Article

Factual Summary: Issuing Bank issued an irrevocable and freely negotiable LC in favor of Beneficiary that undertook to pay at sight and with a latest shipping date of 31 May 2002. Beneficiary submitted a full set of documents to its bank which had advised the LC on 6 June 2002. Advising Bank forwarded the documents to Issuer by express mail the next day. On 19 June 2002, Advising Bank received two notices of dishonor from Issuer, stating the following reasons: non-compliance including the inconsistency of commodity names in the invoice, packing list, and bill of lading; the forged B/L date; different payment bank names on the draft; and lack of consignee. Advising Bank replied the next day insisting that Issuer accept the documents and pay, but Issuer, without further raising any non-compliance issue, dishonored the LC based on alleged Beneficiary fraud.

The claimed fraud was because the LC misnamed "LIANYUNGAND" (instead of"LIANYUNGANG") and the loading of goods on ship was completed at 4:00 am on 1 June 2002, the Beneficiary made a corporate chop with "LIANYUNGAND" and also obtained a back-dated B/L.

Legal Analysis:

1. UCP500: Article 142 of PRC General Principles of the Civil Law provides that international practice may be applied to matters for which neither the PRC law nor any international treaty concluded or acceded to by the People's Republic of China has any provisions. Since the parties did not choose any applicable law in the LC, nor does any PRC law or regulation make provisions in this respect, the internationally accepted UCP500 shall apply.

2. Fraud, Governing Law: Since UCP500 does not deal with LC fraud and remedies and the parties could not reach an agreement in terms of applicable law, the court decided that PRC law would apply to what is a tort dispute under Chinese law. China is the place of occurance of the alleged tort because the relevant documents under the LC and B/L were issued in China and the alleged fraud occurred in China.

3. Issuer's Obligation: UCP500 Article 13requires the Issuing Bank to pay if submitted documents are, on their face, in compliance with LC and the documents themselves are not inconsistent with one another. Although Issuer had raised discrepancies initially, it did not maintain these discrepancies after being challenged by other parties. Subsequently, it only relied on fraud exception.

4. Negotiation: According to UCP500 Article 10,"[m]ere examination of the documents without giving of value does not constitute a negotiation." In the current case, as the LC did not designate a specific negotiation bank; any bank could negotiate documents under the LC. The bank, however, seemed only to have reviewed the documents rather than being paid for them to the Beneficiary. In this regard, it can only be deemed an advising bank and not a negotiating bank.

5. Fraud Exception, Forged Documents: The court considered the following two aspects in determining forged documents:(i) On the subjective side, a fraud means that the Beneficiary should have intended to forge documents in order to defraud the Issuing Bank. The Beneficiary used a separate seal with "LIANYUNGAND" merely for the purpose of compliance with LC; and,(ii) On the objective side, since the corporate seal bore both the Chinese name and the English name, it is unlikely to cause any confusion of the identification of the Beneficiary. Further, the Appellant did not dispute the identity of the Beneficiary.

6. Fraud; Back-Dated B/L; B/L Back-Dated: The court concluded that the back-dating of the B/L does not constitute fraud here because:

(i) [Beneficiary] had no intention of fraud. Evidence showed that [Beneficiary] had arranged for the goods to be transported to the designated place and Customs had released such goods; and,

(ii) [Issuer] did not present any evidence showing that the four-hour delay in boarding caused any damages.

Comments by James E. BYRNE:

1. Distribution of Undertakings between Issuer and Negotiating Bank against Beneficiary under LC: The Beneficiary mentioned in its claim that, since Bank of China collected a remittance fee, it should be regarded as a negotiating bank and should assume joint liability with the Issuer. This argument confuses the liability of a negotiating bank with that of a confirming bank. As a matter of fact, the negotiating bank honors the submitted documents first after examination with reasonable care, and then forwards the documents to the issuing bank or the reimbursing bank. Upon similar examination, the issuing bank will decide whether to honor them or not. In case of dishonor, the negotiating bank is entitled to recourse its payment and the corresponding interest from the beneficiary. Therefore, the negotiating bank is exempted from any liability in respect of payment except for its own default.

2. Strict Compliance or Substantial Compliance?: UCP500 Article 13(a) requires banks to "examine all documents stipulated in the Credit with reasonable care" which indicates that it is not reasonable for the bank to refuse based on minute points of non-compliance (even a typo). The prevalent view in China tends to support strict compliance (also referred to as "mirror standard" or "mirror image" in some other jurisdictions), stemming from a decision made by the PRC Supreme Court.1 In that case, there were signatures of two goods receipt issuers in the samples kept by the issuing bank, but only one signature appeared on the submitted goods receipt. Although the beneficiary claimed that the two signature samples were independent and either of the inconsistent signatures should be fine, the court supported the issuing bank's claim for "obvious non compliance" between the documents. However, this decision made by the Jiangsu People's High Court reflects the change in attitude of Chinese courts towards "substantial compliance", that is, multifaceted consideration over the harsh application of the strict compliance standard.

Comments by DCW:

1. A sign from the courts in China that they have come to the realization that the wooden approach to compliance that masquerades as "strict compliance" by which even minor differences or mistakes are misused as a justification for refusal or documents is unworkable in the long term. A sound approach to strict compliance can only be founded on an appreciation of the role of the document in the LC and in practice and the significance of the data with respect to other data in that and other documents.

2. The question of back-dating of a B/L raises amore delicate question. Some courts have decided that it is per se LC fraud. We think that the issue is not so stark. Indeed, this case poses an example of a situation where the entity asserting that there is fraud should be put to the proof that the difference of four hours was material.

[JS/YW/csb]

1. Chaolian Property (Hong Kong) Co., Ltd. v. Agricultural Bank of China (Hunan Branch), appellant case over LC transaction dispute (Fa Gong Bu (2001) No.2), The Supreme People's Court, China, Civil Judgment (1999) Jing Zhong Zi No. 432. For further discussion, see Jin, "A Review of Key Letter of Credit Cases in the People's Republic of China", 2001 ANNUAL SURVEY 80.

* 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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