Article

Factual Summary:

At the request of the Da Lian Hui Feng Da Int’l Trade Co. (Beneficiary), The Bank of East Asia (Negotiating Bank) negotiated documents under a negotiable LC issued by Issuing Bank. However, when the Negotiating Bank presented documents to the Issuing Bank and requested payment, Issuing Bank refused to honor due to discrepancies and a Korean Court’s injunction order based on alleged LC fraud. Negotiating Bank therefore sought recourse from Beneficiary and requested Beneficiary to repay the full amount plus interest and fees, while Beneficiary alleged that Negotiating Bank was precluded from a right of recourse for its violation of UCP600 rules regarding negotiation.

Legal Analysis:

In Liao Ning Province High People’s Court (23 Dec. 2013), Liao Civil 3 Final No. 276), the court decided against Beneficiary. Beneficiary then applied for retrial from the Supreme People’s Court regarding the LC negotiation dispute with Negotiating Bank.

Beneficiary argued:

1. The appellate court considers that UCP600 does not stipulate whether the Negotiating Bank has recourse against the Beneficiary, and it is wrong for the court to decide that it is in compliance with the laws for the Negotiating Bank to exercise the right of recourse as the holder of a draft according to Article 261 and Article 612 of Negotiable Instruments Law of the People’s Republic of China. According to UCP600 Article 16(g), “When an issuing bank refuses to honour or a confirming bank refuses to honour or negotiate and has given notice to that effect in accordance with this article, it shall then be entitled to claim a refund, with interest, of any reimbursement made.” On 5 July 2011, Beneficiary presented original credit and documents to Negotiating Bank, while it was not until 26 August 2011 that Negotiating Bank advised the refusal of the issuing bank in written form. Since the time of such notice exceeds the allowed time frame of UCP600 Article 16, Negotiating Bank is precluded from exercising its right of recourse against Beneficiary. The drafts mentioned in Article 26 and Article 61 of Negotiable Instruments Law of the People’s Republic of China refer to drafts issued instead of LC negotiation and it is incorrect to apply such law in determining the civil relationship of Beneficiary and Negotiating Bank [as draft drawer against holder of the draft instead of LC beneficiary against LC negotiating bank].

2. When examining documents, Negotiating Bank failed to find the discrepancies raised by Issuing Bank, which affects its right of recourse against Beneficiary. According to UCP600 Article 4 and Article 34, Negotiating Bank should first claim its rights from Issuing Bank. It subsequently took legal action against Issuing Bank. According to UCP600 Article 7(a) and (c), an Issuing Bank’s undertaking to reimburse a Nominated Bank is independent of the Issuing Bank’s undertaking to the Beneficiary. Consequently, Beneficiary is not entitled to claim any rights from the Issuing Bank. It is against the spirit of UCP600 for Negotiating Bank to exercise a right of recourse against Beneficiary instead of claiming reimbursement of its negotiated amount from Issuing Bank.

3. The appellate court is incorrect in its judgment on the nature and effects of the “Application for Export Bill Purchase.” The Application states:

“We hereby present following documents to your bank and apply for export bill purchase on a recourse basis. When the captioned export bill purchase is dishonored by the issuing bank/collecting bank/payee or the amount is overdue, we guarantee to repay the total financed amount under captioned documents and shall bear all interests and fees incurred out of this and the penalty interests for overdue payment shall be subject to the credit policy of your bank.”

Such Export Bill Purchase application is not negotiation, and the arrangement between Beneficiary and Negotiating Bank is negotiation instead of bill purchase. Both the trial court and the appellate court decided that Beneficiary should pay back the negotiated funds to Negotiating Bank according to Negotiable Instruments Law of the People’s Republic of China. We consider that the application of such law is incorrect.

