China's Supreme People's Court has promulgated Regulations of the Supreme People's Court on Relevant Issues on Trying Cases of Letter of Credit Disputes, effective as of 1 January 2006.

The regulations say letter of credit (L/C) disputes should normally be tried in accordance with Uniform Customs and Practice for Documentary Credits (UCP). They also deal with disputes over guarantors' liabilities and fraud.

UCP recognition

The regulations promulgated in November 2005 say the people's court will try L/C disputes according to the provisions of the prevailing UCP, unless the parties have agreed otherwise.

The Supreme Court confirms that a L/C should be treated as an independent payment mechanism, separate from the contract of sale or other agreements on which it may be based. Provided documents accord with the L/C and other documents, the bank is obliged to pay.

Document examination

In response to an all too frequent complaint in the past that China's courts favoured Chinese traders in L/C disputes, the regulations spell out the principle that the bank examines the L/C and associated documentation independently.

Moreover, the Supreme Court says the bank decides whether to accept or reject a discrepancy in the documents independently, regardless of whether or not the L/C applicant accepts this or not.

Guarantors' liabilities

Guarantors cannot claim exemption from their liabilities because the issuing bank or the L/C applicant accepts a discrepancy without their approval according to the regulations.

However, they do say that if the issuing bank or the L/C applicant amends documents without the guarantor's approval, the guarantor's liabilities are limited to those agreed previously and those provided for under prevailing laws and regulations.

Fraud

Where fraud is suspected, the regulations say either the issuing bank, the L/C applicant or other interested parties can apply to the courts for an injunction barring payment, under certain circumstances even before they file the suit.

The people's court can in most but not all circumstances decide to terminate or temporarily stop a payment based on applications it receives. The court must make a ruling within 48 hours of receiving an application, and if it rules for a temporary stop on payment, this should be enforced immediately.

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