Factual Summary: PRC bank issued two similar LCs in favor of the seller/beneficiary for the sale of goods. Among other documents, they required a receipt of goods from the applicant that stipulated: "the signature of the applicant on the receipt of goods shall be in compliance with the signature specimen held by the issuer." The signature specimen prescribed in the first credit was affixed with one official seal of the applicant signed by "Wu Bin". The signature specimen under the second credit was affixed with two official seals, signed by "Yi Feng" and "Wu Bin" respectively. Both signature specimens were deposited with the issuer, copies of which were not attached to the two LCs provided to the beneficiary. After receiving the goods under the two credits, only Yi Feng singed the two receipts of goods. The beneficiary presented the requisite documents, including the receipts of goods, to the issuer for payment. The issuer dishonored the payments under both LCs. The issuer gave as the reason for dishonor of the first LC that the receipt of goods presented by the beneficiary bore the signature of "Yi Feng" while the corresponding signature specimen bore the signature of "Wu Bin". The issuer dishonored the Jin Saibo is a Partner at Beijing Yiwen Law Firm, PRC. Zhou Feng is an Associate at Beijing Yiwen Law Firm, PRC.. 114 second LC because the receipt of goods presented by the beneficiary bore only the signature of "Yi Feng", whereas the corresponding signature specimen contained the signatures of "Wu Bin" and "Yi Feng". The beneficiary sued the issuer for wrongful dishonor. The Hunan Provincial High People's Court awarded judgment for the issuer, finding it was proper for the issuer to dishonor the payment due to the discrepancies between the signature on the receipts of goods and the signature specimens prescribed by the LCs. The beneficiary appealed to the Supreme Court. On appeal, affirmed.

Legal Analysis

1.-Compliance: The appellate court stated that "Both the acceptance of the application for issuing the credit by the issuer and the acceptance of the credit by the beneficiary were indications of the real intentions of the parties, and the legal documents generated thereto shall have binding force on the parties."

2. Compliance, Signatures: The appellate court stated that: "The document appeared on its face to be inconsistent with the application and the signature specimen submitted by the applicant to the issuer. The nature of credit transactions and the provisions of UCP500 entitle the issuer to rightfully refuse to accept the documents as long as the issuer finds discrepancy(ies) on the face of the document(s). In this case, no fault or liability should be imposed on the issuer, who dishonored the presentations after informing the applicant and refusing to waive the discrepancies. Therefore, the issuer conducted its business in accordance with the rules of UCP500, and the judgment of the first trial was rightfully rendered."

