Article

Factual Summary: In 1997, Beneficiary/Seller, a Japanese company in Osaka, to pay for the purchase of textiles, agreed to provide a LC to Buyer, a Taiwanese company located in Taiwan.

At Buyer/Applicant's request, its Bank, a Taiwanese bank whose head office is located in Taipei, issued UCP500 irrevocable LC for JPY8,764,000 in favor of Beneficiary. It was transmitted it via SWIFT to The International Commercial Bank of China, Tokyo Branch Office (Advising Bank). That bank was instructed to advise the LC to Beneficiary/Seller through Advising Bank's Osaka Branch Office which it did. Subsequently, Beneficiary/Seller agreed to make an additional quantity of shipment of the textiles by 31 January 1997 and Applicant obtained a corresponding amendment which Issuer issued as incurring the amount of the original letter of credit by JPY5,545,000, making the total amount JPY14,309,000 after extending the latest shipment date to 20 February and extending the expiry date to 28 February.

This arrangement between Beneficiary/Seller and Applicant/Buyer was never disclosed to Advising Bank which had no way of knowing about it.

The amendment was administered by the Issuer on 22 January 1997 subject to UCP500, but in transmitting the amendment by SWIFT to Japan, the Issuing Bank erroneously named the Tokyo Branch Office as the final advising bank without indicating that bank's Osaka Branch Office, because it should be advised through Advisor's Tokyo Branch Office, could not apply the message from the Issuing Bank properly. Responding to that inquiry on January 26, 1997, the Issuing Bank instructed Advisor to send the amendment to its Osaka Branch Office.

On that date, Advising Bank Tokyo Branch Office received the instructions from the Issuing Bank, but failed to process the amendment in due time and held the amendment in its pending file not processed. Beneficiary/Seller which was eager to have the amendment, repeatedly asked Advising Bank Tokyo Branch Office whether or not the awaited amendment had arrived. On finding the amendment in its file, Advising Bank Tokyo Branch Office transmitted it to its Osaka Branch Office which advised it to hand it over to Beneficiary/Seller on February 4, 1997.

Although Beneficiary/Seller had received the amendment from Advising Bank's Osaka Branch Office, it did not ship the additional quantity of the textiles agreed because the amendment had arrived too late. To accommodate the additional quantity it would have had received by January 29, 1997 at the latest.

Buyer's affiliate in Taiwan, complained bitterly that it affiliate had been blamed by its ultimate buyers for non-delivery of the textiles as a result of Beneficiary/Seller's failure to make the additional shipment of the goods and notified that the affiliate might be compelled to pay damages to its customers.

Beneficiary/Seller was forced to make the additional shipment by air, not by sea, and to accept a price reduction and also to absorb the extra air freight charges incurred.

Apparently, the Taiwanese New Year holiday season delayed communications between Beneficiary/Seller and Buyer/Applicant.

It was further found that there was another amendment including, among others, an increase in the amount to this original letter of credit and that Beneficiary/Seller had its documentary drafts negotiated by another bank in Osaka, because the letter of credit was available with any bank by negotiation.

Beneficiary/Seller sued Advising Bank seeking damages based on tort liability amounting to JPY6,165 thousand plus interest. Beneficiary/Seller alleged that such damages, including the price reduction and the extra air freight charges, were caused by the delayed advising of the amendment by Advising Bank.

Legal Analysis

Judgment by the Osaka District Court1

The Osaka District Court made a judgment in favor of Beneficiary/Seller.

1. Is it illegal that Advising Bank delayed advising the amendment to Beneficiary/Seller, causing loss to Beneficiary/Seller because of the delayed delivery of the goods to the Buyer?:

A LC functions as a prompt payment device in the international trade and it protects the beneficiary which will rely on it so much that the beneficiary will postpone a shipment of goods, if the letter of credit is not made readily available by the advising bank. In the light of such an important function of the letter of credit and the realities of the international trade involved, the letter of credit system itself imposes on the advising bank a duty to advise the LC to the beneficiary promptly in order to avoid a situation where a shipment of goods by the beneficiary may be delayed because the advising bank acts very slowly.

As Advising Bank asserts, UCP500 Article 7 does not have a provision specifying the time frame within which the advising bank should act promptly. UCP500 Article 7 Section (a), however, provides to the effect that the advising bank shall only take reasonable care to check the apparent authenticity of the LC at its hand and that if the advising bank chooses not to advise it, that bank must so inform the issuing bank accordingly.