4. In this case, Wang Qiang (Cargo Owner) was sued by Da Lian People’s Procuratorate for LC fraud crime and Da Lian Intermediate People’s Court decided that Cargo Owner had committed LC fraud crime on 18 Dec. 2013 [(2013) Da Criminal Chu No.15] and Cargo Owner was sentenced to life imprisonment. The case is now being heard in the court of second instance. The LC fraud crime committed by Cargo Owner and related persons may necessarily affect this case and the court should have suspended the trial and waited for the criminal LC fraud decision. However the trial and appellate court still proceeded with their decisions, which directly led to the current incorrect decision.

Negotiating Bank argued:

1. According to the Application for Export Bill Purchase, the relationship between Negotiating Bank and Beneficiary is an export bill purchase contractual legal relationship. Since Negotiating Bank had made actual payment to Beneficiary as agreed, it may exercise its right of recourse against Beneficiary according to the agreement stated in the application form.

2. UCP600 does not stipulate whether Negotiating Bank is entitled to the right of recourse against Beneficiary. However, it can neither prohibit Negotiating Bank from exercising recourse against Beneficiary nor set up any restrictions or conditions for the right of recourse. Beneficiary’s reference and interpretation of UCP600 is incorrect. Whether Negotiating Bank has the right of recourse against Beneficiary is within the scope of Negotiable Instruments Law. The relative regulations of domestic Negotiable Instruments Law are applicable when there are no specific rules in UCP600. In this case, Beneficiary issued a draft drawn on Issuing Bank as the draft drawer and presented draft to Negotiating Bank. From the legal standpoint of negotiable instruments, when Issuing Bank dishonors a draft, as the holder of the draft, Negotiating Bank has a right of recourse against Beneficiary. The reserving of the right of recourse by Negotiating Bank in this case is in accordance with banking practice. Currently in China, banks do not specifically make a distinction between LC bill purchase and LC negotiation. Nonetheless, it is negotiation or a bill purchase and when Issuing Bank dishonors, Negotiating Bank or bill purchasing bank has a right of recourse against Beneficiary.

3. Negotiating Bank examined all documents according to UCP600 and determined that they complied. The fact that no discrepancies were raised by Issuing Bank does not affect its right of recourse against Beneficiary.

4. Cargo Owner and related persons are not the concerned parties of this LC case and do not have a direct stake. Therefore, their LC fraud crimes do not affect this case.

The Supreme People’s Court determined that the dispute of this case is whether Negotiating Bank has a right of recourse against Beneficiary when an Issuing Bank dishonors.

The Supreme People’s Court stated:

1. About the Nature and Application of the Legal Relationship

The disputes arise from LC negotiation. The LC concerned is subject to UCP600 and the application of UCP600 by the trial court and appellate court is correct. For those issues outside the scope of UCP, it is appropriate for the trial court and appellate court to apply domestic laws according to the agreement of the concerned parties.

According to UCP600: “Negotiation means the purchase by the nominated bank of drafts (drawn on a bank other than the nominated bank) and/or documents under a complying presentation, by advancing or agreeing to advance funds to the beneficiary on or before the banking day on which reimbursement is due to the nominated bank.” The LC in this case states that it is freely negotiable. The beneficiary presented an “Application for Export Bill Purchase” to Negotiating Bank, however, from its content, the Beneficiary’s actual intent is to request Negotiating Bank to purchase the documents under the LC. Negotiating Bank actually purchased such documents under the LC and the “Settlement Notice” it issued to Beneficiary states that the deducted fees are “LC negotiation fees.” The Negotiating Bank’s actions are in full compliance with the UCP600 definition of negotiation. Therefore, Bank of East Asia is considered the negotiating bank in the LC legal relationship of this case. Even if the application presented by Beneficiary to Bank of East Asia is titled “Application for Export bill Purchase,” it still does not affect the position of Bank of East Asia’s role as Negotiating Bank. In this regard, the trial court and appellate court are correct in their decisions.

