Article

Factual Summary: Buyer and Seller contracted for the purchase of LDPE made in Russia. The contract stipulated that the port of loading could be any city in Russia. Subsequently, Applicant/Buyer caused issuance of documentary LC in favor of Beneficiary/ Seller. The parties agreed that Applicant should deposit funds representing 30% of the LC amount and that the remaining 70% of the LC amount would be secured by the goods. The LC was freely negotiable by any bank in Amsterdam, Netherlands.

Issuer subsequently received a demand letter and a demand note from Intermediate Bank requesting payment under the LC. Intermediate Bank's demand letter stated "we hereby confirm that all documents comply with the terms and conditions of the LC and inform you that the reimbursement of the LC was hereby assigned to the undersigned [Intermediate Bank] who had accepted the above assignment."

Issuer refused to pay on the ground that the presented documents did not comply with the terms and conditions of the LC. Two days later, Applicant discovered that no goods had arrived and alleged beneficiary fraud.

The full set of documents presented to Intermediate Bank and Issuer by Beneficiary were forged. Applicant was aware of the fraud and did not claim its right in time, thus impairing Issuer's right. Beneficiary did not deliver any goods but presented full set of forged documents to obtain the payment under the LC.

Applicant then applied for an injunction against the payment under the LC.

The court froze payment under the LC and enjoined Issuer from paying. Intermediate Bank requested conciliation and sent a letter to Issuer stating: "(i) Please transfer all the deposit of the LC made by the applicant to us, which should be no less than 30% of the LC amount; (ii) Please confirm that your bank will cooperate with our bank to mitigate the loss suffered by us to the greatest extent and try our best to recover the contract price the beneficiary had assigned to us. After the payment of the deposit to our account at ... and your confirmation of aforementioned (i) and (ii), you have the right to cancel and close your LC automatically."

After Issuer brought this action, it was later confirmed by the relevant transportation institution that the railway bill presented by Beneficiary was forged.

Legal Analysis:

1. Material Fraud: The court ruled that, since all documents of presented by Beneficiary to Intermediate Bank and Issuer were forged, this constituted material LC Fraud and the purchase contract was void due to the material fraud committed by the beneficiary. Therefore, the fraud exception to the independence doctrine should apply.

2. Fraud Exception: The applicant was aware of the fraud committed by Beneficiary, but it did not bring an action against Beneficiary in time to stop it from drawing. Nonetheless, the principle of LC fraud exception should apply to the case.

3. Issuer Entitled to Apply for the Injunction of the Payment under the LC: The view that only the Applicant should have the right to apply for a court order to withhold the payment under the LC or it was only after applicant had committed or involved in fraud that a court order would be made to withhold the payment under the LC is a deviation from the fraud exception principle. Issuer was therefore entitled to withhold payment under the LC.

4. Difference between Assignment and Negotiation: As to "assignment" and "negotiation", these issues have separate provisions and should be differentiated. The issues of "assignment" and "negotiation" have been expressly provided for respectively in UCP500 Article 49 and UCP500 Article 10. Issuer's assertion that Intermediate Bank was an assignee of the LC was supported by evidence. The demand letter and conciliation letter sent to Issuer by Intermediate Bank were offered as evidence in court by Issuer and admitted by Intermediate Bank. Intermediate Bank as an assignee of the LC was not entitled to payment under the LC due to the material fraud by the assignor, the Beneficiary of the LC. Intermediate Bank's assertion that it was a negotiation bank under the LC was not sufficiently supported by evidence.

Comments by Jin Saibo:

1. It is sufficiently evidenced that the beneficiary committed fraud in the underlying contract. The applicant did not sue the beneficiary in time after applying for the court order to freeze the LC. It was quite clear that the applicant intended to shift the risk of LC fraud to the issuing bank. Under such circumstances, the issuing bank was entitled to bring an action to the court declaring the invalidity of the LC and enjoin payment.

2. The essential issue of the case is under a freely negotiable LC, how to distinguish and identify a qualified negotiation bank from an assignee and their respective status under PRC law.

3. Intermediate Bank did not have sufficient evidence to support that it is a qualified negotiation bank under Article 10 of the UCP500. Meanwhile, in the cover of the demand letter and the conciliation letter, Intermediate Bank admitted that it was an assignee of the LC.

4. The applicant previously applied for a freezing order preventing payment under the LC. However, the applicant did not pursue further legal proceedings against the beneficiary. Therefore, the issuing bank initiated this proceeding. Intermediate Bank made an appeal against the ruling of the first instance court and the Inner Mongolian Autonomous Region High People's Court is currently hearing the case.

[JS/csb]

* Jin Saibo's email address is jinsaibo@zhonglun.com.

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