Article

Factual Summary: The Issuer issued an irrevocable LC to Beneficiary. Subsequently, Issuer amended the LC three times with the consent of Beneficiary. The Deposit Bank of the Beneficiary mailed the full set of documents to the Issuer. After receiving these documents, the Issuer did not make payment during the period stated in the credit. Upon the urge of the Deposit Bank, the Issuer replied that it would not make payment due to an injunction. The Beneficiary sued the Issuer for wrongful dishonor. The trial court granted judgment to the Beneficiary. On appeal, affirmed.


Legal Analysis:

1. Choice of Law: The appellate court noted that UCP500 and Chinese law shall apply since the parties hereto agreed they were binding.

2. Independence: In accordance with UCP500 Article 3(a), UCP500 Article 4 and UCP500 Article 14(b), Credits are independent from underlying transaction. Namely, the Issuer must determine on the basis of the documents alone whether or not they appear on their face to be in compliance with the terms and conditions of the Credit. Considering the facts in this case, the Issuer did not indicate any discrepancy within seven banking days after receiving the documents. Therefore, the court concluded that the Issuer must assume the obligation of payment as the dispute about the underlying transaction can not justify dishonor.

3. Fraud of Credits: The appellate court noted that the fraud exception was accepted in China but strictly applied. Namely, the court would issue the injunction to the credit only when enough evidence proved that the seller did not make full or partial delivery of goods under the credit with malice, or minor delivery was unable to satisfy the purpose of contract, or there was counterfeit or fraudulent misdescription in the documents presented by Seller. Considering the facts in this case, it was evident that the goods complied with the terms of the contract. Thus, the court concluded that there was no evidence to prove the fraud, and thus the principle of fraud exception would not apply.

[JS/ec]

* JIN Saibo is a partner of Tongshang Law Firm, assisted by ZHANG Donghong.

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