Article

Factual Summary: At the request of Applicant, China & South Sea Bank, LTD. (Issuer) issued an irrevocable documentary credit in favor of Beneficiary in the amount of US $319,590. The required documents included a commercial invoice, an original copy of the bill of lading, an inspection certificate duly signed and authorized by a representative of the Applicant, as well as an additional copy of the invoice and nonnegotiable bill of lading to be filed with the Issuer. Beneficiary presented the commercial invoices, bill of lading, and inspection certificate to Issuer through Bank of China Jiangyin Branch (Presenting Bank). After examining documents, Issuer informed Presenting Bank that since the additional copy of the bill of lading has not been indicated as "non-negotiable", and that Applicant had informed Issuer that the inspection certificate submitted by Beneficiary was not signed by an authorized representative of the Applicant, the payment request was rejected. On 3 December, 1998, Beneficiary's counsel sent a letter to Issuer claiming that Beneficiary re-provided the documents on 20 November and Issuer had violated the UCP500 when it had failed to make the payment or a notice of refusal within 7 working days after receiving the documents. Thus, Beneficiary's counsel requested Issuer to pay US$319,590 within 3 days after receiving the letter. Counsel of Issuer replied that Issuer had the right to make a prudent investigation before making the payment since Applicant's counsel alleged that Beneficiary had been involved in the forgery of the inspection certificate and Applicant had reported the forgery to Hong Kong police authority and Wuxi People's Procuratorate,. After continual communications between Beneficiary and Issuer, the Issuer finally made the payment of US$319,590 under the LC to Beneficiary on 27 January, 1999. Relevant documents under the LC were still held by Issuer although Applicant had never reimbursed Issuer to purchase those documents.

Beneficiary and Changzhou Gaotian Textile Products Co., Ltd. ("Gaotian Company") had entered into an Export Agency Agreement on 15 September, 1998, in accordance with which, Beneficiary was required, as the agent of Gaotian Company, to handle relevant procedures of transportation and settlement of LC in relation to the export of goods thereunder.

Beneficiary did not enter into a sale contract with Applicant for the export of goods. The inspection certificate was actually delivered from a Hong Kong businessman to Gaotian Company, who in turn, delivered it to the Beneficiary. Neither Gaotian Company nor Beneficiary had done any business with Applicant.

Applicant sued Beneficiary for the proceeds of the LC. In the first trial, Applicant provided an Inspection Report issued by an expert commissioned by Applicant on its own behalf (the "Inspection Report"), according to which, two signatures and seals on the inspection certificate prepared by Beneficiary were forged. Applicant further requested the court to conduct an appraisal for the authenticity of the inspection certificate.

Beneficiary alleged that Applicant had reported the alleged forgery to Wuxi People's Procuratorate, but, neither Wuxi procuratorate nor the Hong Kong police authority had officially filed the case and conducted further investigation.

First Instance:

The trial court held that once the LC was issued, it should be independent of the underlying transaction. Beneficiary had presented relevant documents to Issuer who had made the payment after examining documents. The court stated that the obligation to pay was not subject to any defenses or claims in the underlying transaction but only subject to provisions under the LC. Once Issuer made the payment, its obligation under the LC was released. Issuer had never brought any lawsuit to invalidate its payment to Beneficiary. Since Applicant had never reimbursed to Issuer to purchase the documents under the LC, the court concluded that it did not have direct contractual relationship with Beneficiary as far as the LC transaction was concerned. Therefore, it did not have right to claim for the invalidation of the payment under the LC.

Second Instance:

Applicant appealed to Jiangsu High People's Court (the appeal court) alleging that since Beneficiary's forgery of documents had materially infringed its interests, it should be granted the right to claim for the invalidation of payment under the LC; in addition, since the Inspection Report was legal and effective, Beneficiary should be liable for all of Applicant's losses resulting from the forgery.

The appeal court held that since Beneficiary, had presented all the documents to Issuer in accordance with the terms and conditions under LC, and Issuer had made the payment under the LC after examining the documents in accordance with UCP500, the settlement of LC should be deemed as completed. With respect to the Inspection Report provided by Applicant, the court decided it was not admissible evidence because such a report was issued by a foreign expert commissioned by Applicant on its own behalf. Furthermore, since Beneficiary had never done any business with Applicant before, it would not have the knowledge of what Applicant's seal and its authorized representative's signature were like. Therefore, it was unreasonable for Applicant to allege that Beneficiary had committed forgery. Last, the reason for stipulating an inspection certificate as a required document under the LC is to secure the quality of the goods. Since Applicant has never picked up the goods, it would not have the knowledge of whether the goods are defective. Therefore, the appeal court affirmed the trial judgment and rejected Applicant's appeal.

[JS/ec]

* JIN Saibo is a Partner of Tongshang Law Firm. FENG Jing is a lawyer of Zhonglun Law Firm.

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