Provisions on Several Issues Concerning the Trial of Letter of Credit Disputes

(Promulgated by the Supreme People's Court on November 14 2005 and effective as of January 1 2006.)

SPC Interpretation [2005] No.13

These Provisions on issues relevant to the trial of letter of credit disputes have been formulated pursuant to such laws as the PRC Civil Law General Principles, the PRC Contract Law, the PRC Security Law, the PRC Civil Procedure Law (2nd Revision), etc., with reference to relevant international practice, such as the Uniform Customs and Practice for Documentary Credits of the International Chamber of Commerce, while taking into account trial practice.

Article 1: For the purposes of these Provisions, the term “letter of credit dispute” means a dispute that arises at the stage of opening, notification, revision, cancellation, confirmation, negotiation, payment, etc. of a letter of credit.

Article 2: When a people's court tries a letter of credit dispute, if the concerned parties have agreed on the application of international practice or other provisions, such practice or provisions shall apply. If the concerned parties failed to address the issue, the Uniform Customs and Practice for Documentary Credits of the International Chamber of Commerce or other relevant international practice shall apply.

Article 3: These Provisions shall apply to unpaid amount disputes arising in connection with applications to open letters of credit between applicants and opening banks, disputes arising in connection with the entrusted opening of letters of credit between entrusting and entrusted parties, disputes arising in connection with the provision of security by guarantors for applications to open letters of credit or the entrusted opening of letters of credit and disputes arising in connection with the financing under letters of credit.

Article 4: Relevant laws of the People's Republic of China shall govern unpaid amount disputes arising in connection with applications to open letters of credit, disputes arising in connection with the entrusted opening of letters of credit, security disputes arising as a result thereof and disputes arising in connection with the financing under letters of credit, unless the concerned parties to a foreign-related contract have provided otherwise concerning the governing law.

Article 5: Once an opening bank has given an undertaking to make payment, accept, or perform another obligation under a letter of credit, so long as there is apparent consistency between the documents and the terms of the letter of credit and between document and document, it shall perform its obligation of payment by the time specified in the letter of credit. If a concerned party lodges a protest based on the underlying transaction between the applicant and the beneficiary, the people's court shall not uphold such protest, unless any of the circumstances specified in Article 8 hereof apply.

Article 6: If a document examination is involved in a letter of credit dispute being tried by a people's court, the same shall be carried out in accordance with the applicable relevant international practice or other regulations agreed upon by the concerned parties. If the concerned parties failed to address such issue, the apparent consistency between the documents and the terms of the letter of credit and between document and document shall be determined in accordance with the Uniform Customs and Practice for Documentary Credits of the International Chamber of Commerce and the relevant criteria determined by the International Chamber of Commerce.

If there is not complete apparent consistency between the documents under the letter of credit and the terms of the letter of credit or between document and document, but the same is not sufficient to give rise to ambiguity among them, the same shall not be deemed to be an inconsistency.

Article 7: An opening bank has the right and the obligation to independently examine documents, the right to decide on its own whether there is apparent consistency between the documents and the terms of a letter of credit and between document and document and to decide on its own whether to accept or reject inconsistencies between the documents and the terms of the letter of credit or between document and document.

Once an opening bank discovers an inconsistency under a letter of credit, it may decide at its own discretion to contact the applicant as to whether he/she accepts the inconsistency. The applicant's decision on whether or not to accept the discrepancy shall not affect the opening bank's ultimate decision on whether or not it accepts the discrepancy, unless otherwise agreed by the opening bank and the applicant.

If the opening bank expressly indicates to the beneficiary that it accepts the inconsistency, it shall assume its obligation of payment.

If the opening bank refuses to accept the discrepancy and the beneficiary demands that the opening bank assume its payment obligation under the letter of credit on the grounds that the applicant accepted the inconsistency, the people's court shall not uphold such demand.

Article 8: A determination of letter of credit fraud shall be rendered if:

(1) the beneficiary has falsified documents or submitted documents that contain false information;

(2) the beneficiary fails to deliver the goods in bad faith or the goods that it delivers are worthless;

(3) the beneficiary and the applicant or a third party conspired to submit fraudulent documents and there is no genuine underlying transaction; or

(4) other instances of letter of credit fraud.

Article 9: If an applicant, opening bank or another materially concerned party discovers the existence of one of the circumstances specified in Article 8 and it/he/she deems that the same will cause it/him/her to incur irreparable damage, it/he/she may apply to a competent people's court to suspend payment of the amount under the letter of credit.

Article 10: If the people's court finds that there is letter of credit fraud, it shall rule to suspend the payment or render a judgment halting the payment of the amount under the letter of credit, unless:

(1) the designated or authorized person of the opening bank has already made payment in good faith in accordance with the instructions of the opening bank;

(2) the opening bank or its designated or authorized person has already accepted in good faith an instrument under the letter of credit;

(3) the confirming bank has already performed its payment obligation in good faith; or

(4) the negotiating bank has negotiated in good faith.

Article 11: If the pre-trial application by a concerned party for suspension of payment of the amount under a letter of credit satisfies the following conditions, the people's court shall accept the same:

(1) the people's court accepting the application has jurisdiction over the letter of credit dispute;

(2) the evidentiary materials provided by the applicant establish the existence of one of the circumstances specified in Article 8 hereof;

(3) if suspension of payment of the amount under the letter of credit is not made, the lawful rights and interests of the concerned party will suffer irreparable damage;

(4) the applicant has provided reliable and sufficient security; and

(5) none of the circumstances specified in Article 10 hereof exists.

An application for suspension of payment of the amount under a letter of credit by a concerned party while a trial is pending shall satisfy the conditions specified in Items (2), (3) (4) and (5) of the preceding paragraph.

Article 12: The people's court must render its ruling within 48 hours of accepting the application for the suspension of payment under the letter of credit. Enforcement shall commence immediately upon a ruling of suspension of payment.

A ruling suspending payment of the amount under a letter of credit rendered by a people's court shall specify the applicant, the respondent and third parties.

Article 13: If a concerned party objects to the ruling rendered by a people's court suspending payment of the amount under a letter of credit, he/she may apply to the people's court at the next higher level for review within 10 days of the date of service of the ruling. The people's court at the next higher level shall render its ruling within 10 days of the date of receipt of the application for review.

Enforcement of the original ruling shall not be suspended during the review period.

Article 14: If necessary, while trying a letter of credit dispute, a people's court may consolidate the letter of credit dispute and the underlying transaction dispute.

When a concerned party institutes a legal action on the grounds of a fraudulent underlying transaction, he/she may name the relevant opening bank, negotiating bank or other materially interested party with a legal relationship to the letter of credit as a third party. A third party may also apply to take part in such a legal action, alternatively, the people's court may notify a third party to take part in the legal action.

Article 15: If the people's court, through the actual trial, determines that letter of credit fraud is established and that none of the circumstances specified in Article 10 exists, it shall render a judgment terminating the payment of the amount under the letter of credit.

Article 16: If a guarantor petitions to be released from its guarantee obligations on the grounds that the opening bank or applicant accepted a discrepancy without seeking its consent, the people's court shall reject such petition, unless the guarantee contract provides otherwise.

Article 17: If the applicant and the opening bank revise the letter of credit without the consent of the guarantor, the guarantor shall bear its guarantee obligation only for the time and to the extent specified in the original guarantee contract or in law, unless the guarantee contract provides otherwise.

Article 18: These Provisions shall be effective as of January 1 2006.