Litigation and arbitration team

LITIGATION & ARBITRATION TEAM

Case reports and analysis                  Article9Period

CASES REPORT & ANALYSIS, Volume 9

2012Years9Month22DaySeptember 22, 2012

Review of law and case China standby letter of credit

Jin Saibo*

Catalog

1 Standby letter of credit China method on qualitative problem........................................................................... 2

1.1 The qualitative method in Chinese on standby letter of credit is a credit or a guarantee:?.............................. 2

1.2The risk of uncertain applicable law: the letter of credit guarantee law judicial interpretation still apply?............... 3

1.3 The Supreme People's court four people court is to study and draft see influence of cable demand guarantee judicial qualitative interpretation of standby letter of credit and the law   3

1.4 China court had been on standby letters of credit disputes verdict... 4

2 China court case review of standby letter of credit... 5

2.1The only standby letter of credit case: Sumitomo bank and Guangdong Development Bank compensation for breach of contract dispute case... 5

2.2The issuing bank to honour the standby letter of credit to the applicant after two cases of recovery... 5

2.3Some unpublished or not in the court proceedings of the case.... 6

3 Some problems in the credit business in China should pay attention to.... 7

3.1Whether from the previous case China court can be expected any risk?.... 7

3.2How to reduce these risks?.... 8

3.3 Agreed arbitration clause and China Court on standby in the injunction.... 8

3.4Better rule standby application: "guarantee law",UCP600, ISP98OrURDG?... 9

4 Conclusion: the standby letter of credit than demand guarantees a better payment certainty... 9

 

 

 

1 Standby letter of credit Chinese lawQualitative problem

1.1 The qualitative method in Chinese on standby letter of credit is a credit or a guarantee:?

The Supreme People's Court of the people's Republic of China (hereinafter referred to as"Supreme Court")2005Years formulated and adopted in2006Years1Month1The date of "on Several Issues concerning the trial of letters of credit disputes regulations" (hereinafter referred to as"Credit judicial interpretation")[1] Just for the letters of credit disputes, although in the Supreme Court of Zhejiang province and Shandong Province Higher People's Court of judicial precedent, the credit judicial interpretation is applicable only to the international credit and not suitable for dispute cases permit domestic credit exist contrary cases,[2] But for a standby letter of credit disputes whether the case is applicable to this judicial interpretation, judicial interpretation provisions and shows itself did not make a provision.[3]

Because of the most crucial in the legal problem is China method on standby for qualitative: it belongs to the letter of credit in the legal nature of standby letter of credit, as their names suggest; or from the standby letter of credit and the purpose of the wording, he is usually issued for collateral purposes. On this point may still exist differences even in the Supreme Court level view, not to mention in the local court. One of the methods to avoid the uncertainty in this problem is to avoid agreed by the Chinese court for the future because of this standby letter of credit transaction disputes when the jurisdiction or agree to apply China method.

The Supreme Court's practice is to admit that this is a worthy research problem, but there is no conclusion. The Supreme Court judicial interpretation specifically on the letter of credit is suitable for standby letter of credit disputes case, the Supreme Court four people court is of the opinion that:

"'Standby letter of credit'Is the issuing bank has an obligation to the beneficiary certificate, the certificate, the issuing bank guarantee in the applicant fails to perform its obligations, if the beneficiary in accordance with the provisions of standby letter of credit to the issuing bank issuing bills, along with the applicant fails to perform the obligations the certification or declaration file pay the issuing bank. Standby letter of credit is a special form of clean credit. Standby letter of credit is generally used for bidding, contract, payment, advance payment, credit business. The credit to the beneficiary is used to obtain the compensation applicant default occurs when a way, if the applicant fails to fulfill the contract obligations, the beneficiary has no need for the issuing bank to pay any payment and compensation in the standby credit. Although conceptually, standby letter of credit has all the elements of the documentary credit should possess, but from the attribute and function, the standby letter of credit with a bank guarantee the same. In the past, standby letter of credit is seldom used in China, and the standby letter of credit has been used more and more, and in some areas of the court has heard of standby letter of credit disputes cases. At present, these two kinds of disputes have been appealed to the people's court, and showing a growing trend, we need to further study whether credit judicial interpretation can be applied and how to apply can be applied in the case of."[4]

But the Supreme Court four people court until there is no clear official position.

