Article

Factual Summary: Issuer issued a usance L/C that required presentation of a receipt for the goods signed by the authorized person in employ of Applicant. In addition, the LC provided that the signature must be consistent with the sample kept by Issuer. Subsequently, Beneficiary presented to Negotiating Bank a counterfeit receipt with forged signature and forged stamp on it. Upon receipt of the documents, Negotiating Bank made payment to Beneficiary without consulting with Issuer regarding the authenticity of the stamp and signature or requiring Issuer to accept.

Later, Issuer informed Negotiating Bank that it would not accept the documents because of the forgeries. Negotiating Bank then brought action against Issuer for wrongful dishonor. The trial court entered judgment for Issuer. On appeal, affirmed.

Legal Analysis:

1. Discrepancies:

The Supreme Court held that the forged signature and stamp were inconsistent with the sample kept by Issuer and thus was not in compliance with the terms and conditions of the LC. Pursuant to UCP500 Article 13 and 14(b), Issuer may refuse to accept the documents.

2. Documents, Signature required: The LC required the receipt be issued by Applicant and signed by the authorized person that with signature that was consistent with the sample kept by Issuer. The appellate court indicated that since the LC had this clause, according to banking practice, Negotiating Bank should have consulted with Issuer regarding the authenticity of the signature and the stamp. Therefore, Negotiating Bank should assume the risk if it failed to do so.

3. Reasonable Care, Comparative Negligence Doctrine, Degree of Negligence, Assessment of Liability and Responsibility: The trial court noted that Negotiating Bank did not examine the documents with reasonable care since it failed to find the discrepancies or consult with Issuer regarding the authenticity of the stamp and signature. This decision was supported by the appellate court, which also held that according to the comparative negligence doctrine, degree of negligence on each party should be determined respectively, and liabilities should be assessed accordingly. As Issuer was not liable for negligence, Negotiating Bank was deprived of the right of being reimbursed.

Comment by the Institute:

The requirement that a signature resemble one held by the issuer is a device that has crept into LC practice during the last decade. It is an attempt to reorient the relationship between applicant and beneficiary and supposedly protect the applicant against forgery. Its provenance begins in an already distorted scenario, namely where the LC requires presentation of a document that is under the control of the applicant by the requirement of a signature of the applicant, its employees, or agents. The device is one that lends itself to applicant fraud as readily as it may prevent beneficiary fraud in that the applicant can use it to frustrate the ability of the beneficiary to be paid under an LC even though it has delivered the goods to the applicant or its agents. And the reality is that these devices typically are used in a situation where the beneficiary has delivered the goods to the applicant or its agents. As such, it adds insult to injury, compounding a bad practice into a potentially unsavory one.

Apart from the affect of such a practice on the beneficiary, it also has negative effects on any nominated bank that raises serious theoretical questions about the nature of such a letter of credit type undertaking. There are two possible scenarios explained below and it appears that the case falls into the second category.

In one scenario, the LC does not on its face state that the signature must conform with a sample signature held by the issuer. In that case, refusal of a document can only be based on it being forged or fraudulent since the LC undertaking is not conditioned on conformity of any signature. The burden of proving forgery or fraud falls on the issuer or applicant asserting it and, in any event, a nominated bank acting pursuant to its nomination is protected against such forgery or fraud by the disclaimers and nature of the doctrine of independence in rules of practice and LC law.

In the second scenario, the LC contains an express condition to the effect that the signature of the applicant or its agent must correspond (or whatever term is used) with a sample signature on file with the issuer. As a practical matter, no beneficiary should act under such a credit regardless of promises from the applicant to waive any problems since such promises are not binding on the beneficiary. No nominated bank should act on such a credit but merely forward the documents to the issuer. Even if the document is forwarded to the issuer and it indicates that the signatures pass muster, it is not entirely clear what effect such a statement would have if the applicant claims that the documents are fraudulent.

Beyond these practical admonitions, however, are the theoretical concerns mentioned above. Should such a condition be enforceable or is the undertaking itself a letter of credit? While it is tempting to argue that the condition is non-documentary, that argument is not compelling. The signature would be contained in a document and the sample is within the operational control of the issuer. The real source of the problem is not that the condition is non documentary but that it is not one whose performance the beneficiary or nominated bank can determine. In this sense, it is like applicant controlled conditions, a bad practice but one that must be enforced where there is ample notice of the requirement in the LC.

The real theoretical flaw is that the condition is not itself independent of the will and control of the applicant or issuer. In a sense, the undertaking is no longer neutral. Such undertakings are enforceable but are serious departures from what is normal practice for letters of credit. As such, such conditions should be interpreted in a manner that will not enforce them readily and will do so only on the narrowest terms. Absent conceptual breakthroughs in the understanding of what is meant by an irrevocable independent documentary undertaking, such a condition must unhappily be enforced where it is drafted in such a manner that no other option is available. Where the condition is that apparent, even the most obtuse beneficiary should be aware of its danger to the ability to make a complying presentation.

A more telling argument would be that of the nominated bank. Such a hidden test contradicts the nomination. If the nomination is to negotiate or pay, then the nominated bank bears the burden of compliance. If it is to confirm, a signature that appears to be in order should entitle the confirmer to reimbursement regardless of what is contained in the undisclosed sample.

[JS/LJ/ny]

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

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