Article

Factual Summary:

To purchase various fresh fish (sea bass, red drum, and black porgy), Hallasandf Co. Ltd. (Applicant) requested on 22 March 2011 that Korea Exchange Bank, Jeju Branch issue an irrevocable and freely negotiable commercial LC at sight for USD 217,620 with draft drawn on the issuing bank. The reimbursing bank was the issuing bank's Hong Kong Branch. A week later, the LC amount was amended to USD 230,380 and the expiry date was extended to 25 May 2011. Quantities and unit prices of the merchandise were also amended.

The LC required a signed commercial invoice in triplicate, full set of clean on board ocean bills of lading marked freight prepaid, packing lists in three copies, and a photocopy of goods confirmation.

On 23 May 2011, Beneficiary presented the documents through Industrial and Commercial Bank of ChinaICBC, Ningde Branch to the issuing bank. Among them, the transport document presented showed 'TO BE USED WITH CHARTER-PARTIES' in its top right corner, 'CONGENBILL B/L, 1994 Version' in its top left corner, and 'freight prepaid' in the bottom left corner. The wording 'TO BE USED WITH CHARTER-PARTIES' and the conditions of carriage were also shown on the reverse of the transport document.

On 27 May 2011, Issuing Bank sent notice of dishonor and stated that the applicant had refused to accept the document due to following discrepancy: "CHARTER-PARTIES B/L PRESENTED WITHOUT ORIGINAL B/L". Issuing Bank claimed that it would return documents to the presenting bank at their disposal. Upon receipt of the refusal notice, Beneficiary replied through the presenting bank to the issuing bank and requested it not to return the document according to the agreement between Beneficiary and Applicant. Beneficiary shall present a revised B/L in compliance with the terms of the LC to replace the charter party B/L.

Three days later, Issuing Bank again advised again that Applicant had refused to accept the documents due to the cited discrepancy and Issuing Bank would return documents.

Beneficiary then sued Issuing Bank for wrongful dishonor and demanded payment from Issuing Bank. Beneficiary claimed that only with the express indication of 'subject to charter party' should the B/L be considered as a charter party B/L.

Legal Analysis:

In this case, both the trial court of Fujian Ningde Intermediate People's Court and appellate court of Fujian High People's Court concluded that the discrepancy regarding the determination of a charter party B/L raised by Issuing Bank was valid. The trial court entered judgment for Issuing Bank, basing its conclusion on UCP600, ISBP745, the Commentary on UCP600'”Article-by-Article Analysis by the UCP600 Drafting Group (ICC publication No. 680), and its own interpretation of a charter party B/L.

Beneficiary argued that a transport document can be considered a charter party B/L only when it explicitly indicates that it is 'subject to charter party' and the issuing bank wrongfully interpreted ICC rules regarding the determination of a charter party B/L.

The trial court analyzed that:

1. The transport document presented in this case was a charter party B/L. The LC called for 'FULL SET CLEAN ON BOARD BILL OF LADING', however the B/L presented by the beneficiary indicated 'TO BE USED WITH CHARTER-PARTIES' on its face. The issuing bank's notice of dishonor stated 'charter parties B/L presented without original B/L' therefore the key for determining the validity of the discrepancy is whether the transport document tendered by the beneficiary was a charter-party B/L. According to UCP600 Article 22(a), a charter party bill of lading is one containing an indication that it is subject to a charter party. While according to UCP600 Articles 20 and 21, a bill of lading and non-negotiable seaway bill must 'contain no indication that it is subject to a charter party'. That is, the basis for determining whether a transport document is a charter party B/L is to see whether such document indicates that is subject to a charter party. The top right corner on the transport document presented by the beneficiary indicated 'TO BE USED WITH CHARTER PARTIES' and although the document did not indicate the expression 'subject to a charter party', such statement is sufficient to evidence that the B/L is issued according to charter party contract and subject to charter party contract as well. Therefore, it complies with the rule regarding charter party B/L in UCP600 Article 22(a).

The trial court continued by quoting the explanation in Commentary on UCP600'”Article-by-Article Analysis by the UCP600 Drafting Group (ICC publication No. 680) about the stipulation of UCP600 Article 20(a)(vi) that the bill of lading must "contain no indication that it is subject to a charter party'. The words "no indication" mean that a bill of lading that bears any indication that it is subject to a charter party would not be acceptable under this article. As examples of "no indication", the bill of lading may state "to be used with charter parties" or it could contain the following data: "freight payable as per charter party" or "charter party contract number ABC123".

