Article

Topics: Negotiation; Injunction; Fraud; Fraud Exception; Fake Documents; Original LC

Type of Lawsuit: Court injunctions were granted in P.R.China under two commercial LCs, however, the Supreme Court of the Republic of Korea ruled in favor of the nominated negotiating bank who sued the LC issuing bank for reimbursement under negotiable LCs in Korea.

Parties: Plaintiff/Nominated Negotiating Bank - Korea Exchange Bank, Korea
Defendant/Head Office of Issuing Bank - Bank of China, China
Issuing Bank - Bank of China, Shandong Branch, China
Advising Bank - Pusan Bank, Korea
Applicant under LC No. LC50J0008807 - Qingdao Shunzheng Food Co., Ltd, China
Applicant under LC No. LC50J0010107 - Qingdao Jiayuan Michael Food Co., Ltd, China
Beneficiary under both LCs- Mir Trading Co. Ltd, Korea

Underlying Transaction: Sale of frozen Alaska Pollock and salmon.

LCs: One commercial LC issued in the amount of USD668,100.00 (+/-5%) for sale of frozen Alaska Pollock and another commercial LC issued in the amount of USD780,300.00 (+/-5%) for the sale of salmon. Both LCs were available with any bank by negotiation and subject to UCP600.

Previous Decisions: 1. Decisions of Courts in China:

In the two cases of Qingdao Shunzheng Food Co., Ltd v. Mir Trading Co. Ltd. [2007](Cheng Civil Initial No.3130)(China) under commercial LC No.LC50J0008807 for documents in the amount of USD734,910.00 and Qingdao Jiayuan Michael Food Co. Ltd. v. Mir Trading Co. Ltd. [2007] (Cheng Civil Initial No.2988) (China) under commercial LC No.LC50J0010107 for documents in the amount of USD819,293.15, the LC applicants applied for court injunctions for both presentations under the two LCs alleging that the beneficiary had committed fraud in the underlying transactions.

The trial court granted the LC applicants' motions and ordered the issuing bank (third-party defendant in the trial case) to stop payments to KEB (third-party defendant in the trial case) under both LCs.

KEB appealed to the Court of Appellate Qingdao Intermediary Court and sued the LC applicants, seeking dismissal of the trial court's decisions (Korea Exchange Bank v. Qingdao Shunzheng Food Co., Ltd [2009] (Qing Civil Final No.201) (China) under LC No.LC50J0008807 and Korea Exchange Bank v. Jiayuan Michael Food Co., Ltd [2009](Qing Civil Final No.202)(China) under LC No.LC50J0010107). The Court of Appellate denied the plaintiff's motions to dismiss and affirmed the decisions of trial court.

2. Decisions of Trial Court in Korea:

KEB then sued the issuing bank in Korea in December 2007 for reimbursement of its negotiation under the LCs. In the initial trial, the trial court granted KEB's motion under LC No. LC50J0010107 and ordered the issuing bank to pay the documents' value plus interest to KEB, but decided that the plaintiff's purchase of shipping documents under LC No. LC50J0008807 without examination against the original LC did not constitute LC negotiation and denied the plaintiff's motion for issuing bank's payment (No.2007-111631, Seoul Central District Court).

3. Decisions of Court of Appellate in Korea:

On appeal, the Court of Appellate Seoul High Court granted KEB's motion to reverse the decision of the trial court under LC No. LC50J0008807 and ordered the issuing bank to pay the documents' value plus interest (No. 2008-104309, Seoul High Court, No.19 Civil Division).

Decision: The Supreme Court in Korea, referencing UCP600 Articles 2 and 9, denied the issuing bank's appeal and ruled in favor of the LC nominated bank against the LC issuing bank.

Rationale: Negotiation is an act of the nominated bank's purchase of 'draft and/or documents' and does not require presentation of the original LC.

The fact that the negotiating bank gave value by crediting the negotiated amount into a special deposit account for the purpose of paying back the negotiating bank's previous debts owed by the beneficiary according to their separate agreement does not negate the effect of the negotiating bank's immediate giving of value.

The evidence of fraud is not sufficient.

[For a complete summary of this case, please see Page 211 of this volume]

1. Jun Xu, Senior Product Manager, Bank of China, Jiangsu Branch, China; Member of ICC DOCDEX.

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