1.2The risk of uncertain applicable law: the letter of credit guarantee law judicial interpretation still apply?

Follow the law of qualitative uncertainty of standby letter of credit is uncertain and come first is the applicable law: if the court case Chinese standby credit disputes, is the letter of credit or the legal application of guaranty law? Not to say that the applicable because no guarantee or due to guarantee law or regulation. Avoid appearing in this issue of uncertain risk approach is to avoid agreed in the standby letter of credit terms and conditions apply China method, directly on the standby letter of credit terms agreed upon the application of standby letter of credit to determine other qualitative state laws, such as the UK and Singapore law or American method.

1.3 The Supreme People's court four people court is to study and draft see influence of cable demand guarantee judicial qualitative interpretation of standby letter of credit and the law

The Supreme Court is currently being conducted on demand bank guarantee of investigation and the judicial interpretation of the draft ready first, will face the two questions. Make make the legal nature of standby letter of credit and applicable law to clear before, this problem will be in doubt. Even if there is another place court made clear, also cannot predict elsewhere in the court will take the same position, until the Supreme Court rules or clear so far.

1.4 China court had been on standby letters of credit disputes verdict

A research report on the Supreme Court during the financial crisis has made mention of standby letter of credit Chinese sued to court cases,[5] But according to the mastery of the information, at present a few of the standby letter of credit disputes is not about the standby letter of credit legal relationship disputes,[6] But in the standby letter of credit secured bank to honour, to guarantee bank counter guarantee bank claims.[7] Or bank guarantee in honour to the standby letter of credit beneficiary to the applicant claims.[8]

Only a standby letter of credit claim case ruled that the book is open. This is a Hongkong bank financing and China mainland bank standby letter of credit issuing bank's action. The case first provided by Hongkong company of bridge financing to Bank of Hongkong under the jurisdiction clause of standby letter of credit, in the Hongkong court for mainland banks. Mainland banks after losing in the Chinese court prosecution, then Hongkong bank financing put forward the objection to jurisdiction, the Supreme Court ruled that the Guangdong, the Bank of Hongkong to the jurisdiction of an appeal to the Supreme court. The Supreme Court finally ruled China court does not have jurisdiction over the standby letter of credit.[9]

2 China court case review of standby letter of credit

Can not be accurately known in the past few years how many standby letter of credit is a claim. But according to the collected more than me500The court verdict, the court a Chinese relating to trade financing dispute cases include credit, guarantee and standby letter of credit, there are several standby letter of credit is the beneficiary, or secured bank claims which eventually led to litigation cases. I don't know the number of cases of standby letter of credit is the beneficiary claims should not be a small number.

2.1The only standby letter of credit case: Sumitomo bank and Guangdong Development Bank compensation for breach of contract dispute case[10]

At present, the Beneficiary only a standby letter of credit and the issuing bank disputes be resorted to Chinese court. The Chinese court dispute cases involving a Japanese funded background Sumitomo Mitsui Bank Co. Ltd. is a Chinese mainland investment background, Hongkong Xinhua company provide a bridge loan to purchase property in Hongkong more than2800Million dollars before, as the bridge financing guarantee, the Guangdong Development Bank to open a Hongkong company for more than the Hongkong Finance Bank2800Standby letter of credit million as a guarantee. Mitsui Sumitomo banks made loans, but Xinhua company did not repay financing, so the Mitsui bank to bank Sumitomo proposes reserve under the credit payment, it was the latter refused, Sumitomo Mitsui bank in Hongkong court, the bank loses a lawsuit in Hongkong court. Then the bank to bank and Mitsui, Mitsui Sumitomo Sumitomo illegal bank about three written letter of commitment on the grounds, to the prosecution of Guangdong Provincial Higher People's court, the compensation for the losses. Mitsui Sumitomo Bank Limited and Mitsui bank, Sumitomo challenge the jurisdiction. Guangdong high court that they have jurisdiction over the case, because they accept Co., Mitsui Sumitomo banks have branches and thus has property for execution on the grounds it can exercise jurisdiction in guangdong. But the Supreme Court did not support Guangdong Development Bank's point of view, withdrew Guangdong Court on their jurisdiction of first instance ruled. Therefore, this case also did not enter the China court trial procedure.