The trial court also referred to ISBP paragraph G2: "A transport document, however named, containing any indication that it is subject to, or any reference to a charter party is deemed to be a charter party bill of lading."

Therefore, the trial court concluded that this B/L with such indication is sufficient to evidence that it is subject to a charter party contract and shall be considered a charter-party B/L.

Furthermore, the trial court noticed that the top left corner indicated the code 'CONGENBILL EDITION 1994' and the B/L was on the Baltic Sea International Shipping Association's designed charter party form. The reverse page of the transport document in this case showed Congenbill B/L's formatted Charter Party B/L terms and conditions of carriage which expressly indicated that the transport document was to be used with a charter party contract and subject to a charter party contract. It further proved that the B/L was a charter party B/L.

The trial court added that the beneficiary's reply to the issuing bank also recognized that the transport document was a charter party B/L. The beneficiary's interpretation that the B/L must bear the wording 'subject to a charter party' to comply with UCP600 Article 22 was too literal and the court refused to accept such interpretation.

2. The beneficiary presented a charter party B/L which was discrepant under the credit. According to UCP600 Article 14(a), "A nominated bank acting on its nomination, a confirming bank, if any, and the issuing bank must examine a presentation to determine, on the basis of the documents alone, whether or not the documents appear on their face to constitute a complying presentation." Therefore, the issuing bank is entitled to examine on its face the full set of documents presented by the beneficiary to determine whether the documents comply with the terms and conditions stipulated in the credit. The LC called for a full set of clean on board bills of lading and the beneficiary presented a charter party B/L. However, a charter party B/L may only be presented when the credit expressly requires or allows so. In the absence of such requirement or allowance, the presentation of a charter party B/L constitutes a discrepancy.

3. The issuing bank examined documents and sent a refusal notice to the beneficiary, informing of discrepancies and dishonor. The issuing bank's refusal notice was sent in accordance with UCP600 Article 16 and was considered a valid refusal notice.

Fujian High People's Court upheld the trial court's decision and stated:

"The transport document does not bear the word 'original', instead, from the wording 'TO BE USED WITH CHARTER-PARTIES', the scope of usage of the B/L is restricted. In other words, whether such B/L has independent document of title function is relied upon the terms of the charter party contract. The B/L in the case can be no longer considered as an independent document and shall be subject to a charter party contract.

Furthermore, the beneficiary responds to the issuing bank's refusal notice that it shall present a new B/L required by the LC to replace the charter party B/L, that is, the beneficiary obviously knows that the nature of the B/L presented is a charter party B/L. Consequently, the trial court's decision that the B/L presented in this case is a charter party B/L is correct. Since it lacks factual support and legal basis, the court shall not accept the beneficiary's argument that the statement 'TO BE USED WITH CHARTER-PARTIES' is only an indication that the terms of the B/L can be used as those in a charter party contract at the same time and the independent nature of the B/L is not affected. The issuing bank is justified to refuse to honor because the presented transport document does not comply with the requirements of the credit. LC is a documentary transaction independent of the underlying contract, and the fact whether the merchandise has been accepted by the importer and payment has not be received is neither of relevance with the issuing bank nor within the scope of the court's trial and can be resolved by the beneficiary through other methods."

Comments by Jun XU:

1. Determination of a Charter Party B/L

(1) Opinion of UCP600 Drafting Group

The courts correctly interpreted UCP600's rules regarding the determination of a charter party B/L. Interestingly, instead of quoting ICC's official opinions, the courts quoted from Commentary on UCP600'”Article-by-Article Analysis by the UCP600 Drafting Group (ICC publication No. 680). As its title suggests, it is a publication written by the UCP600 Drafting Group and is distinct from the ICC Banking Commission's official opinions. The book points out that "the text of this Commentary reflects the views of the Drafting Group and not necessarily those of the ICC Banking Commission." Because its content includes information relating to Drafting Group discussions and because there was a need for this publication to be in circulation as soon as possible after the implementation date of UCP 600, it was not passed through the Banking Commission for their approval.

(2) ICC Banking Commission Opinions

Several ICC Opinions address the issue of determination of a charter party B/L:

i) ICC Opinion TA.608

ICC Opinion TA.608 provides that a bill of lading containing "no indication that it is subject to a charter party" does not make the document acceptable under UCP500 Article 23.

