Article

Factual Summary: In 2000, Successor formally decided to merge with Beneficiary of an LC. The decision was approved by the appropriate Taiwanese government authority on 3 January 2001 and officially effective on 1 March 2001. From that date, Beneficiary was deregistered by the government and no longer in existence. Its rights, assets, and liabilities were transferred to Successor, its successor, by operation of Taiwanese law.

Prior to the merger, Bank's Fenshan Branch office at Dafa issued a local LC in favor of Beneficiary on behalf of Applicant, a Taiwanese company. The amount of the LC was TW$ 724,500 and the expiry date was 10 June 2001. The LC covered delivery of firestone powder ("LU SHI FEN") and allowed partial delivery. The following documents were required: Drafts drawn at sight on Issuer, one original Unified Invoice and one copy of the Application for Acceptance/Payment for Draft addressed to Issuer.

The Unified Invoice is a unique document only used in Taiwan for local sales and is normally issued by the seller at the time of sale to the buyer. It is neither a proforma invoice nor a commercial invoice. The LC provided that a Unified Invoice dated prior to the LC issuance date was acceptable. The latest date of delivery was 1 May and payment would only be effected by Issuer on or after 10 May 2001.

The Drafts and Unified Invoice were issued and signed by Beneficiary in its own name before the merger.

Applicant received the firestone powder from both Beneficiary and Successor in a series of deliveries through 16 March 2001, for a total amount of TW$ 481,792.

On 14 May, Successor presented the Drafts, the Unified Invoice and the Application for Acceptance/ Payment for Draft for the LC amount to Issuer for payment. The Application for Acceptance/Payment for Draft contained the name of Beneficiary and the name of Applicant and it was duly signed by both Beneficiary and Applicant. Applicant's signature was duly verified by Issuer. The presentation was accompanied by a number of "CHU HUO DAN", translated as either cargo receipt or delivery order, showing the actual amount of the firestone powder delivered to and received by Applicant and documents from the Taiwanese government authority certifying Successor was the successor corporation of Beneficiary. Successor requested payment of TW$ 481,792. Issuer refused payment.

The reasons given for the refusal were:

1) The total amount shown in the cargo receipts and claimed by Successor was inconsistent with the amount shown in the Drafts, Unified invoice and LC;

2) Cargo receipts were not issued by Beneficiary; They were additional documents not called for under the LC.

3) Documents were not presented by Beneficiary.

The Merchant Union of Banks in Taiwan was requested to give its opinion. It agreed with Issuer that the documents were discrepant on their face and that they were not presented by the Beneficiary named in the LC. Therefore, Issuer had the right to refuse payment under the LC. Unsatisfied, Successor sued Issuer for wrongful dishonor.

The Fenshan Jianyi Court granted judgment to Issuer. On appeal, the Kaoshiung District Court reversed and granted judgment to Successor. It ruled that Issuer must pay Successor TW$ 481,782 plus interest at 5% p.a. from 5 September 2001 till date of payment. All expenses are for Issuer's account. No further appeal was allowed.

Legal Analysis:

1. Successor by Operation of Law: Issuer cited UCP500 Article 13(a), which states:

Banks must examine all documents stipulated in the Credit with reasonable care, to ascertain whether or not they appear, on their face, to be in compliance with the terms and conditions of the Credit ... . Documents which appear on their face to be inconsistent with one another will be considered as not appearing on their face to be in compliance with the terms and conditions of the Credit. Documents not stipulated in the Credit will not be examined by banks ... .

Issuer argued that the documents were discrepant as the amount claimed by Successor was inconsistent with that in the Drafts and Unified Invoice. Moreover, some of the cargo receipts were issued by Successor, which was not a party of the LC, and they were documents not called for under the LC and were disregarded.

The book, ISP98 & UCP500 Compared, written by Professor James E. Byrne, was also quoted in the Merchant Union's argument. At page 171, Professor Byrne states that:

1. ISP98 Rule 6.11 indicates the applicability of ISP98 Rules 6.11 to 6.14 to a drawing by a beneficiary's claimed successor by operation of law made in its own name.

2. There is no parallel provision to these rules in the UCP and the application of the existing provision to the UCP would lead to the conclusion that a presentation in the name of a stranger did not comply with the terms and conditions of the credit.

As there is no such parallel provision in UCP500, documents issued by a party not named in the LC and the document establishing the succession issued by the government authority could be viewed as additional documents not called for in the LC, and banks should disregard them.

In its opinion, the Merchant Union stated that Beneficiary should have arranged with Applicant to amend the name of Beneficiary to the name of Successor or to make the LC transferable.

The Judge disagreed with the Merchant Union's argument and ruled that the Fenshan Jianyi Court erred in entering judgment in favor of Issuer.

