Legal Case Summaries

Article

Factual Summary:

DBS Bank (Issuing Bank) issued an LC for USD 8,938,290.98 in favor of Wuxi Humei Thermal Energy & Electric Power Engineering Co., Ltd. (Beneficiary) on 10 June 2013.

The LC called for “Certificate of origin in one original and 3 copy(ies)” among other documents in Field 46A (Documents Required) and stated trade terms “CIF Dumai, Indonesia”.

On 29 November 2013, Beneficiary presented documents for USD 8,938,290.98 through the advising bank to Issuing Bank.

Certificate of origin was issued in the standard form of “ASEAN-CHINA FREE TRADE AREA PREFERENTIAL TARIFF CERTIFICATE OF ORIGIN” showing the invoice number and date as those shown on commercial invoice and columns 7, 8, and 9 were headed and completed as follows:²

Invoices showing goods descriptions as follows³:

On 5 December 2013, Issuing Bank refused documents due to following discrepancies: “Cert. of origin showing column 9 FOB value as US$8938290.98 whereas invoice showing CIF value for the same amount ie, US$8938290.98 for which is conflicting. The above discrepancy is/are not acceptable to us and we refuse to honour the bill …”

On 13 January 2014, Issuing Bank returned the documents.

Beneficiary sued Issuing Bank in Jiangsu High People’s Court and claimed payment from Issuing Bank.

Jiangsu High People’s Court ruled for Beneficiary and ordered Issuing Bank for payment. Upon appeal, the Supreme People’s Court affirmed the trial court’s decision.

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Legal Analysis:

1. Legal Analysis:

Jurisdiction:

Because the Issuing Bank is an entity registered in Singapore, Jiangsu High People’s Court determined that the LC in question represents a foreign civil relationship.

Due to Field 40E (Applicable Rules) of the LC stating “UCP latest version” and by virtue of Article 2⁴ of the Provisions of the Supreme People’s Court on Several Issues in the Adjudication of Letter of Credit Related Cases, the trial court considered that UCP600 shall in the first place apply for the case.

The trial court analyzed that an LC relationship is a contractual relationship and the parties did not agree on the selection of applicable law of an LC relationship not covered by UCP600. Therefore, and in reference to Article 41⁵ of the Law of Application for Foreign-related Civil Relations of People’s Republic of China, the trial court went on to state: “In LC relationship, the responsibility of the Beneficiary is to present complying documents, while the Issuing Bank’s obligation is to honor when determining that the documents comply, i.e., Beneficiary may obtain payment under the LC once they present complying documents. Therefore, the responsibility of the Beneficiary in presenting complying documents may best reflect the feature of the LC relationship.” Hence, for those relationships in the concerned LC not covered by UCP600, the court decided that the law in the Beneficiary’s domicile, which is the law of P.R. China shall be applicable.

Supreme People’s Court concluded that the trial court’s decision in applying UCP600 and local law of P.R. China was correct.

2. Discrepancy:

Beneficiary claimed that the discrepancy cited by Issuing Bank was not valid, while Issuing Bank insisted that it constitutes a conflict since the value shown in column 9 headed “… value (FOB)” is USD8938290.98, the same as the CIF value shown on the invoice, which is a violation of UCP600 Article 14(d).

The trial court decided that the discrepancy raised by Issuing Bank was invalid based on the following:

“First, Issuing Bank compared different types of data, which is in violation of the examination standard of comparing the same type of data according to UCP600 Article 14(d). [emphasis added]

The stipulation of “identical” in UCP600 Article 14(d) requires that the data banks compare in the examination of documents must be the same type of data, otherwise, it cannot be “identical”. The stipulation that “need not be identical to” does not mean that banks are authorized to compare data of different types, but requires banks not to be too mechanic to compare according to “mirror standards”, and slight differences should be allowed between data of the same type provided that such slight differences do not constitute conflict or ambiguity. It still reflects the examination rule of comparing the same type of data. ISBP745 of the ICC Banking Commission and P.R. China’s judicial practice both hold the same point of view.”

The trial court quoted ISBP745 Paragraph A23 (Misspellings or Typing Errors). The court also referred to ICC Opinion TA722rev (2010) that data on a presented document showing a different contract number from the contract number shown on the invoice presented constitutes conflict according to UCP600 Article 14(d). The trial court further referenced Korea Exchange Bank v. Qingdao Bank Co. (2010) (Civil Appeal No. 112) decided by Supreme People’s Court of P.R. China, which determined that an LC No. indicated on a “Non-wooden Packing Material Declaration” document different from the LC No. constituted conflicting data under UCP600 Article 14(d).

The trial court considers that banks must abide by the examination standard of comparing the same type of data, which is not only the intrinsic requirement of UCP600, but also the uniform requirement of the ICC Banking Commission’s international standard banking practice for the examination of documents, and is reflected in sound judicial decisions.

