Article

Factual Summary: On 17 July 1998, Bank issued an LC in favor of Original Beneficiary for US$1,998,800. The LC was subject to UCP500, negotiable by any bank, and payable 85 days after B/L date.

On 22 July 1998, Issuer received a draft issued by Original Beneficiary from Presenting Bank for its acceptance with documents attached. On 24 July1998, Issuer sent a Payment Notification to Applicant with relevant documents attached for Applicant's examination and comments. On 27 July 1998, Applicant replied to Issuer that it agreed with Issuer's acceptance. The next day, Issuer notified Presenting Bank that it had accepted the draft payable on 14 October 1998.

On 12 August 1998, Original Beneficiary assigned all ownership, rights, and interests under the LC to a Singapore company, which in turn, assigned all ownership, rights, and interests to "Holder in good faith" eight days later. Presenting Bank subsequently notified Issuer of the assignment of proceeds and requested acknowledgment. Issuer acknowledged that the draft had been accepted and that the holder was "Holder in good faith".

On 7 October 1998, Issuer received a notification from Presenting Bank indicating that Presenting Bank was informed that "Holder in good faith" was no longer the holder of the draft and that Original Beneficiary had again become the holder. In the same notification, Issuer was informed that since Original Beneficiary and Applicant had agreed to revoke the LC, Issuer should do so. Upon receiving this notification, Issuer telephoned Presenting Bank to request the latter to contact "Holder in good faith" to confirm this change. Meanwhile, Issuer contacted "Holder in good faith" itself, but was informed that "Holder in good faith" was still the holder of the draft and that Issuer should pay the amount under the LC at maturity. On 16 October 1998, "Holder in good faith" replied to Issuer by SWIFT, stating that it was still the holder of the draft and had never assigned the proceeds under the LC to any third party, and accordingly, Issuer should make payment of US$1,998,800 which had been due on 14 October1998. From 19 October 1998 to 10 December 1998,"Holder in good faith" had continuously sent several telegraphs to Issuer stating that it was still the holder of the draft and requesting Issuer to pay US$1,998,800, plus interest from 14 October 1998calculated at an annual rate of 10%.

On 2 November 1998, Presenting Bank informed Issuer that it withdrew and revoked its letter to Issuer dated 7 October 1998 and restated that neither had it received any notification from "Holder in good faith "stating that the latter was no longer the holder of the draft, nor was there any document to prove the same. In the same telegraph, Presenting Bank apologized to Issuer for the inconvenience caused to Issuer as a result of the letter.

On 13 October 1998, Presenting Bank sent another telegraph to Issuer alleging that, since Issuer had accepted the draft on 28 July 1998 and promised to make the payment to "Holder in good faith" on 25August 1998, Issuer had been involved in a transaction independent of the LC and the underlying transaction. As a result, in no event can Issuer's obligation to pay under the accepted draft released by the request of either the Applicant, Beneficiary, or Presenting Bank; accordingly, Presenting Bank's letter dated 7 October1998 could not be deemed as a request to revoke the LC; furthermore, since Presenting Bank had revoked its 7 October 1998 letter on 2 November 1998, Issuer should have the obligation to make the payment under the draft.

After no result, "Holder in good faith" filed suit against Issuer with Beijing Second Intermediate People's Court, asking the court to order that: (1)Issuer should make payment under the draft drawn under the LC for US$1,998,800; (2) Issuer should pay interest from 14 October 1998 calculated at an annual rate of 10%; and (3) Issuer should be responsible for "Holder in good faith's" litigation fees, transportation fees2, and legal fees resulting from this lawsuit.

Legal Analysis:

1. Governing Law: "Holder in good faith" alleged that the case should be governed by UCP500 and international practice. On the contrary, Issuer argued that since Article 99 of PRC Negotiable Instrument Law provided that the endorsement, acceptance, payment and guaranty of an instrument should be bound by the law of the place where the said action was being carried out, this case should be governed by PRC law. With respect to the governing law of this case, the court invoked the Notification Regarding the Risk Control during the LC Practice of Commercial Banks, promulgated by the People's Bank of China on 20October 1997, which provided that commercial banks should strictly comply with international practice and relevant regulations when they are handling LC operations, and should bear their absolute liabilities for the accepted LC. As this particular case arose out of a dispute relating to LC acceptance, both theUCP500 and PRC Negotiable Instrument Law should apply.