The rationale of the judge's decision was that Successor had honestly requested Issuer to pay the actual amount for the firestone powder delivered to Applicant. Though it might request Issuer to pay for the full LC amount as Beneficiary had issued the Drafts and Unified Invoice for the full LC amount, it did not do so. It was not unjustly enriched in this transaction. Moreover, the LC allowed partial delivery and the amount claimed by Successor was within the LC amount. It was also not possible for Beneficiary to request an amendment as Beneficiary, after the merger, was deregistered and no longer a legal entity. A non-existent company could not arrange for the LC to be amended. As the LC was a local LC and all parties involved were companies incorporated in Taiwan, Issuer should be able to verify with the government authority whether or not Successor was the successor corporation of Beneficiary. Beneficiary's interests had been transferred to Successor by operation of law. As Successor was able to prove that it was the successor corporation of Beneficiary, it had the rights of Beneficiary to present documents and instruct Issuer to honor its presentation in its own name. The Judge also stated that a precedent had been made by Issuer to honor documents issued and presented by a successor corporation of a beneficiary under a separate LC issued by Issuer for the account of another company.

Comments by SOH Chee Seng:

1. Amount Claimed by Successor Inconsistent with Amount Shown in Drafts, Unified Invoice and LC: The practice for Taiwanese local LCs is to call for a Unified Invoice which is neither a proforma invoice nor a commercial invoice. The Unified Invoice shows the agreed amount of sale in the sales agreement, in this case TW$ 724,500.

However, the Drafts drawn by Beneficiary should have reflected the actual amount of sale shown in the cargo receipts. It could be viewed as a discrepancy if a draft does not reflect the actual amount of the transaction. In this case, the amount was overstated as TW$ 724,500 while the actual delivery was only TW$ 481,792. Some banks may waive this discrepancy on the drafts especially if the drafts are drawn at sight on the issuing bank, as the drafts are not documents required by Applicant.

2. Additional Documents: UCP500 Sub-article 13(a) states:

"Documents not stipulated in the Credit will not be examined by banks. If they receive such documents, they shall return them to the presenter or pass them on without responsibility."

The cargo receipt was not a document called for in the LC and will not be examined by the issuing bank. However, the LC allowed partial delivery and called for presentation of a Unified Invoice. The Unified Invoice showed the agreed total amount of sale and it was issued prior to the LC issuance. It would not evidence the actual amount of sale after the LC was issued. Nonetheless, there was no indication whether the documents could only be presented for payment after the firestone powder had been fully delivered. In this case, though the cargo receipt was not a document required in the LC, it was important, as it had evidenced the actual amount of drawing by Beneficiary. However, the cargo receipt would be disregarded as the Application for Acceptance/Payment of Draft and the Drafts drawn by Beneficiary should evidence the actual amount of drawing by Beneficiary as indicated above.

3. Transferee by Operation of Law: Transfer by Operation of Law is a matter of local law in the Beneficiary's country and also the Issuer's. UCP500 is a set of rules governing LC transactions, but it is not law despite being universally accepted. The existing provisions in UCP500 may lead to a conclusion that a presentation by a party other than Beneficiary does not comply with the terms and conditions of the LC as stated by Professor James E. Byrne in ISP98 & UCP500 Compared. The statement is also clear in UCP500 Article 37(a)(i) which states:

"Unless otherwise stipulated in the Credit, commercial invoices;

i. must appear on their face to be issued by the Beneficiary named in the Credit (except as provided in Article 48)..."

There is no parallel provision in the UCP500 to ISP98 Rule 6.11, which provides:

Where an heir, personal representative, liquidator, trustee, receiver, successor corporation, or similar person who claims to be designated by law to succeed to the interests of a beneficiary presents documents in its own name as if it were the authorized transferee of Beneficiary, these Rules on transfer by operation of law apply.

However, I tend to agree with the Judge in his decision. An LC is an instrument to facilitate trade settlement. An issuing bank is responsible for the financial standing of its customer, Applicant. It should not find forged on documents to dishonor its LC undertaking especially when Applicant has financial difficulty. As to what the Judge said, Successor corporation should not be penalized if it has succeeded the interests of an LC beneficiary. Documents may not be issued in the name of Beneficiary if Beneficiary is no longer in existence as a legal entity. Amendment may not be timely for the presentation of documents. I would agree that the documents issued and presented by a successor corporation should be accepted as long as a document establishing the succession issued by the Government Authority is presented with the documents.

In order to resolve this problem, I suggest the Drafting Group of UCP600 should look into the matter. Perhaps it should adopt the practice provided for in ISP98 and allow presentation of documents by the transferee by operation of law.

* Soh Chee Seng is Technical Consultant on Trade Finance Issues for the Association of Banks in Singapore and a member of the Editorial Advisory Board of Documentary Credit World. Mr. Soh extends special thanks to Mr. Alan CY Liu of En Tie Commercial Bank in Taiwan for his contribution to this case abstract and for providing feedback and comments on Taiwanese local banking practice.

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