In this context, UCP500 presupposes that the advising bank handles its advising job quickly enough.

The beneficiary's reliance that it can have a letter of credit advised promptly by the advising bank is a benefit that deserves protection by law and the advising bank owes a duty of care to protect such beneficiary's benefit and to dispose of its work of advising as promptly as possible within the permissible period of time normally required for advising of the letter of credit. Thus, the advising bank owes tort liability.

In the present case, the fact that Advising Bank delayed advising the amendment until February 4, 1997 undoubtedly amounts to a violation of a duty of care by that bank.

2. Was there negligence on the part of the employee of Advising Bank?: The employee of Advising Bank did not dispose of the amendment when it was received and that employee improperly held it in the pending file, which has caused delay in question and which obviously amounts to negligence of Advising Bank.

3. Are damages and causation well founded?: Although Advising Bank argues that it only knew the things indicated in the amendment itself, and that it could not foresee the alleged consequent damages, these damages were foreseeable by Advising Bank and causation is well founded with respect to these damages claimed by Beneficiary/Seller.

JUDGMENT BY THE OSAKA HIGH COURT2

Advising Bank appealed to the Osaka High Court which denied the appeal by affirming, in essence, the reasoning of the Osaka District Court.

JUDGMENT BY THE SUPREME COURT OF JAPAN

On an appeal to the court of the last resort by Advising Bank, the Supreme Court of Japan reversed the judgment of the lower court and made its own judgment in favor of Advising Bank. The Supreme Court held as mentioned below:

"Where a letter of credit is agreed on to be used as a settlement means of the sales price between a seller and a buyer, the seller may, unless otherwise agreed, refuse to perform its obligation until it receives the advice of the letter of credit and, if an amendment is made to the letter of credit, the seller may refuse to perform his obligation with respect to the amendment until it receives the advice and it accepts the amendment."

"The original letter of credit in this case before the Court was advised to Beneficiary/Seller on January 6, 1997, but as agreed by the both parties, its amendment which purported to cover and to include the sales prices and the like for an additional shipment of the goods by consolidating two separate shipments into one and the same shipment of the goods as listed in the attached list of the transaction was not advised to Beneficiary/Seller by January 31, 1997. In the circumstances, Beneficiary/Seller does not owe to the Buyer any liability for default that Beneficiary/ Seller has not effected the shipment of the goods concerning this sales contract by the above latest date of shipment, or January 31, 1997 and therefore, it is determined that there is no reasonable ground that Beneficiary/Seller must have reduced the price of the goods and the like."

"In view of the foregoing, it can not be said that there exists causation between the act that Advising Bank did not advise to Beneficiary/Seller the amendment in question by January 29, 1997 and the loss that Beneficiary/Seller alleges to have suffered."

DISCUSSION

1. A buyer's timely procurement of a required LC in favor of a seller constitutes a condition precedent.

Governing law in this case is presupposed to be Japanese law. There is no Japanese statute which provides the point of time when the buyer must have an appropriate LC issued by its bank in favor of the seller, if the both parties agree to utilize a letter of credit for their transaction. UCP500 does not have a provision either.

In these circumstances, it is understood that in the absence of a specific provision in law and the like, governing law or Japanese law in this case will decide.

Then, Advising Bank asserted that it is an established condition precedent in Japan that the buyer has a LC issued and delivered to the seller before the seller becomes obligated to effect a shipment of the agreed goods and Advising Bank quoted several precedents in the past as follows:

1. Sanindo Sangyo K.K. v. Hoshina3 (Due to the fact that the condition precedent for the shipment under the sales contract has not been fulfilled, the seller may refuse to effect shipment of the goods agreed on until the letter of credit reaches the seller.)

2. Faulty & Co., Ltd. v. K.K. Matsui4 (If a letter of credit is not issued within the period of time agreed, then the seller may cancel the sales contract or act otherwise on the ground that a duty for the buyer to have the letter of credit issued is in a state of tardy performance.)

3. S.L.Jons v. K.K. Shima5 (If a letter of credit is not issued, the buyer may not cancel the sales contract by asserting that the seller has not entrusted a carrier with the carriage of the goods within the time frame agreed on.)