3. Compliance: Beneficiary argued that the two official seals and the two signatures on the specimen should have been regarded as two independent specimens, of which only one was required to be presented. It had provided an identical signature with that on the specimen, and the documents therefore should have been deemed consistent. The Court found such argument without legal basis. Comment by Jin Saibo1. Parties' Agreement on the Terms of a Credit: The PRC Supreme People's Court (the Supreme Court) showed in this case its persistently firm stance of respecting the agreement between the contractual parties. The key issue in this case involves the clause concerning the signature specimen held by the issuer, which is one of the typical "soft clauses" in credit transactions. Under such clauses, it is not the beneficiary but the applicant who controls whether the documents are in strict compliance with the credit. The judgment in this case demonstrates the Supreme Court's clear commitment to respect the agreement reached between the parties and fixed by the terms of credit, although such terms may put the beneficiary at an extreme disadvantage. 2. Application of UCP: As in Newco case,1 the Supreme Court showed its consistent respect for the basic principles of the UCP, giving priority to the parties' agreed terms when expressly stipulated in a letter of credit subject to UCP. But the Supreme Court did not give a definite ruling in this case as to whether UCP will also govern a letter of credit that is neither issued through SWIFT nor expressly stated to be subject to UCP. The Supreme Court is expected to clarify this issue in future cases. 3. Strict Compliance: What makes this a landmark case is that the Supreme Court demonstrated the extent to which it is willing to go to apply the principle of "strict compliance". As for the first letter of credit, the signer of the receipt of goods is different from that of the signature specimen held by the issuer, and the Court clearly recognized that there was a discrepancy. The dispute in the second credit arose 1. Jing Zhong Zi No. 336 Judgment (1998), Issue No. 2 of the Supreme People's Court Bulletin. The English language summary of this case has been published in Shan Jianbao and Jin Saibo on Court Cases that Confirm the Judicial Acceptance of UCP in China, Summer 2000 DOCUMENTARY CREDITS INSIGHT 16. For a detailed review of this case by the author, see CHINA LAWYERS, January 1999..115 2001 LC CASE SUMMARIES because the signature specimen bore two official seals of the applicant with one affixed to "Yi Feng" and the other to "Wu Bin". The receipt of goods presented by the beneficiary, however, was signed by "Yi Feng" only. On the one hand, the beneficiary contended that the two official seals and signatures on the specimen were alternative to each other and the receipt of goods shall be regarded as being in compliance with the specimen as long as one set of official seal and signature correspond to that one the signature specimen. On the other hand, the issuer insisted that both official seals and two signatures were required to match the signatures and seals on the signature specimen according to the principle of strict compliance. The Supreme Court noted that there was an "obvious discrepancy" between the documents presented and the specimen held by the issuer and thus decided in favor of the issuer. The Supreme Court did not expressly address how the standard of "strict compliance" was to be interpreted and applied, however. The standard employed by the Supreme Court in this case was so strict as to suggest a "mirror image" or a "facsimile" standard of compliance. We must acknowledge that the ICC does not recommend applying such a strict standard in common LC practice. Considering the special circumstance of this case in which documents with the very appearance as the LC were required, it is appropriate for the Supreme Court to apply such strict standard. Some cases 2 in the U.S. have taken a similar approach. Unlike Newco and other cases, the Supreme Court did not emphasize in its judgment that the documents must be in "strict compliance" but shall appear "on their face" in compliance with the letter of credit. The Supreme Court stated in its judgment that " … the issuer may refuse to accept the documents as long as it finds the documents appear on their face to be not in compliance with the terms and conditions of the letter of credit according to the nature of the letter of credit and the provisions of UCP … ". The Supreme Court's judgment did not provide any further detailed reasons or considerations in determining the inconsistency between the documents and the letter of credit. For example, we cannot infer from the judgment that issues including the standard of reasonable care, the standard of a reasonable examiner, or whether the discrepancy is substantial, have been taken into consideration before the final conclusion. Although the Supreme Court's judgment is reasonable, the lack of detailed discussion and reasoning regarding the above issues limits the extent to which the judgment may be used to provide guidance in future cases. The Court's decision implies that the issuer is not required to take into consideration any specific agreement or any special trade practice established between the underlying contractual parties, although this issue was not expressly addressed in detail by the Court. Nevertheless, the Court's decision implied that the issuer is only supposed to ascertain whether or not the documents appear on their face to be in compliance with the terms and conditions of the letter of credit without consideration of commercial practices. In this case, for example, the soft clause, which requires the beneficiary to present documents identical to the specimen held by the issuer, deviates from standard banking practice. The Court decided, however, that the issuer shall decide solely based on the terms and conditions of the letter of credit as to whether there is any discrepancy between the documents; the issuer is unable and has no right to determine whether the applicant's signature specimen should be treated as two independent sets or one integral part. Some experts may argue that the document checker of the issuer can easily decide by "common sense" that the specimen should be considered as two sets, which are independent of each other. However, others have noted that the uniqueness of letter of credit lies in its "counter-intuition." 2. e.g. American National Bank v. Cashman Bros. Marine Contracting, 550 So. 2d 98, 9 U.C.C. Rep. Serv. 2d (Callaghan) 1036 (Fla. Dist. App. 1989) and N & Properties v. Amsouth Bank, 558 So. 2d 906, 11 U.C.C. Rep. Serv. 2d 1222 (Ala. 1990).. Although the banking industry in China had various reactions to this case, it is, in our view, justified for the Supreme Court to interpret the strict compliance standard strictly under some extremely special circumstances like in this case. In the past decade, issuers have sought to shift the responsibility for document examination to the applicant in order to avoid risk and liability. Even when the issuer does examine the documents, they tend to examine them in a cursory way, and then compel their customers to accept the non-compliant documents. It is now clear that the Fourth Division of the Supreme Court, which is mainly responsible for LC cases, holds the position that the strict compliance standard should be interpreted strictly. An earlier decision suggests that at least one judge in the Second Division of the Supreme Court holds a different opinion. In a 1999 case 3 , the Second Division stated in its judgment that "because there are no fundamental discrepancies in the documents, the issuing bank is required to honor the LC and the applicant should reimburse the issuing bank." Because the Fourth Division handles most LC cases, their views represent the majority opinion of the Supreme Court.

