Article

Factual Summary: Korea Exchange Bank (Issuer) issued an LC for sight payment in favor of Sanyang Textile Co., Ltd. (Beneficiary). The LC provided that it expired 20 July 2005, was available by Negotiation with any bank and required presentation of: Signed Commercial Invoice, Full Set of Clean On Board B/L, a Letter purportedly signed by Mr. Teak Ho Kim stating that exporter sent 36 pieces of each style sample and quality approved by buyer, Certificate of Origin, and Single Country Declaration.

Beneficiary alleged that, after shipping goods valued at US$39,750, it presented the stipulated documents to Defendant via an advising bank, which was not nominated. However, on 28 June 2005, Issuer refused to effect payment claiming that there were discrepancies concerning the date of exportation on the Single Country Declaration. On the same day, Issuer later stated that the letter in Beneficiary's documents differed from the original form and included a forged signature, the B/L was issued without the goods having been shipped, and the Certificate of Origin was not issued by a certified organization.

Beneficiary alleged that it had cured the Single Country Declaration to Defendant, presenting it via the advising bank on 29 June 2005. Issuer did not effect payment nor did it give a notice of refusal.

Beneficiary claimed that: 1) Issuer should perform its obligation to honor the LC and effect payment of proceeds; 2) With reference to Issuer's wrongful dishonor, Issuer should compensate it for its loss of interest and 3) Issuer should cover litigation and attorney's fees and costs incurred by Beneficiary. The trial court ruled for Beneficiary with respect to the claims regarding payment of proceeds under LC and compensation for loss of interest.

Issuer did not attend the trial proceedings but appealed to Shandong High People's Court. On appeal, the intermediate appellate court vacated the decision of the trial court and remanded the case for retrial.

First Instance: Decision of Qingdao Intermediate People's Court

In accordance with Article 2 of "The Provisions of the Supreme People's Court on Some Issues in the Adjudication of Letter-of-Credit-Related Cases", UCP500 is applicable. Since there is no provision in the rules or within the LC regarding LC fraud, it was inconsistent with UCP500 for Issuer to refuse to effect payment under the LC except for stating discrepancies between the LC and documents or between the documents. Furthermore, according to UCP500, Issuer only had the responsibility to examine the documents to ascertain whether they were in compliance with the terms and conditions of LC on their face.

In addition, Issuer did not submit any relevant evidence to prove its argument that the B/L was issued without there being shipment. The court rejected Issuer's argument of LC fraud regarding signature forgery. In addition, the court did not accept Issuer's argument that the Certificate of Origin had to be issued by a certified organization because there was no such provision in the LC. As a result, according to UCP500 and Articles 1, 2, 5, 6(1), 7(1), 8 of "The Provisions of the Supreme People's Court on Some Issues in the Adjudication of Letter-of-Credit-Related Cases", Issuer was obliged to honor the LC and compensate the Beneficiary for its loss of interest.

With reference to the fees and costs claimed by Beneficiary, the court did not rule for Beneficiary with respect to attorney's fees since there was no such stipulation in the contract between Beneficiary and Issuer.

Second Instance: Decision of Shandong High People's Court

During the proceedings of the appeal, Issuer alleged: first, there was improper service of judicial documents in trial to Issuer; second, Beneficiary had not presented a stipulated Single Country Declaration consistent with LC to Issuer; third, LC fraud existed in the B/L as well as the Letter of Buyer's Confirmation of Quality submitted by Beneficiary; and fourth, "The Provisions of the Supreme People's Court on Some Issues in the Adjudication of Letterof- Credit-Rated Cases" should not apply to the case since this judicial interpretation took effect after the occurrence of this LC dispute and even after commencement of the trial.

The appellate court ruled that there was violation of legal proceedings with respect to improper service of judicial documents that might affect the correctness of the trial court's decision.

The Shandong High People's Court rendered its ruling that Civil Judgment (2005) Qing Min Si Chu Zi No.317 issued by Qingdao Intermediate People's Court be vacated and that the case be remanded to Qingdao Intermediate People's Court for retrial.

Comments by JIN Saibo:

There are two interesting points regarding this case. First, it is explicitly stipulated under Chinese law that when a foreign Issuer is brought by a Chinese Beneficiary for wrongful dishonor to a Chinese court, its branch or office located in China is possibly regarded as the defendant or co-defendant in the proceedings; or they may be served with judicial documents issued by the Chinese court though they are not the defendant(s). In this case, the branch or office of the foreign Issuer was able to invoke this rule that they were authorized by Issuer regarding service of judicial documents as a defense. This was the basis of the appellate decision.

The other interesting point in this case is that the Qingdao Intermediate Court cited Articles 1, 2, 5, 6(1), 7(1), 8 of "Provisions of the Supreme People's Court on Some Issues in the Adjudication of Letter-of- Credit-Related Cases" promulgated by Supreme People's Court of PRC involving application of law, standard of examination of documents, the fraud exception, and other matters. However, both the issuing date (14 April 2005) and the acceptance date of this case (19 October 2005) by the Qingdao Intermediate Court occurred prior to the effective date of the judicial interpretation mentioned above (1 January 2006) and the decision of the Qingdao Intermediate Court was announced on 16 August 2006 after the effective date of the judicial interpretation. On the issue as to whether this judicial interpretation can be applied, Beneficiary and Issuer held different and contradicting opinions. Currently, the appellate court has vacated the judgment of the trial court and remanded the case for retrial. As a result, we must wait for the final judgment to view a definite answer to the question.

[JS/FJ/ec]

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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.

* JIN Saibo is partner of Commerce & Finance Law Offices. He may be reached at: jinsaibo@tongshang.com. Assisted by FENG Jing, lawyer of Zhonglun Law Firm.