Therefore, the court concluded that if Issuing Bank wishes to examine the merchandise value, they should examine whether there is conflict between the LC and documents, and between the documents regarding CIF value instead of comparing CIF value and FOB value. By comparing CIF value and FOB value, the court considered that Issuing Bank obviously violated the document examination rule for comparing the same type of data based on UCP600 Article 14(d).

The trial court further stated:

“Secondly, Issuing Bank is not entitled to examine whether FOB value is proper or not. [emphasis added] FOB value shown in column 9 of the Certificate of Origin is the requirement of the document itself and it is the responsibility of the destination Customs House to examine whether FOB value is appropriate or not. Except for the Certificate of Origin, the LC and other documents did not and could not possibly show FOB value, which evidences that LC Applicant and Beneficiary were not intended to authorize Issuing Bank to examine FOB value. Therefore, there is no basis for determining whether FOB value complies or contradicts between documents and the LC or between documents. Issuing Bank is not entitled to examine FOB value. By comparing FOB value and CIF value and refusing documents due to the fact that the values of FOB and CIF are the same, Issuing Bank conducted examination of the properness of FOB value and was involved in the underlying transaction. As such, Issuing Bank’s practice violated the basic principle of UCP600 in not getting involved with the underlying transaction when examining documents. [Emphasis added] As a result, the discrepancy raised by Issuing Bank deriving from the comparison of different types of data between CIF value and FOB value is against UCP600 Article 14(d) and is therefore invalid.”

Issuing Bank argued that it was wrong for the trial court to restrict Issuing Bank’s core rights in examining documents and the requirements of its contents against the terms and conditions of its LC. Other than the function of the Certificate of Origin to evidence the origin of goods, this document also serves as the basis for calculating customs tariff and determining origin of services or merchandise through the detailed FOB value. Issuing Bank considered that it was entitled to examine all required documents according to Fields 45A (Description of Goods and/or Services), 32B (Currency Code, Amount), and 39A (Percentage Credit Amount Tolerance). As FOB value shown in column 9 of the Certificate of Origin and CIF value on the invoices and insurance policies was exactly the same, Issuing Bank considered that this obviously constituted conflict between the documents.

Issuing Bank further argued that it was wrong for the trial court to decide that examination of documents can only be based on “comparing the same type of data” instead of comparing different types of data. FOB value shown on the Certificate of Origin was not required by LC and Issuing Bank considered that it was entitled to examine that additional information. It was appropriate for Issuing Bank to determine that the documents were discrepant due to the appearance of goods values that were inconsistent and commercially implausible.

Beneficiary stated that the data on the Certificate of Origin complied with the contents of the invoice and the Certificate of Origin issuer’s clear declaration in column 12 that “It is hereby certified on the basis of control carried out, that the declaration by the exporter is correct.” Obviously, the Certificate of Origin appeared to satisfy the function of ASEAN-CHINA FREE TRADE AREA PREFERENTIAL TARIFF CERTIFICATE OF ORIGIN with column 8 containing “WO” （wholly obtained）, evidencing that the goods involved are 100% produced by the exporting country. Therefore, the importer shall not be affected by tariff treatment due to the numbers in column 9. Beneficiary argued that the goods described in the Certificate of Origin corresponded with those mentioned in commercial invoices and, based on “identical” stipulated in UCP600 Article 14(d), banks are required to compare the same type of data while examining documents. Otherwise, it is impossible to determine “identical” or not. Except for the FOB shown in column 9 of the Certificate of Origin, there was no FOB shown in the LC. Beneficiary considered that Issuing Bank had no basis and precondition for comparison. Beneficiary maintained that Issuing Bank looked to the underlying transaction in violation of UCP basic principles by examining FOB value in absence of the LC requirements and other stipulated documents. In so doing, Issuing Bank compared FOB value with CIF value in the invoices and concluded that there exists conflict between FOB value and CIF value based on the same value of the data. Beneficiary further contended that its position was aligned with ICC DOCDEX Decision No. 331⁶ that Issuing Bank should honor since its refusal was invalid for the same reason. Furthermore, Beneficiary claimed that the Certificate of Origin is the standard form set by international agreements signed between China and ASEAN countries which would not prohibit application of other Incoterms, nor restrict the use of FOB only between the trading parties. Therefore, it is incorrect to conclude that the FOB shown in column 9 of the Certificate of Origin is Incoterms.

The Supreme People’s Court upheld the trial court’s decision that the discrepancy raised by Issuing Bank is invalid and Issuing Bank should honor Beneficiary’s complying presentation.

Importantly, the Supreme People’s Court stated:

“According to UCP600 Article 14(f) and (d), although UCP600 has established the standard for examination of documents “on their face”, it does not require that the contents are exactly the same, and the issuing bank must honor once documents are considered complied when there are no conflicts between documents and LC, and between documents themselves.”