4. Soft Clauses: Once again this case demonstrates the danger of "soft clauses" to the beneficiary. The lesson for beneficiaries is to refuse to accept letters of credit with "soft clauses". Indeed, in recent years, PRC courts and banks have frequently encountered problems with letters of credit involving soft clauses, notwithstanding repeated warnings about the dangers of soft clauses. The soft clause contained in the LC in this case is not a non-documentary clause, because it requires the beneficiary to present a specific document, i.e. the receipt of goods, which should be in compliance with the specimen provided by the applicant. Under such a special circumstance, the Court cannot apply the UCP500 Article 13(c) regarding non-documentary conditions. It is worth emphasizing that although we consider the soft clause in this case a poorly drafted LC clause, it is a commercial arrangement voluntarily agreed by the parties to the underlying contract. The Court has no choice but to recognize and enforce it. It should be the beneficiary himself who responsible for watching out for such a LC incorporating such a soft clause. Neither the issuing bank nor the Court can provide any additional protection to such a beneficiary who himself did not care about the LC requirements. DCW

Comment: The question raised by the terms of this credit relate to the documentary requirements contained in the LC. The credit was obviously within the control of the applicant in the sense that a required document, the receipt, was within the control of the applicant. While not ideal, such a provision is inconsistent with the fundamental nature of an LC and it is up to the beneficiary whether it will act on such a credit. The rule of the LC compliance, that the documents must comply with the terms of the LC would then result in dishonor if no such document is produced. The credit here, however, contained an additional feature, namely a hidden requirement regarding whose signature's were available, apparently unknown to the beneficiary. If so, this hidden requirement differs in nature from a provision requiring applicant approval. To be sure, the LC did alert the beneficiary that there were specimen signatures on file with the issuer. It did not, however, alert the beneficiary as to whose signatures were required or that, even if one were present, two would be required. It is possible to treat such a requirement under the principle of "beneficiary beware" as is the case with applicant approval. There are, however, other important principles applicable here that suggest a different result. They are embodied in UCP500 Article 5(b) which provides that "the Credit . . . must state precisely the document(s) against which 3. Harbin Branch of Industrial and Commercial Bank of China, Harbin Textile Import and Export Corp. v. Heilongjiang Long Di (Group) Corp., Jing Zhong Zi No. 152 (1998), the PRC Supreme People's Court..117 2001 LC CASE SUMMARIES payment, acceptance, or negotiation is to be made." This provision which appears unexceptional was first introduced in the 1963 revision and represented a radical departure from prior versions of the UCP. Under the 1933 and 1951 versions, the issuer was given considerable distinction with regard to whether a document such as a transport document was compliant. Instead, the new approach embodied in Article 5(b) requires that the LC be specific. When coupled with UCP500 Article 13(c) regarding non documentary conditions, it follows that an unspecified non-documentary requirement cannot be a basis for dishonor. In this case, the stated requirement that signatures must comply with signatures "on file" should be disregarded. The sample signatures are not specified in the LC and the reference to another document not contained in the LC does not make it documentary. LC policy supports this result. The LC is an undertaking to pay against stated documents. It abhors lending itself to sharp dealing by either the applicant or beneficiary. LC requirements must be expressly stated in the LC. Cross reference to another document, whether the underlying contract or specimen signatures, is to be disregarded in examining the documents.


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.