Article

by King-tak Fung

UCP 600 does not prescribe the governing law of an L/C. Nor does it indicate the jurisdiction that the parties can submit their case to in the event of a dispute. In practice, a vast majority of L/Cs do not provide any governing law or jurisdiction clause.

The objective of this article is to highlight how some courts rule on the governing laws of L/Cs and the factors they may take into account in determining the jurisdiction issue. This is by no means a conclusive or exhaustive overview, as each case depends on its own facts and the laws of individual countries.

Key issues

The test

At common law, in the absence of an express or implied choice of law, the proper law governing a contract is the system of law with which the contract has the closest and most real connection. In Sinotani Pacific Pte Ltd. v Agricultural Bank of China ("ABC")1, with regard to the contract between the issuing bank and the beneficiary, the Singaporean court was of the view that the contract was most closely connected with the place of payment against documents under the L/C. Accordingly, the law of the place of payment against documents under an L/C was determined to govern the contract between the issuing bank and the beneficiary.

The "place of payment"

The relevant terms of the L/C (in SWIFT format) in this case were as follows:

"31D: date and place of expiry: 28 February 1996, Singapore

41D: available with: Agricultural Bank of China, by acceptance

42C: drafts at: 180 days after sight

42A: drawee: Agricultural Bank of China's branch in Dalian, China

47A.5: Each drawing under this credit must be presented to Royal Bank of Canada Singapore Branch, which holds special arrangements for reimbursement and document forwarding.

78: All drafts drawn under and in compliance with the terms of this Credit will be duly honoured on presentation at Agricultural Bank of China ... and ... drafts accepted within the terms of this credit will be duly honoured at maturity."

The beneficiary argued that Singaporean law should apply, because Conditions 31D and 47A.5 above suggested that the documents were to be presented by the beneficiary in Singapore for payment. But the court did not accept this argument. The judge explained that even though these conditions contemplated presentation of documents to the Royal Bank of Canada in Singapore, that bank had no authority under the terms of the L/C to accept the documents on behalf of the issuing bank in Singapore for payment.

By contrast, the court held that, under the terms of the L/C, the beneficiary was required to present the documents to the issuing bank in China for acceptance and payment, as the credit was available with the issuing bank by acceptance. Therefore, the L/C was held to be an unconfirmed straight credit, and the place of payment against documents under the L/C was held to be in China.

In this regard, the judge said: "Conditions 41D, 42A and 42C of the credit [see above], which stipulated that the credit was to be available with the [issuing bank's] Dalian branch by acceptance of drafts at 180 days after sight, entailed that payment, in the sense of honouring drafts drawn under the credit, could only be made by [the issuing bank] in China ... As for the place of payment against documents under the L/C, this would likewise be China since the documents were to be presented for acceptance in that country and since the wording of Conditions 41D, 42A and 42C indicated that payment under the L/C could only be made by [the issuing bank] from its branch in Dalian."

Refusal of payment and the negotiation credit

Could ABC refuse payment under the L/C on the ground of the Chinese court order? The Singaporean court held that the contract between ABC and Sinotani was governed by the laws of China, being the law of the place of payment against documents under the L/C. It followed that ABC was entitled to refuse payment to Sinotani under the L/C due to the Chinese court order.

Would the court's decision about the governing law of the L/C have been different if the L/C had been a negotiation credit? In another Singaporean case, Agritrade International Pte Ltd. v Industrial and Commercial Bank of China ("ICBC")2, ICBC, the issuing bank, was ordered by a PRC court not to pay the beneficiary under an L/C. The L/C in this case was available by negotiation with the advising bank in Hong Kong. The issuing bank argued that the governing law of the L/C was Chinese law (i.e., the place of the issuing bank) and that it was entitled to refuse payment by reason of the PRC court order.

The Singaporean court rejected this argument and held that the L/C was a negotiation credit available with the advising bank in Hong Kong. Having regard to the availability of the credit, the court held that the contract between the issuing bank and the beneficiary was governed by the laws of Hong Kong (being the place where the beneficiary was entitled to present documents for obtaining payment under the negotiation credit).

The court further explained that: "The proper law governing a cross-border banker's L/C was the law of country where the beneficiary was entitled to present the documents and become entitled to payment, unless some other law was expressly provided for. When a credit provided for negotiation in a country other than the country from which it emanated, the beneficiary impliedly intimated that he did not wish to be bound by the law of the country of origin of the credit. The opening bank, by agreeing to issue the credit, impliedly accepted such intimation. In the present case the proper law of the credit was Hong Kong."

Accordingly, ICBC was ordered to pay for the L/C drawing irrespective of the Chinese court order, as the governing law of the L/C was held to be Hong Kong law instead of Chinese law.

Other issues

Would the governing law have been different if the nominated negotiating bank had not confirmed or negotiated the L/C? In an English case, Marconi Communications International Ltd. v PT Pan Indonesia Bank Ltd. TBK3, the facts are very similar to those of the Agritrade case.

The court held:

"24. ...

ii) The credit was available by negotiation and SCB was contemplated by the credit as the (or one of the) negotiating banks. Although SCB did not in the event negotiate the credit, it acted as collecting bank in checking and forwarding the documents and requesting payment to its own London account.

iii) Panin Bank [the confirming bank in Indonesia] undertook to reimburse SCB if SCB negotiated the documents.

25. In short, it was contemplated that the credit would be communicated in this country [England] and become effective here, that the documents would be presented here and payment would be here. It does not seem to me to be a matter of great significance in considering the application of art. 4 [of the Rome Convention] taken as a whole that SCB did not add its confirmation. The availability of SCB as a negotiating bank would give rise to the same closeness of connection with England. The performance characteristic in those circumstances would remain the provision of the banking service in the form of payment on presentation of nondiscrepant documents. Given the availability of negotiation in that form, it would be contrary to the requirement of avoiding the governing law being dependent on the mode of negotiation chosen to contemplate that a different law would govern in the event negotiation did not take place ... .

30. I find that the claimants have made out a good arguable case that the contract between the confirming bank (Panin Bank) and the beneficiary (Marconi) was governed by English law, since a chosen method of performance was by way of negotiation of the documents at the offices of the advising bank in London with payment in sterling. Any other conclusion would give rise to the very great inconvenience contemplated by Mr. Justice Ackner. This conclusion cannot be affected by the fact that, in the event, the documents were not negotiated by the advising bank but were forwarded to the confirming bank as a collecting bank with the request that payment be effected in London."

Comments

Based on the above cases, it appears that the governing law of an L/C should be determined by the place of availability of the L/C. In a negotiation credit, the governing law will be the same, despite the fact that the nominated bank has not confirmed the L/C or negotiated the presented documents.

In the Sinotani case, the decision is sound, since the L/C was available by acceptance at a branch of ABC in China. Note that Singaporean law would apply if the L/C were available by acceptance with a bank in Singapore and the draft were drawn on the accepting bank. n

King-tak FUNG is a Partner and Head of Banking & Finance, Asia of Eversheds Hong Kong, Co-chair of the ICC Consulting Group on the latest ISBP revision, a member of the ICC Consulting Group on the UCP 500 revision and forfaiting, author of Leading Court Cases on Letters of Credit (www.iccbooks. com) and UCP 600 - Legal Analysis and Case Studies (www.peer.com.hk).
His e-mail is ktfung@eversheds.com

1. (Singapore).

2. [1998] 3 SLR 211.

3. [2004] 1 Lloyd's Rep. 594.