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Note: When Kam Hing Trading (Hong Kong) Ltd. (Seller/Beneficiary) agreed to ship logs to Xiamen Xindeco (Buyer/Applicant), payment was to be made by a commercial letter of credit. The LC was issued by Fuzhou Bank (Issuing Bank) and freely negotiable. Beneficiary also procured an "all risks" insurance policy from People's Insurance Co. of China (Insurer). Beneficiary presented its documents to its bank, DBS (Negotiating Bank). Negotiating Bank forwarded the documents to Issuing Bank, but credited Beneficiary's account before Issuing Bank reimbursed the Negotiating Bank.

After the vessel on which the goods were being transported sank, Beneficiary instructed Negotiating Bank to instruct Issuing Bank to release Buyer/ Applicant from any obligations, presumably for selfserving commercial reasons due to the significance of the Buyer. Negotiating Bank subsequently converted Beneficiary's obligation into a term loan that was to be paid from the proceeds of the insurance policy. When Insurer refused to pay on the policy, Beneficiary sued Insurer for the reimbursement value of the shipment, US$1.3 million plus interest and costs.

Insurer contended that by releasing Buyer/ Applicant's obligations and voluntarily converting the credit into a term loan, (a) Seller/Beneficiary cancelled any obligation of Insurer to make a payment; (b) such release of the Buyer/Applicant was a voluntary decision; and (c) the conversion and release of credit documents to Buyer/Applicant had prejudiced subrogation rights of Insurer. The Court of First Instance of the High Court, Stone J., dismissed the complaint.

The Judge rejected the argument that the renegotiation of the Buyer/Applicant's obligation had put Seller/Beneficiary in a "no-loss" position, and concluded that Seller/Beneficiary should not be punished for taking the loss on itself rather than passing it along to Buyer/Applicant. The Judge concluded that the release of Buyer/Applicant from its documentary credit obligation was irrelevant to Seller/Beneficiary's right to seek indemnification under the insurance policy. The Judge, however, dismissed Seller/ Beneficiary's complaint on the ground that the vessel on which the goods were transported was not of the class required by the policy.

[JEB/eml]

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