Article

Factual Summary: To pay for textiles, bank issued a deferred payment LC for US$81,650 in favor of Beneficiary. As stated in the English translation of the opinion, the LC, in SWIFT Field 78, provided that "At maturity, as per instructions of the negotiating bank, for 97% of the value of documents in order only, ____ will be paid by ourselves." It also provided, in SWIFT Field 41D, that "[This L/C is] available with ____ at our counters by deferred payment." Beneficiary shipped textiles inferior in both quantity and quality to those stipulated in the LC and forged shipping documents indicating compliance with the LC's requirements.

Beneficiary requested Plaintiff Bank to negotiate documents under the LC. Plaintiff Bank negotiated the documents and presented them to Issuer for acceptance; Issuer then sent a notice to Plaintiff Bank that it had acknowledged the documents. In fact, the documents were fraudulent.

After receiving the inferior textiles, Applicant applied for and was issued an injunction by the Paris Commercial Court prohibiting the Issuer from paying the proceeds of the LC, and Issuer refused to reimburse Plaintiff Bank. Plaintiff Bank then sued Issuer in Korea demanding payment of the LC proceeds, claiming that it was a negotiating bank.

The trial court dismissed the Plaintiff's claim, ruling that "Because the deferred payment letter of credit, as the one in this case, is not usually accompanied by the negotiation means such as bill(s) of exchange, it is not a negotiable letter of credit in principle." The trial court had also determined that:

Although the negotiability of the deferred payment letter of credit cannot be entirely excluded in a concrete case, the [LC] in this case cannot be said to have nominated the negotiating bank in light of the rationale of the judgment. So the plaintiff is not in the position of the negotiating bank under the [LC] in this case, but only in the position of an assignee of the rights of [the beneficiary] to...the issuing bank, and the defendant can make to the plaintiff who succeeded the status of [Beneficiary] all defenses which it can make to [Beneficiary].

The intermediate appellate court affirmed and the appeal was dismissed.

Legal Analysis:

1. UCP500, Applicability; SWIFT; UCP500 Article 1: Even though the credit did not expressly indicate that it was subject to UCP500, the court took note of the provision in the SWIFT manuals to the effect that the credit is subject to the version of the UCP then in effect unless it states otherwise and ruled that a credit issued under SWIFT will be subject to UCP500.

2. Deferred Payment: In considering whether a nominated bank can discount a deferred payment, the appellate court stated:

In light of the intentions of the provisions of the UCP [500] as to the authorization and the reimbursement duty of the issuing bank to the nominated bank (the same is true of the confirming bank and hereinafter) and also in light of the points that there is no provision in the UCP [500] prohibiting the payment before maturity of the deferred payment letter of credit proceeds or the negotiation of the shipping documents by the nominated bank, and that the fundamental intention of using in the international transactions the letter of credit, an independent and abstract settlement means, is to eliminate the uncertainty of the beneficiary as to the settlement of proceeds and it is in accordance with the principle of fairness that the risk from its independent and abstract character should be on the applicant of the letter of credit, even in the case of the deferred payment letter of credit where a specific maturity date is set for payment, when a bank has been nominated by the issuing bank to pay the proceeds [of documents] by purchase of shipping documents, as long as no contrary agreement exists, it is correct to consider it as included in the authorization given to the nominated bank by the issuing bank that even if the nominated bank negotiates the shipping documents before the maturity date for the payment of proceeds of the deferred payment letter of credit, the issuing bank binds itself to reimburse the said payment at the maturity date (however the issuing bank can refuse to reimburse the payment until the maturity date) and although the issuance of the deferred payment letter of credit does not entail the issuance of bill(s) of exchange, it cannot be inferred thereby that it is impossible to negotiate the letter of credit with the shipping documents, and thus as long as the deferred payment letter of credit has a nominated bank, the said deferred payment letter of credit is subject to the negotiation by the bank [so nominated in the letter of credit].

Accordingly, the appellate court reversed the rule of the trial court on this point.

3. Negotiating Bank; Negotiation: The appellate court asked whether the act of the Plaintiff bank was "negotiation" within the meaning of UCP500.

4. Negotiation; UCP500 Article 10: The appellate court noted that under UCP500 Article 10 only the giving of value of documents by a bank authorized to negotiate would constitute negotiation for LC purposes.

5. Authorization to Negotiate: Reading SWIFT Field 41D, the appellate court concluded that:

[T]he L/C in this case did not nominate a specific bank for payment of proceeds or for negotiation of shipping documents or clearly authorize any bank to freely negotiate on its face, but on the other hand, the letter of credit rather provides that payment of the proceeds is possible only at the issuing bank ([field] 41D: available with ... at our counters by deferred payment), and the place of presentation of shipping documents and the place of expiry of letter of credit is Paris, the location of the issuing bank. Therefore, it is reasonable to conclude that there was no nomination of a bank or authorization for payment of the proceeds or negotiation of the shipping documents in the L/C in this case.

In light of Field 41D, the appellate court indicated that the reference to a negotiating bank in Field 78 did not constitute a nomination.

6. Fraud; Negotiation: The appellate court stated that:

Even if the letter of credit transaction is revealed after the lawful negotiation of the letter of credit to be a fraudulent one by the forgery of the shipping documents, etc., the negotiating bank is entitled to demand the reimbursement of proceeds of the letter of credit as far as the bank itself did not participate as the party of the fraudulent act such as forgery at the time of payment of the letter of credit proceeds or negotiation or it did not have knowledge or have a good reason for suspecting such fraudulent transaction that the documents were forged at the time of negotiation.

citing Korean Supreme Court Judgments No. 96DA43713 on Aug. 29, 1997, No. 96DA37879 on Aug. 29, 1997 and No. 2000DA60296 on Oct. 11, 2000.

[JEB/ees]

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