Article

Factual Summary: Danish Distributor contracted with Chinese Manufacturer to purchase shower cabinets, which were to be paid for by deferred payment LCs. Distributor/Applicant had contracted to resell the cabinets to a final buyer.

The documents apparently were delivered through a Chinese correspondent bank, and Distributor/ Applicant obtained the goods. The goods were sent to the final buyer, who rejected them as defective. Distributor/Applicant then attempted to cancel its order with Manufacturer/Beneficiary, but Manufacturer/Beneficiary was unwilling to modify the contract beyond discounting for the defective cabinets. Concerned about its inability to seek recovery in China, Distributor/Applicant brought this action in Denmark to stop payment on the LCs. The court refused to grant the order and adjourned the action.

Legal Analysis:

1. Independence: The court stated that honoring an LC is not conditioned on the status of any external transaction, whether it is the transaction between applicant and issuer or the underlying contract between applicant and beneficiary. Distributor/ Applicant could not sue Issuer to stop payment on the LC it had applied for regardless of whether or not Manufacturer/Beneficiary had defaulted on the underlying contract.

2. Legal Remedy: Distributor/Applicant argued that a stop payment order against Issuer was necessary because it was not possible for Distributor/Applicant to settle its dispute with Manufacturer/Beneficiary. The court ruled that conditions for the injunction sought by Retailer/Applicant had not been met. The court found that Distributor/Applicant had not provided any evidence that Manufacturer/Beneficiary had taken any action to jeopardize the enforcement of any potential ruling in China. In the absence of such action by Manufacturer/Beneficiary, these circumstances do not fulfill the conditions of §652 of the Danish Administration of Justice Act, which would justifying legal action in Denmark.

3. Economic Hardship: The court considered whether or not Distributor/Applicant could be required to seek redress in China. The court concluded that it could. The court stated that Distributor/Applicant knowingly entered into business dealings with Manufacturer/Beneficiary, a Chinese enterprise, and therefore could anticipate that it might become necessary to file a lawsuit in China.

[JEB/dgd]

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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.