Article

Factual Summary: Bank (Issuer) issued a documentary LC in favor of Seller/Beneficiary, under which there was a "more or less" clause regarding 10% of the amount and quantity stipulated in LC. Seller/Beneficiary presented the required documents under the LC to Advising Bank for negotiation. After examining the documents, Advising Bank forwarded them to Issuer. Issuer refused to make payment, raising three discrepancies. The alleged discrepancies were (1) the date of shipment was not indicated in B/L; (2) quantity of goods and invoice amount were not indicated in Seller/Beneficiary's fax; and (3) there was no evidence indicating the connection between the shipment under the LC and the shipment evidenced by the shipping company. Issuer then stated that Applicant had not waived the discrepancies. Subsequently, Issuer returned the documents to Advising Bank. Seller/Beneficiary sued Advising Bank and Issuer for wrongful dishonor. The trial court judged in favor of Beneficiary while release the responsibility of Advising Bank. Issuer appealed and the judgment was reversed. At trial, Issuer abandoned the first discrepancy.

Legal Analysis:

First Instance: Decision of Taiyuan Intermediate People's Court

1. UCP500: According to "General Principles of the Civil Law of PRC", UCP500, as international practices for LC, can apply to the present LC dispute, though UCP500 was not designated in the LC as the governing rule.

2. Advising Bank, Responsibility: In the present case, Advising Bank received the required documents but did not make payment. According to the definition of "negotiation" provided by UCP500, Advising Bank's act did not constitute negotiation and it was not a negotiating bank. Therefore, it had no obligation to make payment to Seller/Beneficiary under LC.

3. Issuer, Responsibility: Issuer had the unconditional obligation to make payment when it was presented with all required documents under the LC.

4. Discrepancies: Given the "10% more or less clause", the shipping notice and invoice met the requirement of the LC on their face. In addition, the evidence provided by the shipping company also met the requirement of the LC and other documents.

5. Fraud: LC is independent of the underlying transaction, and Issuer cannot refuse payment under LC by reason of problems in the underlying transaction. In addition, the evidence provided by Issuer could not demonstrate the fraud of Antedated B/L. In conclusion, the alleged discrepancies of documents and Antedated B/L were not proved. As a result, Issuer, rather than Advising Bank, should make payment.

Second Instance: Decision of Shanxi High People's Court

On appeal, Issuer claimed that (1) it was justified to refuse the payment under LC because of the discrepancies; (2) there was fraud of Antedated B/ L; and (3) it was procedurally wrong for the trial court to include Issuer as a defendant.

1. UCP500; Chinese Law, UCP: LC disputes should be heard separately from underlying transactions. In the present case, given that the LC was issued via SWIFT, UCP500 would apply. In addition, since there was no relevant provision in UCP500, Chinese Law and the Principles of the Closest Connection should apply in deciding the liability among the parties.

2. Discrepancies; Strict Compliance: The principle of Strict Compliance is one of the most important principles in deciding LC disputes and Issuer should follow this principle when examining documents.

A. Inconsistency: As for the first discrepancy, the quantity and amount indicated in the fax were not consistent with those indicated in the invoice. Furthermore, both the quantity and amount in the fax were uncertain, which were violations of the stipulations of LC. Therefore, the fax presented by Seller/Beneficiary was not consistent with the terms and conditions of the LC.

B. Shipping Information: For the second discrepancy, as name of vessel, voyage and number of LC was not indicated in the evidence provided by the shipping company, the connection between the shipment under the LC and the shipment evidenced by the shipping company was not proved. Nor was there any further evidence indicating the connection. In sum, discrepancies existed in the documents.

3. Fraud: The evidence proving the forged issuing date of the invoice was direct and could be confirmed. Therefore, Issuer's claim of the Antedated B/L should be upheld.

4. Advising Bank: The trial court held that Advising Bank was not obliged to make payment to Seller/Beneficiary and Advising Bank did not legally involve in this LC dispute.

[JEB/ny]

* Jin Saibo is partner of Commerce & Finance Law Offices, jinsaibo@tongshang.com. Assisted by Feng Jing and Song Wei. Niu Yue, J.D. Candidate 2012, George Mason University School of Law, assisted in the edits.

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