Letter of Credit Litigation

The NYB, upon inspection of the documents, informed CCB by telex that the documents were inconsistent with the L/C in several respects, including:

a) the railway transportation documents were issued in Russian;

b) two railway transportation documents were missing;

c) there was a delay in delivering the commodities;

d) the railway and railway carriage codes on the loading documents were inconsistent with those on the transportation documents;

e) the contract number on the invoice was inconsistent with the number on other documents;

f) clause 2 of the quality certificate was inconsistent with the invoice and L/C; and

g) the manner of packing as faxed by the beneficiary was inconsistent with that designated on the L/C.

NYB asked CCB to confirm whether to accept the documents. CCB informed NYB by telex that it would not accept the discrepancies. NYB informed NCL of the refusal and returned all documents to NCL on December 18 1995. In the meantime, Huichun Municipal Trade Industry Co. Ltd. (HCTC), the end-user on whose behalf JIEC was acting, took delivery of the goods. NCL therefore initiated litigation in Jilin High Court for the purchase price and interest.

The Jilin High Court decided against NCL. On appeal, the Supreme Court upheld the decision of the Jilin High Court. In reaching its decision, the Supreme Court confirmed the following principles.

The Applicability of UCP

PRC courts consider the UCP to be international practice. The Supreme Court confirmed in Newco and other cases that PRC courts will honour the agreement of parties who provide in the L/C that disputes are to be resolved in accordance with the UCP, provided that international practice as defined in the UCP is not contrary to public interest.

Although there has been no case on point to date, presumably PRC courts would apply the UCP as customary international practice even when the parties do not expressly invoke the UCP in the L/C in accordance with the PRC, Civil Law. The Independence of the L/C

In Newco, the Supreme Court expressly stated for the first time the basic principle of the independence of the L/C. One reason L/C's are so widely used in international trade is that the underlying contract for the sale of goods is independent of the L/C transaction. Thus, a dispute regarding the goods will not affect payment under the L/C.

In Newco, NCL had delivered the goods but was not paid for them due to discrepancies in the documents submitted. Yet the rights of the seller vis-¨¤-vis the buyer are independent of the seller's rights vis-¨¤-vis the issuing bank. Similarly, the rights and obligations among the issuing bank, advising bank and negotiating bank must all be considered independently.

The Principle of Strict Compliance

The Supreme Court also stated "in relationships concerning L/C, the issuing bank is responsible for strict inspection of the documents under the L/C and deciding on whether the documents conform to the L/C. It will pay only under the condition that the documents are consistent with each other and conform to the L/C." At present, the Court has yet to address expressly the issue of "material consistency". The Court has also not yet clarified whether other documents may be relied on to rectify inconsistencies.

Time to Examine the Documents

Clause 13b of UCP 500 provides that issuing banks shall examine the documents within a reasonable time, not to exceed seven banking days from time of receipt. The Supreme Court confirmed the seven-day maximum time limit while leaving the issue of a shorter "reasonable time" open, perhaps because PRC banks have yet to establish a clear practice.

Conforming with International Practices

The Newco case demonstrates the Supreme Court's commitment to conform PRC judicial practice to international practices. The Court confirmed several key principles, including applicability of the UCP, the independence of the L/C, the strict consistency between the L/C and other documents, and the maximum time for inspecting documents.

At the same time, the Supreme Court has moved cautiously with respect to a number of controversial issues. Such caution is understandable given the banking industry's relative lack of experience regarding L/Cs. In the future, the Supreme Court will no doubt be called on to provide clear guidance regarding many more difficult L/C issues.

Jin Saibo,
Yiwen Law Firm, Beijing