Article

Factual Summary: In its LC Application on 17July 1998, Applicant promised to pay all debts, fees, and interest in relation to Issuer's payment under the LC. On the same day, Guarantor issued an irrevocable guarantee letter to Issuer, pursuant to which, Guarantor would assume joint and several guarantee liability for Applicant's debts to Issuer. Applicant then paid Issuer a deposit of RMB4,972,200 (US$600,529)for the LC, and Bank issued an LC in favor of Original Beneficiary.

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 Second Assignee eight days later. On 24 August 1998, Presenting Bank notified Issuer of the assignment of proceeds and requested acknowledgment. Issuer acknowledged that the draft had been accepted and that the holder was Second Assignee.

On 7 October 1998, Issuer received a notification from Presenting Bank indicating that Presenting Bank was informed that Second Assignee 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 Second Assignee to confirm this change. Meanwhile, Issuer contacted Second Assignee itself, but was informed that Second Assignee was still the holder of the draft and that Issuer should pay the amount under the LC at maturity.

On 16 October 1998, Original Beneficiary sent a letter to Applicant, instructing it to contact Issuer immediately to stop payment of the LC proceeds. On 19 October 1998, Issuer sent a Payment Notification to Applicant, requesting Applicant to pay its debt of 70% of the amount of the LC, i.e., RMB11,610,000 (US$1,402,225) to facilitate Issuer's payment under the LC. On 20 October 1998,however, Applicant informed Issuer that as it is "very likely" that there was material fraud in the underlying transaction, Issuer should not make payment under the LC. On 26 October 1998, Issuer sent a letter to Applicant, informing it that if Issuer did not receive a letter from Second Assignee, confirming that Issuer's payment obligation was released, then Issuer would make payment. On 2 November 1998, Presenting Bank sent a letter to Issuer, clarifying that the notification dated 7 October 1998 was revoked. Between 9 November 1998 and 20 April 1999,Original Beneficiary sent several letters to both Applicant and Issuer, indicating that it was still the holder of the draft and that, since the underlying transaction had been terminated, Issuer's payment was no longer required.

Issuer then sued Applicant and Guarantor, requesting an order that Applicant should repay the debts arising out of its LC application and that Guarantor should satisfy its guarantee liabilities for Applicant's debts. Applicant counterclaimed, alleging that Issuer should return its LC application deposit. The Beijing No.2 Intermediate People's Court tried the case in the first instance and ruled that Applicant should pay its debts and corresponding interest to Issuer and that Guarantor should assume joint and several liabilities for Applicant's debts. Issuer and Guarantor accepted this judgment, but Applicant appealed. On appeal, affirmed.

According to the trial court, the Application Declaration and Application Form issued by Applicant were valid and, therefore, Issuer's actions in accordance with such documents were legitimate and valid. Since relevant documents in this case, e.g., the Application Declaration and Application Form, the LC, and the irrevocable guarantee letter reflected the genuine intentions of the relevant parties and did not violate relevant laws and regulations, the appellate court determined that such documents were legitimate and valid and relevant parties should bear their respective liabilities under such documents.

In a separate action, Second Assignee sued Issuer on 17 March 1999 in Beijing No.2 Intermediate People's Court, alleging that the amount under the LC and relevant interest should be paid. The first instance court found in favor of Second Assignee. Issuer appealed to the Beijing High People's Court, but later withdrew the appeal.

Legal Analysis:

1. Transfer; Assignment; UCP500 Article 48; UCP500 Article 49; Did the Assignment of Proceeds Constitute Transfer of the Credit?: Applicant alleged that since Issuer had transferred the LC to a third party without its consent, Issuer should bear all consequences arising out of the amended LC.

UCP500 Article 48(b) provides that: "A credit can be transferred only if it is expressly designated as 'transferable' by the Issuing Bank." Therefore, the LC in this case could not be transferred. Moreover, a transfer of the credit would take place before presentation and acceptance. In this case, the Original Beneficiary presented documents and obtained Issuer's acceptance on 28 July 1998.Therefore, the LC had not been transferred.

With respect to transfer of the LC, according toUCP500, the credit transfer means a change of the beneficiary of the credit. However, in this case, before the acceptance of the LC, the beneficiary of the LC had always been the Original Beneficiary, Global Company. Therefore, the LC had not been transferred.

