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Factual Summary: Broker, a British Virgin Islands photovoltaic products trading company with an office in Beijing, agreed to purchase 7.056 megawatts multicrystalline solar modules from Ultimate Seller, a PRC company in the ReneSola Group of Companies ("Sales Contract"). Broker then contracted to resell the Modules to Ultimate Buyer, a power generation company in Italy, for EUR 1.48/ watt ("Sub-Sale Contract").

The Sales Contract between Broker and Ultimate Seller provided that Broker was to pay for the goods by "irrevocable documentary letter of credit (L/C). The original L/C should be issued latest 20 days prior to partial delivery. All the terms of the L/C should be confirmed in writing by the [Ultimate Seller] finally before the [Broker] applies to the bank for the issuance of L/C; any delay will affect shipping date accordingly. The L/C is valid 12 months upon the issuance." Under a Sub-Sale Contract, Ultimate Buyer/Applicant was to pay for the goods by "confirmed, irrevocable, transferable L/C".

In early June 2010, Ultimate Seller informed Broker that due to changing market conditions it could no longer ship the modules at the agreed-upon price. Broker then entered into a supplementary agreement with Ultimate Seller that raised the module price to EUR 1.40/watt.

Ultimate Buyer/Applicant had opened three irrevocable, transferable LCs (LC 005, 006, 007) in favor of Broker on 17 and 18 June 2010, which were advised (but not confirmed) by Broker's bank, which was nominated as Transferring Bank. The LCs, which were subject to UCP600, were amended to cancel LC 005, so that LC 007 would be used for the first batch of 30 containers of modules and LC 006 for any remaining deliveries.

Subsequently, a representative of Broker, a representative of Ultimate Seller, and two representatives of Ultimate Buyer/Applicant attended a meeting and visited Ultimate Seller's module factory in PRC, during which time various technical and logistical issues were discussed. It was agreed that Ultimate Seller would ship 30 containers by 20 July 2010, and Broker's representative showed Ultimate Seller's representative hardcopies of the unamended LCs. Subsequently, in an email, the representative of Ultimate Seller requested that Broker transmit the LC 007 draft "for our final conformation (sic) before it is issued officially".

On 2 July 2010, Transferring Bank advised Broker that the amended LC 007 had been transferred to Ultimate Seller as Transferee Beneficiary. Broker attached the advice to an email to Ultimate Seller, but the advice did not set out all of the terms of LC 007. Ultimate Seller shipped the first nine containers, which were originally intended for another customer and thus shipped earlier than anticipated, from Shanghai to Naples, with bills of lading "To Order" with Ultimate Buyer named as the notify party. The same day, Ultimate Seller also sent Broker a request for "some bank name by which our module is bankable".

The Chief Executive Officer of Renesola America Inc., the parent company of Ultimate Seller, informed Broker that "[c]onsidering the big risk of transfable [sic] L/C", Ultimate Seller could not accept a transferable LC from Ultimate Buyer for the modules in the Sub-Sale Contract. Broker responded that it would change the transferable LCs to direct LCs, but in the end, no direct LC was issued. Deciding to drop out of the deal, Broker suggested later that day that Ultimate Buyer and Ultimate Seller sign a direct contract for the sale of the modules at the Sub-Sale Contract price of EUR 1.48/watt. Ultimate Seller agreed to sell directly to Ultimate Buyer, but at a price of EUR 1.51/watt: the two parties entered into a direct contract on 9 July 2010. On 13 July 2010, the three parties signed an additional agreement whereby Broker was refunded its original deposit to Ultimate Seller.

Broker subsequently sued Ultimate Seller for breach of contract for refusing to deliver the modules on the pretext that the transferable LC was not acceptable. The Recorder dismissed the claim and ruled in favor of Ultimate Seller.

Legal Analysis:

1. Transferable LC: Broker argued that Ultimate Seller was aware that Broker was acting as an intermediary, and that the use of transferable LCs in those situations is a widely accepted practice. Further, it argued that the Sales Contract did not specify that only direct LCs could be accepted.