In 2006 when UCP500 was in force, the ICC Banking Commission was asked whether the following transport document is a charter party B/L in query TA 608:

"The credit calls for a bill of lading. The title of the presented B/L (Congenbill, Edition 1978) reads in print in two lines: 'Bill of Lading' - 'To be used with charter parties'. The second line appears to be deleted by letters xxx and bears a correction stamp. The printed box in the body of the document reserved for the date of a charter party has no date. The document is signed by the master."

Regarding this query, the ICC Banking Commission expressed its analysis as follows:

"The requirement under UCP 500 Article 23 is that the bill of lading 'contains no indication that it is subject to a charter party'. The fact that the heading has been amended to remove reference to applicability of use with charter parties does not make the document acceptable under Article 23 due to the further reference to a charter party date. The UCP draws no distinction as to the manner in which 'no indication' is to be applied, and therefore any reference, including that stated in the Query, would make the document discrepant. The document must fully comply with the provisions of Article 23 to be acceptable."

It can be seen that interpretation of the term "no indication" in the Commentary on UCP600'”Article-by-Article Analysis by the UCP600 Drafting Group (ICC publication No. 680) can be traced back to the analysis and conclusion of TA.608.

ii) ICC Opinion TA.662rev

ICC Opinion TA.662rev (UCP 600) provides that no date added after the words 'Issued pursuant to charter party dated" should be treated as a charter party B/L.

In TA.662rev, ICC re-affirmed its position as stated in TA.608 regarding whether the wording "charter party dated" without a date is considered an indication of a charter party nature B/L.

The query in TA.662rev is whether the following transport document is considered a charter party B/L: a transport document titled "Bill of Lading" contains pre-printed wording "Issued pursuant to charter party dated ..." without specifying any date in the blank space and contains the terms and conditions of carriage as those on a normal bill of lading on the reverse of the document?

ICC Opinion TA.662rev concluded in part that "The document contains the following wording 'Issued pursuant to charter party dated '¦ '. For the purposes of sub-articles 20(a)(vi) and 22(a), this represents an indication that it is issued subject to a charter party."

ISBP 745 Paragraph G2(b) reflects ICC's opinions in TA 608 and TA 662rev by stating: "A transport document, however named, indicating expressions such as 'freight payable as per charter party dated (with or without mentioning a date)', [emphasis added] or 'freight payable as per charter party', will be an indication that it is subject to a charter party."

(3) Is a B/L Titled 'Congenbill' Considered 'an indication' of a Charter Party B/L?

i) ISBP 745 Paragraph G3

ISBP Paragraph G3 states: "A transport document, however named, containing a code name or form name usually associated with a charter party bill of lading, for example, 'Congenbill' or 'Tanker Bill of Lading' without any further indication or reference to a charter party, is not by itself an indication of, or reference to, a charter party."

ii) ICC Opinion TA.635

In TA.635, the following question regarding the determination of a charter party B/L when a document is titled as 'Congenbill' was posed to ICC: "It is widely known that a B/L marked in print 'Congenbill 1978 (or 1994)' is designed for charter party B/Ls. Can said marking alone be considered 'an indication' under [UCP600] sub-article 22 (a) that the presented B/L is a charter party B/L?"

Regarding this query, the ICC Banking Commission responded: "A 'congenbill' usually bears the heading 'Bill of Lading to be used with Charter Parties' '¦ would be considered to be an 'indication that it [the bill of lading] is subject to a charter party'".

iii) ICC Opinion TA.793rev

In TA.793rev, a similar query was submitted to ICC. The LC called for shipped on board marine bills of lading, but allowed Charter Party B/L marked "freight prepaid" or "freight payable as per charter party".

The presented B/L showed: "Code name 'CONGENBILL' - TO BE USED WITH CHARTER-PARTIES (top, left-hand corner) signed by 'YYY SHIPPING JAPAN CO LTD' as agents for the master, Cap. (name) [and] also shows 'CARRIER: ZZZ SHIPPING LINE LTD" (twice, near the right-hand top and at signature column). The reverse page shows the shipper's blank endorsement [and the] typical Charter Party B/L terms & conditions of carriage." Is such B/L a charter party B/L? The ICC's Analysis states in part:

"The credit included a condition that a Charter Party Bill of Lading (CPBL) marked 'freight prepaid' or 'freight payable as per charter party' was acceptable.

The presented bill of lading included a code name 'congenbill'. Such code name is not, by itself, an indication of, or reference to, a charter party. However, in the absence of any other indication in the query, it is assumed that the bill of lading was marked 'freight prepaid as per charter party' or 'freight payable as per charter party'.