On 12 August 1998, Original Beneficiary assigned all ownership, rights, and interests under the LC to a Singapore Company, which in turn, assigned all the ownership, rights, and interests to Second Assignee on 20 August 1998. UCP500 Article 49provides that: "The fact that a Credit is not stated to be transferable shall not affect the Beneficiary's right to assign any proceeds to which he may be, or may become, entitled under such Credit, in accordance with the provisions of applicable law." This article further provides that: "This Article relates only to the assignment of proceeds and not to the assignment of the right to perform under the Credit itself." Therefore, the Original Beneficiary's assignment of proceeds was in accordance with UCP500 and the consent of the Issuer and Applicant were not required.

2. Assignment; Acceptance, Holder; Was Second Assignee the Holder of the Draft?: Applicant alleged that since Second Assignee was not the holder of the draft, there was no factual basis for the trial court to order Issuer to pay the amount under the LC to Second Assignee.

The court noted that this case only concerned the dispute regarding reimbursement and the Second Assignee was not a named party in this lawsuit. Whether Second Assignee was the holder of the draft should be based on the case, Finanz AG Zurich v. GDB regarding LC acceptance, i.e., the judgment rendered by the Beijing No. 2 Intermediate People's Court ((1999) Er Zhong Jing Chu Zi No. 1837), abstracted at 2006 ANNUAL SURVEY 315, and the appellate judgment rendered by the Beijing High People's Court ((2001) Gao Jing Zhong Zi No. 148). According to these cases, Issuer should be liable for payment under the LC and Second Assignee was the holder of the draft. Issuer's decision to withdraw its appeal in that case was a legitimate exercise of its rights and the decision is final.

As a result, Applicant's allegation that the trial court's ruling that Second Assignee was not a holder was groundless and without merit.

3. Irrevocable; Termination; Could This LC be Revoked?: Applicant alleged that it was improper for Issuer to ask the Second Assignee for confirmation of the request to terminate LC after Presenting Bank notified Issuer that Second Assignee was no longer the holder since Applicant had reached an agreement with the Original Beneficiary to revoke the LC.

UCP500 Article 6(c) provides that an LC maybe either revocable or irrevocable. UCP500 Article 9(d)(i) provides that: "Except as otherwise provided by Article 48, an irrevocable Credit can neither be amended nor cancelled without the agreement of the Issuing Bank ... and the Beneficiary."

With respect to the revocation of the LC, since Applicant and Original Beneficiary cannot revoke an irrevocable credit without Issuer consent, the LC in this case had not been revoked. Issuer had performed its obligations to the Applicant, i.e., issuing the LC, examining documents presented under the LC, and making acceptance of the LC.

The court noted in this case, there was no evidence proving that Issuer had agreed to revoke the LC. In addition, after Original Beneficiary's assignment of proceeds, it was no longer the beneficiary of the LC. As such, it had lost the right to revoke the LC. When Original Beneficiary requested Issuer to revoke the LC, Issuer was entitled to ask for the consent of Second Assignee.

UCP500 Article 3(e) provides that: "Credits, by their nature, are separate transactions from the sales or other contract(s) on which they may be based and banks are in no way concerned with or bound by such contract(s), even if any reference whatsoever to such contract(s) is included in the Credit." Based on the principle of autonomy, it follows that after Issuer accepted the draft, termination of the underlying contract by the Original Beneficiary and Applicant should not result in revocation of the payment obligation.

4. Fraud Exception: Applicant alleged that since the fraud exception should apply in this case, the LC dispute should be tried together with the underlying transaction dispute. According to a symposium minute1 of the Supreme People's Court (Fa (Jing) Fa [1989] No.121), even if material fraud was present in the underlying contract, if the issuing bank had accepted drafts, then the fraud exception should not apply. Therefore, Applicant's argument that the fraud exception should apply in this case was rejected.

5. Reimbursement, Suretyship: With respect to its guarantee liabilities, Guarantor alleged that since the principal contract had been amended without its consent when the LC was transferred, it should no longer be liable for the debts of Applicant. In addition, Guarantor alleged that the guarantee letter, which was a standard document prepared by Issuer, was void since it had violated the principle of good faith. The trial court held that the principal contract of the guarantee agreement was the Application Form issued by Applicant. Since both the Application Declaration and Application Form had not been amended, Guarantor should still be liable for Applicant's debts.

[JS/YW/csb]

1. In PRC practice, such "symposium minute" is often considered to be a judicial interpretation.

* JIN Saibo is a partner with Zhonglun Law Firm (Beijing office) and YANG Wantao is a partner with Zhonglun Law Firm (Shanghaioffice).1. In PRC practice, such "symposium minute" is often considered to be a judicial interpretation.

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