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Copyright © International Chamber of Commerce (ICC). All rights reserved. ( Source of the document: ICC Digital Library )
2016 LC CASE SUMMARIES
Topics: Export bill advance; Negotiation; Discrepancy; Examination of Documents; UCP500
Type of Lawsuit: The Second Beneficiary sued Transferring Bank for changing and deleting the terms of the credit without authorization.
Parties: Appellant/Plaintiff/Advising Bank – Bank of China Yantai Economic-Technological Development Zone Branch (“Yantai Bank”)
Appellee/Defendant/Beneficiary/Seller – Yantai Tianfu Food Co., Ltd (“Tianfu”)
Appellee/Defendant – Yantai Development Zone Huamei Bonsai Gardening Co., Ltd (“Huamei”)
Underlying
Transaction:
Purchase of frozen yellow croaker.
LC: Subject to UCP500.
Decision: The Intermediate Court ruled that Tianfu should reimburse the amount of USD 51,880, along with RMB 49,684.80 as interest. Huamei should assume the joint and several responsibility for clearing the aforesaid payments.
Rationale: First instance: Decision of Yantai Economic-Technological Development Zone People’s Court
It is Tianfu’s responsibility to prepare the documents complying with LC’s content, because it didn’t make any amendment to the LC when advised by the advising bank. The reason why the issuing bank refused to honour lies in that Tianfu’s presentation is not complying. According to Article 10 of UCP500, negotiation means the giving of value for draft(s) and/or documents by the bank authorized to negotiate. Mere examination of the documents without giving of value does not constitute a negotiation. Tianfu is not a negotiating bank for it didn’t pay consideration to the documents. On the basis of the explanation of export bill advance in Bank of China’s regulation about International Settlement Business, export bill advance is a kind of financing fund with recourse paid to the exporter before the bank receives the payment from issuing bank. Tianfu promised in the application forms that Yantai Bank maintains right of recourse if discrepancy is raised and has right to claim all export bill advance, loans, interest and any loss. So the plaintiff has the right to claimed against Tianfu for reimbursement according to the agreement. From another aspect, the plaintiff failed to examine documents with reasonable care as required by Article 13 of UCP500.
The Trial Court held that Tianfu should assume primary liabilities (60%), while the Yantai Bank shall bear minor liability (40%) for the loss. Also, Huamei should assume the joint and several liability guarantee for the aforesaid export bill advance.
Appeal: Decision of Yantai Intermediate People’s Court
Both parties have objections to the judgment of first instance and lodged an appeal to the Yantai Intermediate People’s Court.
The application forms signed by Yantai Bank and Tianfu states that Yantai Bank maintains right of recourse if discrepancy is raised and has right to claim all the export bill advance, loans, interests and any losses. The court held that the rights and obligations of both parties are stipulated in the agreement clearly. As the agreement is executed by both parties voluntarily, and the contents thereof reflect the true intention of both parties and are not contrary to the prohibitive provisions of the laws and administrative regulations, the agreement should be determined valid.
Also, the court cited Notice of the People’s Bank of China on Strengthening Settlement by International Letters of Credit issued by People’s Bank of China: “All the banks engaging in foreign exchange operations shall carefully review import/export documents in strict accordance with the Uniform Customs and Practice for Documentary Credit (UCP500) to avoid, as far as possible, unnecessary losses as a result of giving others an excuse due to their own negligence or fault. Foreign trade exporters that have opened accounts with the said banks shall mark the documents made by photocopying, carbon copying, printing or other means with the word "ORIGINAL". In addition, the banks may prepare their own seals bearing "ORIGINAL", and affix the word on the documents when foreign trade exporters fail to mark the word thereon, so as to facilitate the timely and safe collection of foreign exchange. The above notice is requested to be promptly forwarded to all subordinate banks engaging in foreign exchange operations and foreign exchange exporters that have opened accounts therewith.” The Inspection Certificate provide by Tianfu was stated as original copy, but Yantai Bank didn’t mark the Inspection Certificate with the word "ORIGINAL" The court held that Yantai Bank’s failing to fulfill the obligation to examining documents violated Article 20 of UCP500 as well as Notice of the People’s Bank of China on Strengthening Settlement by International Letters of Credit issued by People’s Bank of China. So the judge think Yantai Bank should assume certain responsibilities which is 50% of the interest of export bill advance.
The Intermediate Court reversed the decision made by the court of first instance and held that Tianfu should reimburse the amount of USD 51,880 along with RMB 49,684.80 as interests. Huamei should assume the joint and several responsibilities for clearing the aforesaid payments.
Article
Factual Summary: In June 1998, Yantai Bank received 4 irrevocable LCs in favor of Tianfu with amount of USD 290,275 from Issuing bank-- Kookmin Bank, Seoul branch (“Kookmin Bank”). The four LCs are subject to UCP500 and available with any Kookmin Bank in Philadelphia. The beneficiary—Tianfu applied for export bill advance to Yantai Bank by submitting 4 pieces of application forms. Besides, Huamei offered guarantee the above export bill advance by providing four letters of guarantee to plaintiff. Yantai Bank accepted the application for export bill purchase.
On 22 June, the plaintiff reclaimed the amount under the four LC from Kookmin Bank in Philadelphia via Bank of China, New York Branch. After receiving the stipulated documents from Tianfu, the plaintiff presented the documents to Kookmin Bank, Seoul branch.
On 3 July1998, Kookmin Bank sent a swift message to Yantai Bank, informing that it would not accept the presentation due to 4 discrepancies and demand repayment of principal and interest. On 17 September, Yantai Bank lodge a claim against Tianfu for reimbursement, but it was refused. Finally, Yantai Bank reimbursed part of the amount and paid USD 51,880 to Kookmin Bank in advance. Then, Yantai Bank claimed against Tianfu for reimbursement of USD 57,197.30 and required Huamei to assume the responsibility for the guarantee.
Tianfu argued that export bill advance is a business practice whereby banks provide financing for exporters against the export bills presented thereby, which means purchasing bill. Therefore Yantai Bank has no right of recourse. Once the plaintiff purchased the drafts and documents presented by beneficiary according to terms of LC, it obtains the ownership of goods. Tianfu should not assume responsibility for the discrepancies caused by the plaintiff’s negligence.
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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 the ICC or Coastline Solutions.