Type of Lawsuit: Negotiating bank sued issuer for wrongful dishonor, and issuer sued applicant for indemnity in a third party action.

Parties: Plaintiff/Negotiating Bank- Bank of China (Counsel: Mr Robert Tang SC, leading Mr Rimsky Yuen, instructed by Messrs Deacons, Grahams James) Defendant/Issuer- Jian Sing Bank Ltd. (Counsel: Mr Geoffrey Ma SC, leading Ms Liza Jane Cruden, instructed by Messrs Wilkinson & Grist) Third Party Defendant/Applicant/Buyer- Xinyuan Trading Co. Ltd. (Counsel: Mr Louis Chan, instructed by Messrs K.M. Lai & Li)Beneficiary/Seller- NPH Petrochemical Limited Underlying

Transaction: Sale of fuel oil.

LC: Commercial LC for US$ 1,580,000.00. Subject to UCP500.

Decision: The Court of First Instance, Stone, J., entered judgment for negotiating bank against issuer in the amount of US$1,658,067.80 and entered judgment for issuer against applicant on its indemnity.

Rationale: An issuer is obligated to honor an acceptance credit whether or not it actually accepts a draft where it communicates its acceptance to the confirmer. An applicant is obligated to reimburse an issuer for payments made under an LC within its mandate.

Factual Summary: To pay for 20,000 metric tons of fuel oil, an LC was issued for account of buyer. The LC stated that payment would be made " 90 days after sight...."

The beneficiary presented the documents to the nominated negotiating bank which was named as payee on the draft and which on the same day forwarded the documents to the issuer. Issuer subsequently sent a message to the applicant noting a discrepancy in a required document, namely, that the name of the Master of the relevant vessel was not indicated on the bill of lading, and sought its waiver. Applicant responded to issuer that it accepted the B/L by countersigning the message and issuer then informed the negotiating bank that its bill of exchange would be paid upon maturity. The negotiating bank then paid beneficiary US$1,626,555.88, subtracting from the face amount of the draft the interest between the date of payment to the beneficiary and the date of maturity of the LC. Prior to delivery of the goods, applicant sold the fuel oil to a sub-contractor, who then sold it to a sub-sub- contractor. Applicant alleged that the delivery to the ultimate buyer was of only 3,000 metric tons of fuel oil and that the B/L and commercial invoice had been forged. Accordingly, applicant requested that.negotiating bank extend the maturity date of the draft. It refused and communicated to issuer that it should effect payment on the maturity date, with interest from the maturity date until negotiating bank's receipt of the funds. Issuer responded that it had been told by applicant that "...applicant suspected certain documents presented under the letter of credit were inconsistent," and that the issuer had "...decided to withhold payment on the subject documentary credit..." The negotiating bank then sued the issuer which initiated a third party action against applicant. The court entered judgment in favor of negotiating bank against issuer for US$1,658,067.80 in the principal action and entered judgment for issuer against applicant in issuer's indemnity action.

Legal Analysis:

1. Acceptance; Estoppel: The issuer argued that under the Bills of Exchange Ordinance, Cap. 19, section 17(2)(a), "an acceptance of the bill is invalid unless the same is written on the bill and signed by the drawee", and that "absent return of and physical possession of the accepted draft, duly signed, the negotiating bank performed any discounting function at its own risk". The court stated that the issuer "...cannot reasonably have...contemplated or expected but that [the communications by the issuer to the negotiating bank]...would be relied upon by [the negotiating bank]," and that as a result issuer "must be stopped from asserting the absence of physical signature upon the draft to connote acceptance". The court stated that it did not matter "whether the argument be couched in terms of estoppel, or...waiver and/or change of position". It went on to say that there was no merit in issuer's resistance of the negotiating bank's "absolutely justified" claim.

2. Acceptance: The buyer argued "that absent return of and physical possession of the accepted draft, duly signed, [the negotiating bank] performed any discounting function at its own risk." The judge indicated that "I reject it as firmly as I may."

3. Reimbursement; Independence: Applicant claimed that it was not liable because issuer "conducted itself in a way that resulted in an estoppel being raised against it" despite the extensive Terms and Conditions it had signed. The applicant nevertheless asserted that the issuer's behavior was "contrary to the instructions of applicant contained in the application for the LC". The court disagreed, stating "this case may represent yet another instance of a failure to recognise...the cardinal principle in international commerce that a letter of credit is independent from the underlying transaction, that once issued such instruments are to be honoured absent clear and cogent evidence of fraud, and ... to do otherwise is to undermine a vital element within the financing of modern international trade".


1. It is most curious to find that jurists, shaped by the very system that has only recently disrupted the expectations of the bulk of the international LC community by refusing to accord the same degree of abstraction to a deferred payment undertaking that obtains for an acceptance for reasons based solely on the formalities of the law related to negotiable instruments, now almost giddily waiving the requirement that an acceptance appear on the face of the instrument. Whether by estoppel or waiver, the result is the same, it would appear. The net result is that the physical instrument and its acceptance does not matter so much as does the undertaking of the issuer.

It is a pity that the court that decided Banco Santander SA v. Banque Paribas, [2000] 1 All ER (Comm) 776 [England], abstracted at 2001 Annual Survey of Letter of Credit Law & Practice 194, did not have the same perspective. Or perhaps the law is that as long as the undertaking is intended to be an acceptance, it qualifies even if there is no actual acceptance but only a spiritual one. Therefore, one may take it that an unaccepted acceptance that is. intended to be accepted is acceptable but that an unacceptance in the form of a deferred payment undertaking is unacceptable. Alas for the glories of English jurisprudence.

2. While one might be forgiven for having thought that no cardinals were tolerated in principle in England since Wolsey (but, then, Hong Kong is now reunited with China), the reference to the cardinal principle of the doctrine of independence cannot be tolerated without noting that the case involves reimbursement, not presentation by the beneficiary. In such a situation, the issue is not independence but the right of the issuer that has paid pursuant to the instructions of the applicant is entitled to be reimbursed and that pursuant to LC law and practice, the applicant bears the risk of forged documents and fraudulent transactions.

3. The result itself accords with standard international LC (and acceptance) practice. No one really cares whether the acceptance is noted on the face of the instrument because, except for lawyers, no one really takes the physical reality of the acceptance literally. Which is, of course, why it is silly to deny the same degree of abstraction to a deferred payment undertaking.

4. The text of the LC is set forth in the opinion. The clause which renders it subject to the UCP contains an unusual statement, namely "except otherwise expressly stated this documentary credit is subject to Uniform Customs and Practice for Documentary Credits (1993 revision), International Chamber of Commerce Publication No. 500 and engages us in accordance with the terms thereof, especially in accordance with the terms of Article 9 thereof." It is unclear what might have been the intent behind this clause but it would be interesting to know.


The views expressed in this Case Summary are those of the Institute of International Banking Law and Practice and not necessarily those of ICC or the other partners in DC-PRO.