New Rules for Resolving Letters of Credit Disputes in China

On 2006 January 1, the Judicial Interpretation of China Supreme People’s Court for Resolving Disputes Concerning Letters of Credit (Judicial Interpretation) entered into force. Under Chinese legal system, this Judicial Interpretation will definitely become the most effective law for resolving Letters of Credit (L/C) cases before all courts in China.

Below is a brief summary of several of the key rules of the Judicial Interpretation.

Ⅰ. Cases Classification and Governing Laws

The Judicial Interpretation is intended to be applied to two categories of cases submitted before courts. The first category includes cases concerning the disputes of issuance, advice, amendment, revocation, confirmation, negotiation, and payment of the L/C. The second category involves cases concerning disputes between applicant and issuer, disputes between principal and agent in a contract for opening the L/C, guaranteeing or financing disputes under the L/C.

The Judicial Interpretation has set two different governing laws for each category of the cases. For cases fallen into the first category, article two of the Judicial Interpretation says that if parties concerned have stipulated an international practice or other regulations as governing law in their documents, then the governing law shall be what the parties have stipulated; if the parties have failed to do so, then the governing law shall be Uniform Customs and Practice for Documentary Credits published by International Chamber of Commerce. For cases fallen into the second category, relevant Chinese laws shall be applied by the court as governing laws with one exception. The exception is that if the case involves foreign party and disputing parties have stipulated governing laws rather than relevant Chinese laws in their documents, then the governing laws shall be those thus stipulated.

Ⅱ. Standard for Examination of Documents

The Judicial Interpretation first reiterates the independent feature of the L/C in its article five and makes it clear that no claims based on the underlying transactions shall be supported by any courts except there is fraud, which shall meet the requirements set out in article 8 of the Judicial Interpretation.

Then article six stipulates that if the case involves the examination of documents, the court shall use the international practice or other regulations chosen by the disputing parties as the examination standard, and if the disputing parties have not so chosen, then the court shall use Uniform Customs and Practice for Documentary Credits or other relevant standards stipulated by International Chamber of Commerce as the examination standard. The court shall examine all documents stipulated in the L/C to ascertain whether or not these documents appear, on their face, to be in compliance with the terms and conditions of the L/C or with each other. However, if the discrepancies among documents or between documents and the terms and conditions of the L/C are insignificant and will not lead to misunderstanding, the court shall ignore such discrepancies.

In article seven, the Judicial Interpretation further states that it is the rights and obligations of the issuing bank to examine the documents independently, to make a decision on whether discrepancy exists, to decide whether accept or refuse such discrepancy.

Ⅲ. Fraud and Its Exclusion

Article eight sets out standards for the court to acknowledge the existence of fraud. It states that fraud shall be acknowledged if following facts exist: A. the beneficiary has forged documents or submitted falsely recorded documents; B. the beneficiary has not delivered the goods with vicious intent or has delivered the goods that have no value; C. the beneficiary and the applicant or other third party have colluded with each other to submit faked documents and there is no real underlying transactions; D. other circumstances that L/C is used for fraud. (Under Chinese judicial practice, no court other than the Supreme Court shall apply section D to acknowledge fraud in L/C cases unless the Supreme Court has reviewed the case facts and given the court a definite approval.)

To protect the interests of bona fide banks involved in L/C disputes, article ten of the Judicial Interpretation regulates that the court shall not enjoin the payment even if fraud does exist in the following cases: A. the bona fide nominated bank or authorized bank has made the payment; B. the bona fide issuing bank, nominated bank or authorized bank has accepted the instruments; C. the bona fide confirming bank has made the payment; D. the bona fide negotiating bank has negotiated the instruments.

Ⅳ. Conditions and Procedure for enjoining payment

To prevent the L/C mechanism being interrupted by improper judicial practice, article eleven sets out five conditions for the party who applies to enjoin the payment prior to a trial. These conditions are: A. the court that accepts the application shall have the jurisdiction over the case; B. the evidence provided by the applicant shall indicate the existence of fraud per article eight; C. the applicant shall suffer irreparable harm if not freezing the payment; D. the applicant has provided reliable and sufficient collateral; E. the application does not include the cases stipulated in article ten. (If the applicant wants to enjoin the payment during a trial procedure, then conditions B, C, D, E shall be satisfied.)

If the abovementioned conditions have been met, article twelve stipulates, the court shall make a decision on whether or not to enjoin the payment within forty-eight hours. If the court decides to enjoin the payment, the decision shall be carried out immediately. The decision shall also list the names of applicant, respondent and the third party.

Article thirteen further states that if the parties concerned want to demur at the decision, they can file a petition to the higher court for reviewing the decision within ten days of the issuing of the decision. The higher court shall make a ruling within ten days after receiving the petition. During reviewing period, the decision remains valid.