In asserting that only a direct credit was permitted, Ultimate Seller relied solely on clause 7a of the contract:

"...The 95% of each delivery shall be paid by the irrevocable documentary Letter of Credit (L/C). The original L/C should be issued latest 20 days prior to the partial delivery. All the terms of the L/C should be confirmed in writing by the Seller finally before the Buyer applies to the Bank for the issuance of L/C; any delay will affect shipping date accordingly..." [Emphasis added by court]

The Recorder agreed with Broker that Ultimate Seller probably knew or would have expected its contracting partner to resell the modules. However, noting that under clause 16 of the Sales Contract, the "Agreement shall be interpreted in accordance with the plain English meaning of its terms", the Recorder was reluctant to interpret that "applies" in clause 7a meant "procure" a transferable LC, or referred to an "application" by Broker to its own bank to transfer an LC. The Recorder commented that neither side could refer to relevant academic or judicial authority on this issue. However, the Recorder agreed with Ultimate Seller's interpretation of "applies", finding that Broker would open the LC envisaged under clause 7a at least 20 days prior to delivery.

While the Recorder recognized that a validly transferred credit would make little difference to a seller, there could be a practical difference between the two, as under UCP600 Article 38 (Transferable Credits), a nominated bank can refuse a request by a Broker to transfer to an Ultimate Seller or impose conditions for doing so. Citing UCP600 and Jack, Documentary Credits para. 10.4, the Recorder rejected the possibility of refusal or arduous conditions by a nominating bank as plausible reasons why Ultimate Seller would require a direct LC under clause 7a.

Ultimate Seller also contended that LC 007 had not been validly transferred. Based on the contents of Field 79 of a SWIFT message sent on 19 July 2010 from Transferring Bank to Ultimate Seller's bank, Bank of China, the Recorder rejected this contention. Field 79 provided:

"OUR REFERENCE NO, AS95C10C00919 YOUR TRANSFER...

PLEASE BE INFORMED THAT THE BENEFICIARY HAS REQUESTED TO CANCEL THIS A/M L/C."

The Recorder accepted Broker's assertion that "beneficiary" above referred to Ultimate Seller, also taking into account handwritten remark "Jiacheng cancel credit" on the message copy.

2. Waiver/Estoppel: In the alternative, Broker claimed that the 25 June 2010 visit to Ultimate Seller's factory was successful in resolving all outstanding issues; in particular, the amendments to the LCs were agreed upon and copies of the unamended LCs submitted to Ultimate Seller's representative. Further, Broker claimed that the conduct of Ultimate Seller was consistent with it being willing to make delivery without objecting to the transferability of the LCs.

The Recorder rejected Broker's arguments, finding evidence that Ultimate Seller's representative present at the meeting had no authority to bind Ultimate Seller on all of the issues discussed, and that Broker's representative was aware from prior communications that the Chief Executive Officer of Renesola America Inc. had the final say on all key issues concerning commercial terms. Further, there was no contemporaneous documentary evidence showing that prior to the factory visit, Ultimate Seller knew or expected that Broker would be using transferable LCs for payment of the modules, nor was there documentary evidence indicating that the transferable nature of the LCs was discussed during the visit.

The Recorder did not find persuasive the lack of objection to the LCs by Ultimate Seller's representative immediately following the visit, as there was no indication that he understood the difference between a direct and transferable LC. Further, the representative's 28 June 2010 email requesting confirmation of the LC terms suggests that the LCs were subject to final confirmation by Ultimate Seller and that the representative expected them to be issued shortly thereafter.

3. Contract: The Recorder rejected Ultimate Seller's contention that LC 007 was non-compliant with the contract in three other respects: (1) there was no written confirmation as to the terms of the LC; (2) the LCs did not have a validity date of 12 months from the date of the issue; and (3) the LCs were issued later than the latest issue date applicable to the shipment schedule. As discussed, the first shipment of modules in July was shipped earlier than expected. Ultimate Seller made no protest prior to issuance that Broker had failed to provide the draft LC terms; instead, it merely asked for the final terms for approval.

[KCM/jbb]

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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.

This article represents the views of the author and not necessarily those of the ICC or any of the other partners in DC-PRO.