Article

Factual Summary:Negotiating Bank maintained export bills comprehensive insurance from Insurer that would cover usance drafts issued by Beneficiary up to US$200,000. The policy provided that Insurer would pay 90% of any loss within the amount covered for bills that were purchased and as to which notice was provided to Insurer within 10 business days of Negotiating Bank's purchase. It also provided that Insurer is excused where the loss is due to intentional or negligent acts of the insured, its agents, or employees.

Negotiating Bank negotiated US$200,000 worth of usance drafts drawn on Issuer at 45 days. The LC had required presentation of three copies of the signed commercial invoices, three copies of the packing lists/ weight memos, one original copy of the inspection certificate issued by Mr. Liu Yue Hong from the import/export company with the stamp of the import/ export company.

When the documents were forwarded to Issuer, it refused to honor because 1) the commercial invoice, packing list, and inspection certificated bore no original marks and 2) there was no stamp from the import/ export company. The actual documents tendered were typewritten commercial invoices and packing lists lacking "original" marks. The inspection certificate contained the personal seal of Mr. Liu Yue Hong instead of the stamp of the export/import company; however, after Mr. Hong's name appeared "of Weigai Imp. & Exp. Corp. Huati Branch."

Negotiating Bank then made a claim against the insurance policy. When payment was refused, it transferred the insurance claim to a government asset insurance corporation which had taken over the assets of the bank due to its insolvency and which intervened at the trial stage of the case. The trial court ruled that Insurer was liable for 50% of the claim due to negotiating bank's partial negligence. On appeal by Insurer, reversed as to the negligence of negotiating bank but affirmed due to the fact that only Insurer had appealed the case.

Legal Analysis:

1. Insurance: The court considered the meaning of the exclusion in the insurance policy of losses due to negligence and stated that:

It is reasonable to interpret this provision as meaning that the negotiating bank is negligent if the bank [as] the insured negotiated the 61 2002 LC CASE SUMMARIES documents not in compliance with the terms and conditions of the L/C as a result of the nonperformance of duty of care to be performed in the ordinary L/C transaction in the course of negotiation of the [documentary] drafts issued in the letter of credit method export transaction and L/C issuing bank refused the payment; if the degree [of negligence] is as serious as corresponds to the intention, the defendant is exempted from the responsibility; and if [negligence] does not reach such a degree, [the defendant] can be partially exempted according to the degree.

2. Originality; ICC Originals Decision; Originals Decision; Interpretation of UCP; UCP500 Article 20: Issuer had based its refusal in part on the absence of "original marks" on the typewritten packing lists and commercial invoices. The appellate court noted the text of UCP500 Article 20(b) and the interpretation of this provision by the ICC Banking Commission contained in its Policy Statement dated 12 July 1999 (Doc. No. 470/871) Rev. 29 July 1999 and quoted at length from the document. The appellate court recognized that UCP500 Article 20(b) "does not seem to be the comprehensive or exclusive provision distinguishing the original document from the copy in recognizing the original characteristic in light of the intention of the determination heretofore of the ICC Banking Commission ... ."

Considering the documents presented, the court stated:

(4) In this case, among the L/C-related documents that the plaintiff sent to the issuing bank, the invoice and the packing list were prepared by typewriter with the stamp signature by the document maker. And the inspection certificate which the defendant is disputing seemed to be prepared by word-processor not by typewriter, but was the document prepared on the form with the letterhead of Weihai Import & Export Corp., shown as the maker of the document and signed by handwriting of Mr. Liu Yue Hong indicated as the maker of the document in the terms and conditions of the L/C with the personal seals impressed. Therefore, the additional mark of "original" on the face of the document is not necessary, and the part of the conclusion of the court below that the mark "original" is needed cannot but be illegal due to the misunderstanding on the "originality" rule of the documents in the letter of credit transaction.

3. Duty of Care; Reasonable Care; Examination: The court noted that the issuer

"has the duty to investigate and examine the documents presented to it with reasonable care to ascertain whether or not they are strictly in accordance with the terms of the L/C in form, and gets exempted from its responsibilities by performing such duty. Reasonable care means the objective and rational care which should be taken as the banker having the general knowledge and experience, not the specific knowledge on the dealing of goods, and the banker, with this kind of care, has the duty to distinguish whether or not [the documents are] in accordance with the terms and conditions of the L/C by strictly interpreting in form the writing on the L/C and other documents but doesn't have the duty of substantial examination...."

4. Compliance; Strict Compliance: In considering what constituted strict compliance, the appellate court noted that "for the documents attached to the L/C to be strictly in accordance with the terms and conditions of the L/C does not necessarily mean that they must be completely in compliance with each other letter to letter: When there exists a little difference in words and phrases which is slight but the bank, if taking reasonable care, can understand that it does not cause the [grave] difference and does not harm the terms and conditions of the letter of credit at all from its face, it must be regarded as in accordance with the terms and conditions of the letter of (See Supreme Court Judgments 1992.2.25. 91 DA 30026, 1985.5.28. 84 DAKA 696,697) and such a decision must be according to whether or not the difference from the terms and conditions of the letter of credit is acceptable in light of international standard banking practice under concrete circumstances."

5. Compliance; Signature: Issuer had dishonored in part because the inspection certificate did not have the stamp of the Weihai Imp. & Exp. Corp on it. The appellate court concluded that what was required was that the bank be sufficiently able to confirm by the examination of documents only that the inspection certificate was made in reality by the person representing this company. As to inspection certificate in this case, the form was marked to be the Weihai Import & Export Corp.'s by the letterhead, and, in addition to the signature and personal seal of Mr. Liu Yue Hong, maker [of the inspection certificate], the phrase "of Weihai Imp. & Exp. Corp. Huatai Branch" was marked just behind the signature of Mr. Liu Yue Hong, which means that Mr. Liu Yue Hong signed and sealed as a representative of the company not in his individual capacity. If so, in light of the international standard banking practice, although the inspection certificate in this case does not have the [corporation] stamp on it, the fact that this document was duly made by the person representing the company can be understood simply by the document review, and it is reasonable not to regard the inspection certificate as against the terms and conditions of the letter of credit even if it has no stamp of the corporation on it.

Comment:

1. This decision is valuable in several respects. It provides a useful affirmation of the ICC Decision on Originals and an indication that courts will defer to interpretations of the Banking Commission.

2. More interestingly, it provides judicial support in Korea for the progressive approach to discrepancies. Not only does the court state that not every difference between the documents and terms of the LC does not constitute a discrepancy but it applies this rule to conclude that a bank should take into account the representative capacity of the signatory of a document, a decision that is fully consistent with LC practice.

3. Interestingly, the court framed its analysis in the archaic formulation of UCP500 Article 13 with its reference to reasonable care. While banks are not held to the standard of reasonable care in the sense that compliant documents are entitled to be honored regardless of how much care the bank exercised in examining them, there is another sense in which the formula is useful in indicating the rigor with which the bank may examine the documents. It may not use unreasonable care in attempting to discover discrepancies. While there are better ways to articulate this concept, the presence of the phrase and the court's willingness to read it in this sense are useful supports in the attempt to maintain objective balance in the ongoing problem of restricting refusals to those cases that truly warrant it.

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