Legal Case Summaries

Article

Factual Summary:

To sell codfish to Polish and Russian buyers, , First Beneficiary purchased codfish from Second Beneficiary who shipped the goods directly to the Polish and Russian importers after processing. The parties agreed to settle payment through transferred usance LCs.

On 22 May 2008 and 3 June 2008, Issuing Bank issued two transferrable usance LCs subject to UCP600 at 65 days after shipment date. The LCs were available with any bank by negotiation in favor of the first beneficiary. Advising Bank was nominated as the Transferring Bank.

Issuing Bank stipulated in Field 47B of both original LCs: “[T]he transferring bank is required to notify us when effecting the transfer ... . The applicant will present Cargo Customs Clearance Certificate issued in English by Russian Veterinary Bureau to us at least three banking days before the maturity date, and we shall make payment as instructed by the applicant. We shall forward the documents to the applicant upon receipt of the documents and we shall not bear any responsibilities in returning the documents if the documents are refused.” (English translation from Chinese court decision)

On 22 May and 3 June 2008, at the request of the First Beneficiary, Transferring Bank transferred the two LCs in favor of Second Beneficiary in the amounts of USD 40,560 and USD 42,750 respectively. On transferring the LCs, the Transferring Bank altered the expiry dates, latest shipment dates, total amount, and also deleted the above-mentioned contents of Field 47B in the original LCs at the instruction of the First Beneficiary.

On 11 June and 27 June 2008, Second Beneficiary presented documents under the two LCs totaling USD 83,310 with shipment dates of 30 May and 8 June respectively to Issuing Bank through Presenting Bank.

Presenting Bank subsequently requested payment and Issuing Bank replied that it would only make payment according to the stipulated clause in Field 47B that: “The applicant will present Cargo Customs Clearance Certificate issued in English by Russian Veterinary Bureau to us at least three banking days before the maturity date, and we shall make payment as instructed by the applicant.”

Second Beneficiary sued Transferring Bank, demanding compensation for losses caused by Transferring Bank’s deletion of the clause in the original LCs. Second Beneficiary claimed that this action infringed on its legitimate rights of receiving payment under the LCs.

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Legal Analysis:

1. Applicable Law:

The Shandong Yan Tai Intermediary People’s Court (trial court) quoted Articles 1 and 2 of The Provisions of the Supreme People’s Court on Some Issues in the Adjudication of Letter-of-Credit-Related Cases.

Article 1 states: The L/C-related cases as referred to in these provisions are those involving disputes arising in such letter of credit (L/C) transactions as L/C issuance, advice, amendment, revocation, confirmation, negotiation, reimbursement and etc.

Article 2 states: In the adjudication of L/C-related cases before a People’s Court, where the parties have agreed on the application of any international customs, usages, practices or any other rules, such as agreed on shall be applicable. Absent such agreement, the Uniform Customs and Practice for Documentary Credits as formulated by the International Chamber of Commerce or other relevant international customs, usages and practices shall be applicable. (both articles translated from Chinese)

The trial court found that because the LCs in this case were subject to the latest version of UCP, UCP600 shall be the basis for determining the responsibilities of the parties involved in the LC transactions.

2. Implications of Transferring Bank’s Deletion of Field 47B Clause:

The trial court observed that both LCs were subject to UCP600 and, in the absence of proof that there were any amendments or modifications of the LCs from the transferring bank, the UCP rules are binding on all parties of the LCs.

After quoting UCP600 Article 38(g) the trial court analyzed: “In other words, except for the amount of the credit, any unit price stated therein, the expiry date, the period for presentation, or the latest shipment date or given period for shipment, the transferring bank can only transfer the LC according to the terms and conditions of the original LC. Even if the first beneficiary instructed the transferring bank to delete the additional conditions in Field 47B of the original LC, the transferring bank should not violate such UCP rules by deleting the terms and conditions of the credit what the transferred credit should have accurately reflected. In this case, if the transferring bank had accurately reflected in the transferred LC the terms and conditions of field 47B of the original LC, the second beneficiary, based on their actual situation, would be able to make their own judgment as to whether a document controlled by the applicant may be presented, so as to decide whether they would accept the terms and conditions of the transferred credit. Due to the transferring bank’s action, the second beneficiary was unable to avoid the risks of the inability of presenting “Customs Clearance Certificate”, and such action resulted in the failure of collecting proceeds under the LCs. Such losses have direct cause and effect relationship with the transferring bank’s wrongful acts. Therefore, the court does not support the transferring bank’s claim that the deletion of the additional clause in Field 47B of the original LCs does not constitute any damages to the second beneficiary.”