The Supreme People’s Court referred to Article 6⁷ of the Provisions of the Supreme People’s Court on Several Issues in the Adjudication of Letter of Credit Related Cases and considered the spirit of that article to be the same as UCP600 Article 14 in the examination of documents.

The Supreme People’s Court decided that “according to UCP600 Article 14(f) and (d), the Certificate of Origin shall be deemed complying provided that its contents appear to fulfill its function and the data does not conflict with the data required by LC and data on other required documents”. [emphasis added]

The Supreme People’s Court further stated:

“As the Certificate of Origin is a form and the heading of each column cannot be amended, column 9 “FOB” is the heading of the column and “FOB” should not be interpreted as the FOB price under Incoterms due to the following reasons:

The expression is not in compliance with the basic format of Incoterms rules. The Incoterms rules describe mainly the tasks, costs and risks involved in the delivery of goods from sellers to buyers. According to Incoterms 2010 effective as of January 1^st, 2011, FOB is the abbreviation for “Free on Board (… named port of shipment)” … . CIF is the abbreviation for “Cost, Insurance and Freight (… named port of destination)” … . In this case, there is no “(… named port of shipment)” after “FOB” which is obviously not in compliance with the format requirement of Incoterms rules. In addition, it can be seen from Incoterms 2010 that the components of FOB value and CIF value under Incoterms are obviously different and it is simply unable to apply certain formula or other forms mechanically to convert them to one another. The above mentioned Certificate of Origin serves for international trade within ASEAN-China Free Trade Zone and it is impossible that only FOB value instead of other types of price terms can be used by the trading parties within ASEAN-China Free Trade Zone. It is obviously not in compliance with the market demands if “FOB” in column 9 is to be interpreted as the merchandise FOB value under Incoterms. Therefore, it is illogical to interpret “FOB” in column 9 as the merchandise FOB value under Incoterms. [emphasis added] The reasonable interpretation for “FOB” herein should be guidance, i.e., guiding the exporter to fill the relative merchandise value in the column.

The agreed merchandise value of the underlying contract in the case is “CIF Dumai, Indonesia” … and Beneficiary directly filled in column 9 USD8938290.98 in order to comply with the requirements of LC. Column 7 of Certificate of Origin was already completed with information such as “One set of equipment supply for power plant … as per contract no … CIF DUMAI, INDONESIA” which matches the contents filled in column 9 “USD： 8938290.98”. What is most important is that “WO” (wholly obtained) is filled in column 8 which is sufficient to evidence the function of the document. … Therefore, it cannot be considered as constituting a discrepancy based on such reasons.”

1. Comments by XU Jun:

Discrepancy

The case is about a discrepancy related to a comparison of CIF value and FOB value. The case focuses on two questions: Whether the amount in column 9 is to be considered as FOB value? And whether FOB value is equivalent to CIF value?

What is tricky in the case is that the LC calls for CIF while the Certificate of Origin shows both the required CIF trade terms in column 7 and an amount, same as CIF value shown on invoices, in column 9 headed with preprinted “… value (FOB)”.

Despite the fact that the Jiangsu High People’s Court and the Supreme People’s Court took different approaches in treating the amount filled in column 9 as FOB value, they both reached the same conclusion that the discrepancy was invalid.

The trial court relied on ICC DOCDEX Decision No. 331 that the comparison of different types of data contravenes the examination standards set by UCP600 and the Certificate of Origin presented fulfilled the function of the document. The trial court further pointed out that Issuing Bank was not entitled to determine whether the FOB value was appropriate which would have involved looking to the underlying transaction.

The Supreme People’s Court upheld the trial court’s decision that the discrepancy is invalid, but considered that it is unreasonable to treat the amount in column 9 as FOB trade terms articulated under Incoterms 2010 based on the analysis of the Incoterms 2010 rules and market practice.

2. Document Examination Standards

The case poses questions as to the “identical” examination standard under UCP600, i.e., whether banks need to examine additional data not required by LC, but seems to be in conflict with the LC or other documents and whether banks need to examine the reasonableness of certain content agreed in the underlying transaction.

In this case, the courts respect the standard for examination of documents under UCP600 and correctly interpret the “identical” examination standard.

It is obvious that banks should not go so far as to examine the reasonableness of content in the underlying transaction.

However, as the format of the concerned Certificate of Origin only showed preprinted wording “FOB” instead of other trade terms as required by the LC, the challenge to document examiners in practice remains as to how to treat situations like this. In practice, it is not uncommon for many documents issued by a party other than the beneficiary (for example, official formatted documents, transport documents, etc) to have pre-printed wording that conflicts with some content required by the LC or UCP rules. ICC Opinions⁸ have determined that added content supersedes pre-printed content and it seems that position may also apply to this situation. However, the determination shall depend on the specific scenario.

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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.

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