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Factual Summary: Intermediate Seller and Buyer contracted for the sale of electric appliances including refrigerators. Tajikistan: Bank (Issuer) issued a Transferable LC (hereinafter referred to as "the Master LC") in favor of Intermediate Seller for US$138,384 nominating Transferring Bank to affect transfers.

In order to fulfill the contract, mentioned above, Intermediate Seller entered into a sales contract with Manufacturer for production of refrigerators. The content contained an arbitration clause providing that all disputes arising from it would be resolved by arbitration in China pursuant to the Arbitration Rules of China International Economic and Trade Arbitration Commission.

Based on the Master LC and at the application of Intermediate Seller, Transferring Bank advised a Transferred LC in favor of Manufacturer/Second Beneficiary. It stated: "We will effect payment to you only after we receive the proceeds from the issuing bank of the Master LC."

After shipping the goods, Manufacturer/Second Beneficiary submitted the required documents to Transferring Bank which forwarded them to the Issuer. However, the Issuer did not honor the Master LC which prevented the Transferring Bank from modifying payment to Second Beneficiary.

Subsequently, Second Beneficiary sued First Beneficiary/Intermediate Seller and Transferring Bank seeking payment as well as for loss.

Both First Beneficiary and Transferring Bank objected to the jurisdiction of the court, arguing that the trial court did not have jurisdiction over the case.

First Instance: Decision of Jingdezhen Intermediate People's Court

The trial court ruled that it had the authority to exercise jurisdiction over the case and rejected both of the objections raised by First and Second Defendant. It concluded that the underlying contract performed by Plaintiff and First Defendant was the one with the number of HYEIE-0415/04EVER which did not contain an arbitration clause. Therefore, the court had the jurisdiction over the underlying contract. Furthermore, it concluded that LC was a kind of guarantee for the underlying contact and in virtue of the co-litigation raised by Plaintiff to Second Defendant; it had the jurisdiction over the LC dispute concerning the underlying transaction.

Second Instance: Decision of Jiangxi High People's Court

In the proceedings of appeal, Second Defendant claimed its allegations as follows: (1) the underlying contract performed by Plaintiff and First Defendant was the one of No. HYEIE-0428/04EVER within which there was an effective and applicable arbitration clause, therefore the trial court did not have the jurisdiction over the underlying transaction; (2) in accordance with UCP500, LC was a separate transaction from the sales contract on which it was based that indicated its nature of independence, so the court could not exercise its jurisdiction over the LC dispute; (3) this was a lawsuit involving foreign interests in several aspects, as a result, the trial court did not have jurisdiction over such a foreign-related lawsuit.

The appellate court supported the conclusion of the trial court that the underlying contract performed by Plaintiff and First Defendant in trial was the contract with the number of HYEIE-0415/04EVER rather than the one of No. HYEIE-0428/04EVER, therefore the arbitration clause included in the latter one could not be applied and the trial court had jurisdiction over the dispute. In addition, LC was a conditional guarantee of payment issued by the bank to the beneficiary and the underlying transaction between Plaintiff and First Defendant as well as the LC transaction between Plaintiff and Second Defendant in trial were related disputes. As a result, the two related disputes could be tried together and the trial court had the jurisdiction over the disputes regarding the underlying transaction as well as the LC transaction.

To conclude, Jiangxi High People's Court rendered its final ruling as follows: The appeal is to be rejected and the original ruling sustained.

* JIN Saibo is partner of Tongshang Law Firm, assisted by FENG Jing and SONG Wei.

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