A bill of lading including the code name 'congenbill' usually bears the heading 'Bill of Lading to be used with Charter Parties'. The presentation of this form of document without amendment to the stated terminology would be considered to be an indication that the bill of lading is subject to a charter party.

Accordingly, the bill of lading presented under this credit is to be considered as a CPBL"

iv) ICC Opinion TA.683

TA.683 concludes, in part, that: "A requirement for the presentation of the 'respective' charter party contract does not modify or exclude sub-article 22(b)."

UCP600 Article 22(b) states: "A bank will not examine charter party contracts, even if they are required to be presented by the terms of the credit."

Regrettably, the trial court's analysis regarding Congenbill seems too narrow and not in line with international banking practice. The trial court only mentions that the face of the B/L indicates the code 'CONGENBILL EDITION 1994' and points out that such a B/L is Baltic Sea International Shipping Association's designed charter party form. Obviously, such a B/L does not amend the heading "to be used with Charter-Parties" and the trial court does not address the issue of amendment. Instead, the trial court continues to mention the Charter Party B/L terms and conditions of carriage on the reverse page of the transport document and concludes that the B/L is a charter party B/L.

However, international banking practice is that banks will not examine the back of transport document. UCP600 Articles 19-21 (Transport Document Covering at Least Two Different Modes of Transport; Bill of Lading; Non-Negotiable Sea Waybill) stipulate that banks will not examine the contents of terms and conditions of carriage. UCP600 Article 22(b) (Charter Party Bill of Lading) states: "A bank will not examine charter party contracts, even if they are required to be presented by the terms of the credit."

In ICC Opinion TA680rev, ICC went further in responding that a bank is not required to review clauses on the reverse side of the transport document if a reference to a clause on the back of the bill of lading (terms and conditions) appears.

v) ICC Opinion TA.662rev

In TA.662rev, ICC was asked whether the following is a charter party B/L: A transport document titled "Charter Party Bill of Lading" with no other reference to a charter party on the bill of lading and containing terms and conditions of carriage as those on a normal bill of lading on the reverse of the document.

The principle applied in the UCP is that it is not necessarily the title of a document that will determine the applicable article under which it will be examined. However, in this case, due to the fact that there is an indication of "Charter Party" in the title of the transport document and based on UCP600 Article 22(a) as well as UCP600 Article 20(a)(vi) in relation to bills of lading that "contain no indication that it is subject to a charter party", ICC Opinion TA.662rev concluded that "The document is entitled 'Charter Party Bill of Lading'. For the purposes of sub-article 20(a)(vi) and 22(a), this represents an indication that it is issued subject to a charter party."

(4) What kind of indication is needed for a transport document to be "subject to a charter party"?

ISBP745 paragraph G2 states:

"a. A transport document, however named, containing any indication that it is subject to, or any reference to, a charter party is deemed to be a charter party bill of lading.

b. A transport document, however named, indicating expressions such as "freight payable as per charter party dated (with or without mentioning a date)", or "freight payable as per charter party", will be an indication that it is subject to a charter party."

2. Effect of beneficiary's acknowledgement of discrepancies

Both courts mentioned that the beneficiary's reply to the issuing bank indicated its acknowledgment of the discrepancy. However, in LC practice, an issuing bank makes its own independent judgment based on the documents presented alone instead of other factors regarding the compliance of the documents. UCP600 Article 14(a) states: A nominated bank acting on its nomination, a confirming bank, if any, and the issuing bank must examine a presentation to determine, on the basis of the documents alone, whether or not the documents appear on their face to constitute a complying presentation."

UCP600 Articles 4 and 5 also address the independent nature of LCs. Article 4(a) states, in part:

"A credit by its nature is a separate transaction from the sale or other contract on which it may be based. Banks are in no way concerned with or bound by such contract, even if any reference whatsoever to it is included in the credit. Consequently, the undertaking of a bank to honour, to negotiate or to fulfill any other obligation under the credit is not subject to claims or defenses by the applicant resulting from its relationships with the issuing bank or the beneficiary."

Article 5 states: "Banks deal with documents and not with goods, services or performance to which the documents may relate."

In my view, the trial and appellate courts based their conclusions on facts and documents outside the terms and conditions of the LC, which is obviously beyond the independence principle of LC law.

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

The author wishes to express special thanks to Dr. Saibo JIN and Ms.Qishi Li of Beijing Commerce & Finance Law Office for their valuable revision suggestions.

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