Legal Case Summaries

Article

Note: To facilitate a sale of goods, ML Company (Applicant) caused Rabobank Nederland (Issuer) to issue a UCP600 commercial letter of credit for USD 12,615,000 in favor of Shenghua International Logistics Co. (Beneficiary). The original LC called for the presentation of, among other documents, a commercial invoice, a full set of clean on board ocean bills of lading, a detailed packing list, a certificate of origin, and a beneficiary certificate confirming that the required documents were sent to Applicant. Subsequently, Issuer amended the LC at the request of Applicant. Among other adjustments, the amended required Beneficiary to confirm that one set of non-negotiable documents (i.e., invoice, simplified packing list, B/L and certificate of origin) had been sent to Applicant by email within seven working days after the B/L date. Before Beneficiary shipped any goods, Issuer amended the LC again, revising, among other terms, the shipment period, serial number, and quantity of goods. After shipping the goods, Beneficiary presented documents to its bank, Bank of Communications (Presenting Bank), which forwarded the documents to Issuer and included a notice that the documents complied under the terms and conditions of the amended LC. Issuer, however, dishonored the presentation on the basis that a Dutch court had issued a temporary injunction retraining Issuer from honoring. Applicant had initiated the Dutch proceedings in order to arbitrate the case as provided for in the underlying contract. Presenting Bank repeatedly requested that Issuer either make payment under the documents or return them. After Issuer informed Presenting Bank that its undertaking had expired, Beneficiary sued Issuer for breach of contract. The trial court entered judgment in favor of Issuer. On appeal, the Beijing High-Level People’s Court affirmed.

The main issues were whether Beneficiary accepted the LC amendments and whether Beneficiary had presented fraudulent documents to Presenting Bank. The court cited UCP600 Article 10(c) (Amendments) which provides, in part, that: “The beneficiary should give notification of acceptance or rejection of an amendment. If the beneficiary fails to give such notification, a presentation that complies with the credit and to any not yet accepted amendment will be deemed to be notification of acceptance by the beneficiary of such amendment.” The trial court determined that although Beneficiary first objected to the change in shipment dates, it had accepted the second amendment by submitting documents that complied on their face with the terms of the second amendment. Apparently Issuer had stipulated that the presented documents were complying. The trial court noted the independence principle, citing UCP600 Article 4 (Contracts v. Credits) and UCP600 Article 5 (Documents v. Goods, Services or Performance). The trial court also referenced the Rules of the Supreme Court of the People’s Republic of China Concerning Several Issues in Hearing Letter of Credit Cases, Articles 5 and 8. PRC LC Rules Article 5 (Time for Honor of Letter of Credit Undertaking) provides in part that “A people’s court shall not give effect to a defence based on the underlying transaction between the applicant and the beneficiary unless it is based on the circumstances provided in Article 8”. PRC LC Rules Article 8(i) (What Constitutes Letter of Credit Fraud) provides that where a beneficiary “has forged documents or presented documents containing fraudulent information”, that such will be considered credit fraud. Looking also to UCP600 Article 20 (Bill of Lading), the trial court concluded that documents presented by Beneficiary stated dates of shipment in parts of the bills of lading conflicting with the actual dates of shipment. Because Beneficiary failed to provide other evidence of the authenticity of the B/Ls, Beneficiary committed LC fraud by submitting false B/Ls to Issuer.

The appellate court affirmed the judgment of the trial court although it focused on the actions of Issuer in reviewing and returning the documents to Presenting Bank. The appellate court cited PRC LC Rules Article 7 (Independence in Examination and Waiver) which provides, in part, that an issuing bank “is entitled to determine by itself whether or not the documents appear” to comply on their face with the terms of the LC. The appellate court noted that Issuer had examined the documents and discovered the inauthentic B/Ls that complied with the amended LC but nevertheless returned the documents citing the temporary injunction imposed by the Dutch Court. Thus, the appellate court concluded that Issuer’s conduct was proper under UCP600 and affirmed the trial court’s decision.

---

---

COPYRIGHT OF THE INSTITUTE OF INTERNATIONAL BANKING LAW & PRACTICE

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.