Preface

The year of 2014 was, subsequent to 2008, another year with alarms raised at all border posts for the disputes over letters of credits.  In Guangzhou, on behalf of an Australian bank, we handled a series of stop-payment cases raised by a Chinese bank; in the series cases of Dezheng financial fraud in Qingdao Port, as engaged by another Australian bank, we dealt with the injunction orders successively issued in Erdos, Urumchi and Weihai.  However, The most remarkable case should be the battles in two-level courts in Wuxi and Nanjing we involved on behalf of a Hong Kong negotiating bank for four years.

In the early 2018, the appellate court clearly define the “negotiation in good faith” with a judgment of nearly one hundred pages(“the Judgment”), which announces the triumph of the negotiating bank.  Meanwhile, we believe the Judgment will help to restore or enhance the overseas banks’ confidence in cooperation with Chinese banks and companies in letter of credit operation, which will give a boost to the orderly development of the international trade.

Case Brief

From September 2013 to January 2014, the actual controller of a series of trade corporations in Jiangyin, who was later listed on the Interpol Red Notice, utilized the domestic and overseas affiliated companies over which he assumed de facto control to conduct wash trades, fabricated the underlying contracts, bills of lading, packing lists, and so on in trade of chemical product and iron ore, and engaged in the domestic companies having higher credit line with bank as the applicants for the issuance of letter of credit or as the guarantors of letter of credit directly issued for the affiliated companies, during which a series of letters of credit had been issued and amounted to tens of millions of US dollar involved.  The beneficiaries abroad negotiated these letters of credit with the negotiating bank in Hong Kong. In early 2014, but then the surrogate applicants or the guarantors alleged that the letters of credit opened or guaranteed by them were suspected of involving in false trade and applied to Wuxi Intermediate Court  (“Wuxi Court”) for injunctions to prevent the banks from paying out.  Meantime, they filed a lawsuit, listing the issuing banks and the negotiating banks as the third parties to the proceedings, before Wuxi Court against the traders allegedly involved in the false trades. 

Accordingly the payment under a large number of letters of credit negotiated by the Hong Kong negotiating banks had been stopped suddenly, upon instruction by the Hong Kong bank, we applied immediately for a review to higher-level court for the stop-payment rulings delivered by Wuxi Court and submitted the full set of evidences in connection with the negotiation.  The substantive hearing of the first instance commenced after our application for review had been dismissed; as a counter measure, the negotiating bank issued parallel proceedings in Hong Kong to demand the payment at the same time based on the fact that the issuing bank had accepted the bill of exchange under the letter of credit.  We first crossed the finish line in substantive judgment after four years, whereas the Hong Kong Court was still stuck with the procedural disputes. 

Judgment

This case dealt with the criteria of bona fide negotiation at the root.  A remarkable signal on letter of credit dispute in China prior to this instance is the trials on a series of letter of credit fraud involved in an Australian Bank, which commenced in 2008 and closed by retrial before the Supreme Court in 2014 (“Australian Bank Cases”), and provided the most important guidance in judicial practice of letter of credit disputes. 

Article 10 of Provisions of the Supreme People's Court on Some Issues Concerning the Trial of Cases of Disputes over Letter of Credit (2005) provides for the exceptions to exceptions of the letter of credit fraud, i.e. although the letter of credit fraud occurs, the payment under the letter of credit shall not be stopped provided that issuing bank or its nominee or entrusted party, in bona fide, has accepted the instruments under the letter of credit or that the negotiating bank, in bona fide, has negotiated the payment.  In spite of this, the Judicial Interpretation does not make directives on how to define a bone fide negotiation.  The logic embodied in the Australian Bank Cases is that the nature of negotiation should be examined in light of the backgrounds, details and so on generated by all the underlying trade under all letters of credit involved, instead of dealing with each letter of credit isolately and unilaterally. 

The creative value of this Judgment which makes it distinguished from the Australian Bank Cases is that the appellate court defined “bona fide” comprehensively based on the system of civil law and commercial law, i.e. the system of acquisition  by bona fide of ownership in the Property Law and the structure of bona fide holder in the Law of Negotiable Instrument, and therefore held that the negotiation shall be regarded as bona fide, in absence of the contrary evidence which suffices to prove the non-bona fide negotiation, if the negotiating bank did not have information of the existence of letter of credit fraud and negotiated the instruments without gross negligence.

During the process of the first instance and the second instance, the applicants of stop-payment orders attempted to break the principle of autonomy under letter of credit and of non-causation under negotiable instruments instead to mix up the letters of credit, underlying trades and concealed relationship between different participants together and to contend  that the non-bona fide negotiation was constituted for the negotiating bank knew or should have known the letter of credit fraud relying on the logic of the Australian Bank Cases.  The court of second instance treated every piece of evidences submitted by each party carefully and exposited the legal concept of bona fide in very detail.  Finally, it held that the evidences surrendered by the applicants of stop-payment orders did not suffice to prove the negotiating bank’ s knowledge of the letter of credit fraud neither the gross negligence, as a result the stop-payment applications were dismissed from substantive prospect.

Besides, this Judgement also convincingly demonstrates the constitution and identification of the negotiation and the acceptance on the basis of international practice such as UCP 600, international rules and relevant legal precedents of ICC.