2. Issuer Obligation to Make the Payment under the Accepted Draft: On 28 July 1998, Issuer notified Presenting Bank that the draft under the LC had been accepted. After "Holder in good faith" was assigned the proceeds under the LC, Issuer confirmed its acceptance of the draft on 25 August1998 and further confirmed that it would hold the draft on behalf of "Holder in good faith". Therefore, the court held that it was obvious that Issuer had the obligation to make payment under the LC. Although the court was of the opinion that Issuer's obligation was rather obvious and undoubted, the court still addressed several of the Issuer's arguments.

2A. Issuer argued that Article 42 of PRC Negotiable Instrument Law provided that when accepting a bill, the payer should write the word" accepted" and the date of acceptance on the front of the bill and sign it. When Issuer sent the telegraph to Presenting Bank on 28 July 1998, confirming that it would make payment when the draft was due, Issuer had failed to meet the requirements of acceptance because it did not write the word" accepted" on the draft. Therefore, Issuer's 28 July1998 telegraph should not be deemed as a valid acceptance of draft. In addition, Presenting Bank, to whom Issuer's 25 August 1998 telegraph was sent, was the agent bank of the Original Beneficiary rather than the "Holder in good faith". Therefore, such telegraph should not be deemed as a promise to "Holder in good faith".

The court rejected this argument. Firstly, Issuer had not provided evidence to the court to prove that it did not write "accepted" on the draft. Secondly, even if Issuer did fail to write "accepted" on the draft, Issuer should be responsible for its own negligence and should not take its own negligence as a defense for its obligations to "Holder in good faith". As the draft which had been accepted by Issuer was held by Issuer on behalf of "Holder in good faith", and Issuer had expressly promised to make payment when the draft was due, telegraph sent by "Holder in good faith" requesting Issuer to make payment should be deemed as a presentation for payment under the draft.

2B. Issuer argued that although the Original Beneficiary had assigned all proceeds under the LC to the Singapore company on 12 August 1998, which in turn, assigned the same to "Holder in good faith" on 20 August 1998, since the Singapore company had never paid the considerations for the assignment of proceeds, the proceeds assignment from the Singapore company to "Holder in good faith" was invalid. Therefore, Issuer was of the opinion that Finanz AG Zurich was not the holder of the draft.

The court also rejected this argument because Issuer did not provide evidence to prove that the Singapore company had never paid the considerations; on the contrary, "Holder in good faith's" payment to the Singapore company was relied on Issuer's confirmation.

2C. Issuer further argued that since Presenting Bank had informed it that Original Beneficiary and Applicant of the LC had agreed to revoke the LC and both parties had confirmed revocation to Issuer later, Issuer's obligation to make payment under the LC had therefore been released. Even if Presenting Bank was the agent bank of "Holder in good faith", the telegraph that had been sent to Issuer by Presenting Bank on 7 October 1998 alleging that "Holder in good faith" was no longer the holder of the draft should be deemed as what had been sent by "Holder in good faith". Therefore, such telegraph could sufficiently prove that "Holder in good faith" had confirmed that it was no longer the holder. As a result, Issuer's revocation in accordance with the 7 October 1998 telegraph sent by Presenting Bank should be construed to be agreed by "Holder in good faith".

The court, however, held that since the LC was irrevocable, Original Beneficiary and Applicant could not revoke the LC after Issuer had accepted the draft under the credit.

3. Issuer's Liability for Breach of Contract: The court held that Issuer's failure to make payment in time should be deemed as a breach of contract. Therefore, the court sustained "Holder in good faith's" claims for interest due to Issuer's delayed payment as well as legal fees. The court, however, was of the opinion that the alleged interest rate of10% per year was too high and according to international practice, the court decided that interest should be calculated at the rate of LIBOR plus 1%from 14 October 1998 to the date when the entire amount has been fully paid. With respect to "Holder in good faith's" legal fees, the court determined that Issuer should be responsible not only for the RMB192,000 (US$23,195) that had already been paid to its attorneys, but also for the RMB 64,000 (US$7,732)that would necessarily be paid. In addition, Issuer should also be responsible for litigation fees for this case in the amount of RMB 84,528 (US$10,211).

[JS/YW/csb]

1. The court used the term "Holder in good faith" in this case.

2. "Holder in good faith" later withdrew its claim for transportation fees.

* JIN Saibo is a partner with Zhonglun Law Firm (Beijing office) and YANG Wantao is a partner with Zhonglun Law Firm (Shanghai office).

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