In addition, Advising Bank showed an established theory that the issuance of an irrevocable LC constitutes a condition precedent that the buyer may require the seller to make a shipment of the goods agreed and that the letter of credit must be issued prior to shipment of the goods.6

In this respect, US UCC Article 2(Sales) contains appropriate provisions such as §2-325, §2-703 and §2-325.7

The similar case in the United States is: Sound of Market Street v. Continental Bank International.8

In reversing the judgment of the lower court and making its own judgment in favor of Advising Bank as above, the Supreme Court of Japan has acknowledged and followed a trend of the theory and decisions made by other lower courts in the past in Japan.

2. A view in the context of the letter of credit transaction will also sustain the Judgment of the Supreme Court of Japan.

(1) Contents of the original letter of credit and the amendment in question

A review of the evidence presented reveals the following facts:

1. The original letter of credit permitted partial shipments, and therefore partial drawings, and the amendment did not prohibit them either.

2. Neither the original letter of credit nor the amendment stipulated shipments and drawings by installments or the shipment schedule according to which given quantities of the textiles were to be shipped, thus allowing Beneficiary/Seller to make shipments in any timing up to the latest date of shipment as extended by the amendment.

3. Both the original LC and the amendment did not stipulate the unit prices corresponding to various kinds of textiles.

4. All that the amendment stipulated was the increased amount, the extension of the latest shipment date and finally, the extension of the expiry date only, without showing any of the important particulars for the additional and urgent shipment in question, such as deadline of the shipment by January 31, 1997 and the quantity of textiles which are said to have been specifically agreed by Beneficiary/Seller and the Buyer.

The evidence above clearly shows that so long as the additional shipment by January 31, 1997 in question is concerned, this amendment in essence does well by itself and works almost independently of the original letter of credit, quite contrary to the holding of the Osaka District Court that "once an amendment has been issued, it becomes an integral part of the original letter of credit, and the both instruments are to be treated as one and a single letter of credit."

(2) Independence principle of the letter of credit transaction applicable to the advising bank The original letter of credit and the amendment in this lawsuit were specifically made subject to UCP500.

UCP500 Article 3 provides to the effect that the letter of credit by its nature is a separate transaction from the sale or other contract on which it may be based and that the beneficiary can in no case avail itself of the contractual relationship existing between banks or between the applicant and the issuing bank.

And UCP500 Article 4 provides:

"In Credit operations all parties concerned deal with documents, and not with goods, services and/or other performances to which the documents may relate."

It is noted that the advice cover letter of Advising Bank in this case indicated that it was subject to UCP500.

Comments by Professor IIDA:

In this writer's opinion, this judgment of the Supreme Court of Japan is sound and acceptable.

From the above facts (1) and (2), in addition to the fact that UCP500 does not stipulate any time frame within which the advising bank shall advise to the beneficiary the original letter of credit and the amendment thereto, if any, the Supreme Court of Japan could have held also in this lawsuit that Advising Bank did not owe any duty of care to send the amendment to the beneficiary by January 29, 1997 in order for Beneficiary/Seller to effect that specific shipment by January 31, 1997, and that Advising Bank had no way of knowing about the urgent needs of Beneficiary/Seller to receive the amendment.

In this writer's opinion, one of the reasons that the Supreme Court did not do so would probably be that it preferred refraining from stepping into the complicated world of the letter of credit procedure.

* Faculty of Law and Policy, Tezukayama University, Nara, Japan.

1. 1110 KIN YU SHOJI HANREI (FINANCIAL AND BUSINESS LAW PRECEDENTS) 56(2001)(Osaka District Court, September 25, 2000)

2. 1123 KIN YU SHOJI HANREI (FINANCIAL AND BUSINESS LAW PRECEDENTS) 25(2001)(Osaka High Court, June 12, 2001)

3. 2567 SHINBUN 6259 (Kobe D. Ct., Mar. 22, 1926)

4. 13 KAMINNSHU 11 at 2293 (Kobe D. Ct., Nov. 10, 1962)

5. 2936 SHINBUN 7057 (Osaka D. Ct., Mar. 10, 1928)

6. KOHEI IZAWA, SHOGYO SHINNYOUJO RON (COMMERCIAL LETTERS OF CREDIT) (enlarged) 241 at 251 (1960).

7. UNIFORM COMMERCIAL CODE 2007 ed.( 2007)

8. 819 F.2d 384 (3d Cir. 1987).

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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.