The trial court continued its analysis: “As for the Transferring Bank’s argument that ‘it [Transferring Bank] only acted as an intermediary bank by transmitting information between the Issuing Bank, First Beneficiary, and Second Beneficiary and it would also advise the amendment of the original LC to the Second Beneficiary according to the First Beneficiary’s instructions’”

The court considered this argument according to UCP600 Article 10(a) (Amendments): “Except as otherwise provided by article 38, a credit can neither be amended nor cancelled without the agreement of the issuing bank, the confirming bank, if any, and the beneficiary.” The court determined that the Transferring Bank did not provide any proof that the Issuing Bank and the First Beneficiary had agreed to amend the conditions of Field 47B in the original LC. Since there were no amendments or deletion of such clause, the transferring bank must accurately reflect such conditions when effecting the LC transfer. The court said that the Transferring Bank’s deletion prevented the Second Beneficiary from collecting the proceeds under the two transferred LCs and the Transferring Bank should compensate it for the losses incurred thereof. The Transferring Bank claims that it acted upon the First Beneficiary’s instructions to delete the clause and all the consequences thereof have no cause and effect relationship with the transferring bank. The court could not support the Transferring Bank’s claim since it found it does not have any legal basis. The trial court also rejected the Transferring Bank’s claim that the reason why the payment was refused by the Issuing Bank was that the goods delivered by the Second Beneficiary failed to pass inspection, hence veterinary bureaus in Poland and Russia did not issue the requisite customs clearance documentation and the LC Applicant was therefore unable to obtain the Cargo Customs Clearance Certificates.

Instead, the trial court stated that “the reason based upon which the issuing bank refused payment is that the documents presented did not comply with the condition of 47B in the original LC and the issuing bank did not address the issue as to whether the goods were qualified or not.”

Based on this analysis, the trial court decided that the Transferring Bank violated the rules of UCP600 by deleting conditions from the original credit without authorization and infringed on the Second Beneficiary’s rights to receive funds under the LCs and led to its inability to recover lost funds under the LCs. Based on UCP600 Article 38(g) Article 106(2) of the General Principles of the Civil Law of the People’s Republic of China, and The Provisions of the Supreme People’s Court on Some Issues in the Adjudication of Letter-of-Credit-Related Cases, the trial court ruled in favor of the Second Beneficiary and ordered the Transferring Bank to pay compensation of USD 83,310 plus interest under the two transferred LCs.

1. Comments:

Transfer Instructions:

When processing transferable credits, a transferring bank usually is confronted by a first beneficiary insisting it alter clauses far beyond those permitted in UCP600 Article 38(g).

According to UCP600, a transferring bank shall not be liable for payment to a second beneficiary if it is not the confirming bank when a complying presentation is tendered.

The court is correct in its analysis that when a credit is not amended or a specific clause is not deleted from the original credit, the transferring bank’s responsibility is to act according to UCP600 and it cannot apply UCP600 Article 1 to guard against its unauthorized action for altering items beyond the scope of the rules. The transferring bank must bear the consequences of its violation of UCP rules if its actions infringe on the second beneficiary’s legitimate rights, even if the transferring bank acted on the first beneficiary’s instructions.

2. Notice of Refusal:

It is unclear when the issuing bank refused payment. The credit contained a so-called ‘soft clause’. Such clauses are also called “pitfall clauses” in practice as they usually give license to the applicant or issuing bank to discharge its payment liabilities unilaterally, that is, the applicant may fully control the entire transaction and the beneficiary’s right to receive payment is contingent upon the applicant’s willingness to issue certain documents or satisfy certain conditions. In such LCs, usually an applicant- controlled document is required. Examples of soft clauses include an inspection certificate issued by the applicant or issuance of a notice of the applicant’s receipt of an import permit. The irrevocable nature of LCs is brought into doubt with use of such soft clauses. Therefore, soft clause LCs are discouraged by ICC and, in ISBP745 paragraph vii (“Preliminary Considerations”), ICC specifically cautions that “A credit or any amendment thereto should not require presentation of a document that is to be issued, signed or countersigned by the applicant.” Even with a credit containing such a ‘soft clause’, the issuing bank must give its notice of refusal within five banking days after receipt of documents according to UCP600. Based on the text of this case, it seems that the issuing bank far exceeded five banking days before sending its refusal notice.

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