2. On Whether Negotiating Bank has a Right of Recourse against Beneficiary

UCP600 does not address whether a Negotiating Bank has recourse against a Beneficiary. UCP600 Article 16 (Discrepant Documents, Waiver and Notice) should not be interpreted as stipulating whether a Negotiating Bank has a right of recourse against a Beneficiary. Despite this, according to the commitment made by Beneficiary in the “Application for Export Bill Purchase” it issued to Negotiating Bank, if Issuing Bank dishonors, Beneficiary guarantees to Negotiating Bank that it shall repay the full amount financed under the LC and all related interest and fees. Since such agreement is the actual meaning expressed between the parties, it does not violate the laws and administrative regulations of China. When Issuing Bank refuses to pay, Negotiating Bank may exercise its right of recourse against Beneficiary. The trial court and appellate court are correct in their decisions that Negotiating Bank is entitled to a right of recourse against Beneficiary according to regulations in the Contract Law of the Peoples’ Republic of China.

There is no legal basis for Beneficiary’s arguments that UCP600 stipulates a Negotiating Bank’s right of recourse against Beneficiary, but Negotiating Bank is precluded from recourse for exceeding the stipulated time frame by UCP600 Article 16 and discrepancies shall affect Negotiating Bank’s right of recourse. Consequently, Beneficiary’s arguments cannot be supported.

Furthermore, whether Cargo Owner committed an LC fraud crime does not affect the results of the substantive hearing. There are no situations of suspension of hearing this case. The decisions of the trial court and appellate court not to suspend the case are correct.

Comments:

1. Determination of Negotiation: The Supreme People’s Court makes clear that when determining whether a nominated bank under a negotiable LC has negotiated, the court shall look at the bank’s actions rather than the name appearing on the related transaction documents.

In fact, in the 2004 case of Sichuan Emeishan Import & Export Co., Ltd. v. Korea Shinho Corporation,3 the Supreme People’s Court established the standard of negotiation. For a negotiable LC subject to UCP500, the court decided that the negotiating bank had made payment under complying documents in good faith and was thus considered a qualified negotiating bank. However, that case was not concerned with the issue of financing under a different trade finance product.

The significance of The Bank of East Asia (China), Da Lian Branch v. Da Lian Hui Feng Da International Trade Co., however, is that it further clarifies very clearly that the Supreme People’s Court considers the essence of the nominated negotiating bank’s transaction under a negotiable LC. That is, for a finance transaction, however named, under a negotiable LC, the status of a qualified negotiating bank is based on the action. The court shall, therefore, determine the status of the negotiation based on whether the bank has actually negotiated instead of looking at the name of the transaction itself or the name on the transaction documents.

2. Right of Recourse: ICC Opinion R259 (1997) states: “The inclusion of conditions under which a bank will offer negotiation, with or without recourse, is not for the ICC to arbitrate. Local law and relationships between advising banks and exporters will dictate those terms.”

The Supreme People’s Court is correct in its interpretation of UCP600 Article 16(g) regarding the right of recourse for negotiation, and its ruling that the agreement between the Beneficiary and the Negotiating Bank for negotiation on a recourse basis is not a violation of Chinese law.

* Jun XU is Deputy General Manager, Bank of China, Jiangsu Branch, China, a Member of ICC DOCDEX, and a DCW Editorial Advisory Board Member.

1
Article 26: After signing the draft, the drawer shall bear the responsibility of ensuring the acceptance and payment of the draft. If a drawer has failed to get the draft accepted or paid, the drawer shall undertake to pay the amount and expenses provided for in Article 70 and Article 71 of this law.

2
Article 61: Upon a refusal of payment to a draft, the holder may exercise the right of recourse against the endorser, drawer or other debtors of the draft.

3
[2004] Min Si Zhong Zi No.28, (Supreme People’s Court, September 28, 2004) [China] abstracted at 2006 Annual Survey of Letter of Credit Law & Practice 323.

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