Article

Factual Summary: When documents were presented under its LC, Issuer accepted the bills of exchange undertaking to pay on a specific future date. Based on an application for assets preservation made by the Chinese International Economic and Trade Arbitration Commission, the court made an order to withhold payment under the LC. Beneficiary and Advising Bank entered into an assignment contract which provided that Beneficiary and Advising Bank assigned all claims, rights, and credit under LC to Beneficiary's Insurer. After execution of the assignment contract, however, Beneficiary and Advising Bank failed to inform Issuer of the assignment.

Legal Analysis:

1. Binding Effect of the Assignment Contract: Insurer's action was based on the Assignment Contract, thus, whether Issuer was obligated to pay Insurer depends on whether the assignment contract had binding effect on it.

2. Assignment of Payment under the LC: Under Chinese law, a person who assigns contract rights must be a legitimate creditor. The court held that Insurer presented no evidence demonstrating that it was a creditor under the LC. As a result, it was improper for Insurer to assert a claim on the LC as if it were a creditor of the assignment contract.

3. Choice of Law under Assignment of LC: Article 145 of the PRC Civil General Principle provides that "parties to a contract involved with foreign elements may choose the substantial law to resolve disputes. In case no choice of law is made by the parties, the laws of the country which has closest connection shall be applied." Since the parties in this case did not select applicable law, the place of issuance should be the country which has the closest connection with the assignment contract. In accordance with Article 80 of the PRC Contract Law, when a creditor assigns his rights, the debtor shall be informed. Otherwise, the assignment will not be effective against the debtor. Since assignment of credit under the LC from the Beneficiary to the Insurer had not been advised to the debtor, assignment had no effect on Issuer. Therefore, the court rejected Plaintiff's request for payment under the LC.

Comments by Jin Saibo:

1. Assignment of the credit was made in South Korea. In addition, both the assignor and the assignee thereof are companies incorporated and located in South Korea. It would not be surprising that another court could find the validity of the assignment shall be governed by the law of South Korea.

2. It is interesting that no evidence of formal advice of the assignment was available even after the initiation of the proceedings.

3. It is not uncommon in practice to have the beneficiary and the intermediate bank collectively assign whatever rights they have. Such practice is intended to ensure that the debtor cannot argue that only a portion of the rights has been assigned. However, under the court's ruling here, such practice could become a defect. Therefore, parties might need to sign two sets of assignment documents.

4. Plaintiff has made an appeal against the ruling of the first instance court and the case is currently being heard by the Zhejiang High People's Court.

[JS/csb]

* Jin Saibo's email address is jinsaibo@zhonglun.com.

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