Article

Factual Summary: Joint Venture contracted to sell equipment for making building materials to Buyer who caused a transferable LC (LC1) to be issued in its favor by First LC Issuer. Because neither Joint Venture nor its members had sufficient available credit facilities to obtain an LC required to purchase the machinery from Manufacturer, Joint Venture Member approached Principal of Company, asking it to obtain an LC (LC2) in favor of Manufacturer. As security, it caused LC1, issued by First LC Issuer, to be transferred to Company. At the request of Company, Second LC Issuer opened its commercial LC in favor of Manufacturer.

The machinery arrived before the documents and, at the request of Company, Second LC Issuer issued a steamship indemnity to enable Company to obtain the machinery. LC2 was honored.

After the documents arrived, Company as transferree of LC1, sought to draw on LC1 and submitted a request to Second LC Issuer to forward the documents to First LC Issuer. The request was on a form entitled a "Collection Order" that stated that it was subject to URC322. On the order form, Company ticked an option naming Second LC Issuer as a negotiating bank.

On that day, Second LC Issuer credited the account of Company and reimbursed itself for the payment on the LC issued by First LC Issuer. Second LC Issuer then forwarded the documents to First LC Issuer. Thereafter, as stated in the court's opinion (with the court's comments shown here), First LC Issuer sent a notice of refusal, claiming the following discrepancies:

(1) There is no number on invoice (invoice was not numbered).

(2) There is no initial signature beside correction seals on invoice, draft, packing list and fax copy of shipping advice.

(3) In 120MM RMP rogid pipe, making M/C model number KC/RP-120' on packing list and inspection certificate. Rogid' was illogically spelt according to the context (Rogid' should have been rigid')

(4) In RMP drying and grinding machines model number KC/DG-200, on inspection certificates appendix, [machines] should have been [machine].

Second LC Issuer took the position that the alleged discrepancies were not valid. Company was informed of their correspondence.

Later, Company submitted a revised collection order to Second LC Issuer. In this collection order, Second LC Issuer was authorized only to collect, not to negotiate.

There was also an action in Mainland China for a freeze order by the applicant for LC1 due to the alleged poor quality of the machinery. Arbitration was also invoked pursuant to the contract terms. The arbitrators concluded that the machinery should first be installed.

Company's Principal sued Issuer at its provincial branch that issued the LC. Issuer's defense was that Beneficiary had already negotiated the documents and could not claim payment. The court ruled that the rejection was proper. On appeal the Supreme People's Court affirmed the decision regarding standing of the transferee but did not rule on whether the documents were discrepant.

Second LC Issuer also sued First LC issuer in Beijing but the action was dismissed on the ground that it was brought in the wrong venue and would have to be filed in the same provincial court as had transferee's action. In any event, no funds were paid by First LC Issuer.

When Company refused to refund the payment credited to its account by Second LC Issuer, Second LC Issuer sued Company for the amount due. In this action, the court entered judgment for Second LC Issuer. The appellate court dismissed the appeal.

Legal Analysis:

1. Collection; Duty of Collecting Bank; URC322 Articles 1 and 2: Company and its Principal argued that Second LC Issuer owed a duty to act in good faith as collecting bank in addition to its role as a negotiating bank. Specifically, it claimed that as collecting bank, Second LC Issuer was obligated to assert the preclusion of First LC Issuer for failure to give a timely notice of refusal, for the nonexistence of the asserted discrepancies, and to open proceedings against First LC Issuer on behalf of Company subject to its indemnification.

The appellate court agreed that separate duties arose from Second LC Issuer's role as collecting bank under the Uniform Rules for Collection (URC322 Article 1), namely to act in good faith and exercise reasonable care. However, the court rejected the argument that Second LC Issuer as collecting bank had the duty to take the actions suggested. It noted that there was no support for this position in URC322 and that the suggested duties were inconsistent with the agreement between Second LC Issuer and Company which expressly gave the Second LC Issuer discretion as to what and whether to pursue actions regarding collections. Furthermore, the court noted that "had [Second LC Issuer] failed to present the documents for payment, [it] would be liable to [Company]." The court also stated, "nor would business efficacy require the implication of any such terms."

2. Recourse: Company and its Principal also argued that Second LC Issuer had no right of recourse against it until exhausting all remedies against First LC Issuer. The appellate court rejected this argument, noting that it agreed with the trial court that the contemporaneous documents indicated a right of recourse and further noted that nothing had been asserted in the appeal to alter this conclusion.

Comment by Professor James E. BYRNE: The notion that the collecting bank must go to extraordinary lengths to collect is properly rejected. On the facts as recited, it appears that the bank more than fulfilled any duties that it had.

[JEB/dep]

COPYRIGHT OF THE INSTITUTE OF INTERNATIONAL BANKING LAW & PRACTICE

The views expressed in this Case Summary are those of the Institute of International Banking Law and Practice and not necessarily those of ICC or the other partners in DC-PRO.