Article

Factual Summary: Issuer issued an LC upon application of Applicant, and all other Defendants were Guarantors who undertook to pay to Issuer when Applicant failed to make payment to Issuer. Issuer and Applicant agreed in the LC Application Agreement, among others, that Issuer has right to dispose the documents/goods under the LC when Applicant fails to reimburse Issuer after Issuer pays under the LC. To support its application, Applicant issued a Trust Receipt to Issuer, in which Issuer and Applicant confirmed that upon receipt of or Issuer’s consent to the use or dispose the goods or the document of title of the goods presented under the LC, the trust relationship would be therefore established between Issuer as trustor/beneficiary and Applicant as trustee, and the ownership of the goods and the documents under the LC was transferred to Issuer upon the issuance of the Trust Receipt if the documents were delivered by Issuer to Applicant.

Before the issuance of the Trust Receipt, a Bill of Lading was issued made out to order. And after the issuance of the Trust Receipt, the Bill of Lading was presented together with other required documents to Issuer. Issuer made payment against complying presentation. Thereafter, Applicant’s business had significantly deteriorated due to price slump in the energy market. Issuer did not deliver the documents presented under the LC to Applicant and Applicant failed to reimburse Issuer.

Issuer claimed against Applicant and Guarantors for reimbursement, and requested the court to confirm that Issuer is the owner of the goods under the BL presented under the LC and has priority in the proceeds of sale of such goods.

Guangzhou Intermediate Court (the trial court) and Guangdong High Court (the appeal court) held that Issuer should be reimbursed but Issuer had no ownership or priority in the goods. Issuer petitioned to Supreme People’s Court for retrial which was allowed and Supreme People’s Court heard the case. Supreme People’s Court found that although a trust relationship was agreed, but there had never been transfer of ownership of the goods from Applicant to Issuer, which, according to the Trust Receipt, should be effective upon delivery of the BL by Issuer to Applicant. Applicant had no intention to transfer the ownership in any other circumstance since there was no other agreement in relation to the transfer of ownership between Applicant and Issuer, so the fact the BL was held by Issuer did not mean that Issuer was the owner of the goods despite that the BL was made out to order. Supreme People’s Court further found that Issuer had right to make a pledge in the goods in favor of Issuer since it was agreed by Applicant in the LC Application Agreement that Issuer has right to dispose the documents/goods under the LC when Applicant fails to reimburse Issuer after Issuer pays under the LC. Supreme People’s Court also found that Issuer had right to refuse to deliver BL to Applicant when there was evidence showing that it was likely that Applicant was no longer capable of performing its obligation to reimburse Issuer. It was held by the Supreme People’s Court that Issuer should be reimbursed by Applicant and Guarantors and Issuer has priority in the goods under the BL.

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