Issuer subsequently informed Transferring Bank that the letter from Metro Duesseldorf must be presented to Issuer as a required document of the original LC. Issuer sent the sample letter from Metro Duesseldorf to Transferring Bank.

Transferee Beneficiary subsequently presented documents under the transferred LCs to Transferring Bank, which forwarded them to Issuer. Issuer informed Transferring Bank that it had dishonored the three transferred LCs because of discrepancies, including the failure of the presentation of the letter from Metro Duesseldorf.

Issuer subsequently informed Transferring Bank that it would waive other discrepancies in the presentation and the transferred LCs would be honored upon the presentation of the letter signed by Metro Duesseldorf or upon the receipt of the payment from Metro Duesseldorf for the orders.

Issuing Bank returned the unpaid documents to Transferring Bank and restated that it had not received the letter from Metro Duesseldorf as required under the original LC. Transferring Bank then returned the unpaid documents to Transferee Beneficiary and Transferee Beneficiary sued Transferring Bank for wrongfully transferring the credit. The trial court ruled in favor of the Transferee Beneficiary. On appeal, affirmed.

Legal Analysis of Trial Court Decision:

1. UCP500 Article 48(h): The trial court noted that under Article 48(h) of UCP500, the letter of credit can only be transferred according to the terms stated in the original letter of credit except the terms on the amount of the letter of credit, any stated unit price, expiration date, the deadline for the delivery of the documents under UCP500, Article 43 and the date of shipment.

2. Transfer; UCP500 Article 48: The trial court stated that Transferring Bank should conduct business strictly according to UCP500, Article 48. However, Transferring Bank deleted the letter of Metro Duesseldorf from the documents listed in the original LC, putting the Transferee Beneficiary in a position where its presentation under the transferred credit would not comply under the original LC. In so doing, the Transferring Bank failed to comply with relevant international practices. The court ruled that this action of the Transferring Bank prevented Transferee Beneficiary from obtaining payment under the LC. The trial court concluded that there was a cause and effect relationship between the behavior of the Transferring Bank and the failure of the Transferee Beneficiary to obtain the payment under the LC. The trial court, therefore, ruled that according to Article 48(h) of UCP500 and Article 106 of the PRC General Principles of Civil Law, Transferring Bank must pay Transferee Beneficiary the remaining principal on the LCs plus interest.

Legal Analysis of Appellate Court Decision:

1. Apply UCP500: The appellate court noted that this dispute was on the LC transactions between the transferring bank and the transferee beneficiary. Since the LC in dispute stated that the UCP500 shall apply, the appellate court applied UCP500 in determining the responsibilities of the parties.

2. UCP500 Article 48(h); Transfer: The appellate court noted that according to UCP500 Article 48(h) regarding the responsibility of the transferring bank, a letter of credit can only be transferred according to the terms stated in the original letter of credit, with the exception of the amount of the letter of credit, any stated unit price, expiration date, the deadline for the delivery of the documents under UCP500 Article 43 and the date of shipment.

In this case, the appellate court noted that transferring bank violated UCP500 by deleting the term on the requirement for the letter from Metro Duesseldorf. There were other discrepancies cited in Issuer's refusal, but Issuer apparently waived those discrepancies in their subsequent communication with Transferring Bank. According to the appellate court, after Issuer's waiver of all discrepancies except the letter, meant that if Transferee Beneficiary had submitted the letter from Metro Duesseldorf, Issuing Bank would be responsible for the payment under the LCs. The lack of the letter from Metro Duesseldorf was the only discrepancy which prevented payment under the LC. Transferring Bank's failure to comply with the common practices by deleting the term in the original LC caused Transferee Beneficiary to be unaware of this requirement and as a result, they failed to obtain the complying document. The behavior of Transferring Bank infringed on the lawful interests of the Transferee Beneficiary in connection with receiving the payment under the LC.

3. Waiver (Discrepancies): Since the transferred LC expired on November 30, 2001 in Shanghai, the Transferring Bank argued that the LC had no binding force even if Issuing Bank intended, on December 5, 2001, that it would amend the original LC in effect waiving the discrepancies except for the letter because the LC was no longer valid. The appellate court stated that the communication by the Issuing Bank was binding on the Issuing Bank, as it represented a decision by the Issuing Bank to waive the discrepancies other than the letter from Metro Duesseldorf. This communication does not constitute an amendment to the LC. In addition, the LC in dispute provided that the documents should be delivered 120 days after the date of the shipment documents. By this provision, both the delivery of the documents by the Transferring Bank and the examination of the documents by the issuing bank are within the time limit prescribed by the LC. Therefore, the allegation of the Transferring Bank is not justified that the LC would have no legal force even amended as Issuing Bank desired because it is no longer valid.

4. Independence; UCP500 Article 3: The appellate court stated that according to UCP500 Article 3, so far as the characteristics are concerned, letter of credit is a payment method in international trade independent of the contracts such as the sales contract and the shipment contract. A letter of credit is not subject to any claim or defense made by the applicant, beneficiaries or other parties once it becomes effective. That is to say, the issuing bank and other banks involved in the LC transaction must conduct the business in accordance with the provisions of the LC. Their obligation to pay is independent and is not affected by the dispute between the applicant, beneficiary or any other parties. The allegation of the Transferring Bank that it is be responsible to pay under the LC because the Transferee Beneficiary had made claims in property right in Hong Kong based the bill of lading and, therefore, that the Transferee Beneficiary suffered no actual loss is not justified. In rejecting this claim, the appellate court noted that the Transferring Bank had confused the dispute on property right with the dispute on the LC. There is not any connection between the two disputes.

5. Expiration Date of LC: The Appellant argued that the trial court overlooked the fact that when the LC in dispute expired on November 30, 2001 in Shanghai, the originals of the documents under the LC in dispute were already in the possession of Transferee Beneficiary on April 30, 2002 and that Transferee Beneficiary had initiated a lawsuit in Hong Kong against the shipping company. The appellate court stated that the letter of Issuing Bank dated December 5 did not constitute an amendment to the LC. It was subject to neither the expiration date of the LC, i.e. November 30, 2001 nor the nonconnection between the above allegation and the dispute in LC infringement. The appellate court concluded that the trial court did not err in excluding it from consideration in reaching its judgment. It should be particularly pointed out that the Transferee Beneficiary did not own the originals of the documents (including the bill of lading) that were in the actual possession of the Transferring Bank. The claim that the Transferring Bank made in this regard was ruled to be in contradiction with the facts and cannot be established.

6. Interest: Another reason for the appeal was that the Transferring Bank believed that the trial court made a mistake in calculating the interests. As stated above, the trial court noted that Issuing Bank shall take the responsibility for payment after December 5, 2001 when Issuing Bank issued the document indicating that it has waived the right to raise the discrepancies except the letter from Metro Duesseldorf upon the delivery of the letter from Metro Duesseldorf. The Transferring Bank violated UCP500 and deleted the letter from Metro Duesseldorf from the required documents, resulting in the failure of the Transferee Beneficiary to deliver the complying documents and thus to obtain the payment by Issuing Bank. Such behavior of the Transferring Bank infringed the interests of the Transferee Beneficiary in receiving the payments under the LC. Therefore, the trial court is correct in making the judgment that the Transferring Bank should be responsible for the payment plus the interests thereon since December 6, 2001.

[JS/ees/fkd]

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The views expressed in this Case Summary are those of the Institute of International Banking Law and Practice and not necessarily those of ICC or the other partners in DC-PRO.