2.2The issuing bank to honour the standby letter of credit to the applicant after two cases of recovery

The two case is the issuing bank on standby letters of credit to pay by recourse to the beneficiary in the case after the standby letter of credit:

A Jiangsu court, is a financial standby letter of credit transaction, Jiangsu bank loans to a company in Suzhou, the guarantee measures for the standby letter of credit for a foreign bank to Bank of Suzhou. When borrowers default, the Agricultural Bank of China Suzhou branch to guarantee bank cable cash credit guarantee payment, in cash to the borrower after claims rejected the prosecution;[11]

Another is Anhui Hefei court case in court, but this standby letter of credit is the case of standby letter of credit in international project contracting, and the stand-by letter of credit issuing bank to the beneficiary after the turn to the counter guarantee bank payment, the contractor may apply to the court for injunction stopped the domestic counter guarantee bank opened on demand demand guarantees payment under this basis, transactions are not based on trade.[12]

There are two court cases involve financial standby letter of credit under dispute, but the two cases under the standby letter of credit is the issuing bank to the beneficiary to the applicant after payment claims disputes. In fact the two standby letter of credit has not occurred litigation, the issuing bank only recourse to the applicant in the repayment of the loan line. Of course, the two, the case of Jiangsu is"External credit really"That is, Shenzhen"Baowai loans".[13]

2.3Some unpublished or not in the court proceedings of the case

I have handled a case, standby letter of credit established a Philippines bank to pay the demand for payment to beneficiary after China domestic counter guarantee banks claim counter guarantee the next item in the issuing bank was Chinese guarantee for payment, but because of the limitation of action in the Chinese may exceed, leading to the Philippines party finally not in the China court security bank. This case is a Chinese enterprises to Philippines contracted projects based on the letter of guarantee.[14]

The author participated in addition to a standby letter of credit disputes between Hongkong and mainland Chinese beneficiary, this is a claim case, but in the domestic bank guarantee of standby letter of credit is extended as the end. Standby letter of credit in this case is a guarantee of payment of the purchase of Chinese foreign cooperative enterprises issued by the power of the standby letter of credit.

3 Some problems in the credit business in China should pay attention to

3.1Whether from the previous case China court can be expected any risk?

First of all, from the case of view, the first visible is the risk of foreign banks after a domestic bank according to the instructions to the letter of standby letter of credit to foreign beneficiary, when the beneficiary to the issuing bank debit and overseas foreign bank according to the payment claim documents strictly complied with, turn to the counter guarantee bank claims China territory, risk the territory of counter guarantee bank unreasonable refusal, such as the Philippines bank case relates to the problem; the risk case and standby letter of credit in favour of Hongkong may also have been a Chinese unreasonably refuse to pay the issuing bank within the territory of china. But Jiangsu's case shows, standby letter of credit transactions in the issuing bank will usually pay payment standby credit, because the rights and obligations are fairly clear, no doubt.

The second risk is inside the bank customers will open a standby letter of credit applicants to apply for a court injunction against risk, such as the case of Hefei trial court that Indonesia's case, although issued the injunction is probably not justified.

Thirdly, when the documents presented for example claim and claim documents are inconsistent, there is the issuing bank the documents discrepancies as risk grounds dishonored.

Fourthly, there is a risk that the article1.1Festival and the1.2Verse says the qualitative and applicable law of the risk of uncertainty.

Fifthly, a relatively large risk also worth noting is the basic contract caused by false and false contract documents of transaction risk. Because the basic contract on one hand the issuing bank may be false triggered by the case involved in disputes, on the other hand, standby letter of credit issuing bank within the territory of Chinese open will result in the risk of China court stopped.

3.2How to reduce these risks?

The previous chapter2.2Festival has said reducing method two aspects and measures of risk, namely the agreement does not apply Chinese court jurisdiction, China law does not apply to contract. In addition, also should take the following measures to reduce the risk of:

First of all, should also be careful selection of counter guarantee bank, parts of the counter guarantee bank is a very important consideration. Bank guarantee against some areas because and customer interest is very easy by be involved in litigation and joint on standby letter of credit issuing bank was dragged into the dispute.

Secondly.To understand the basis of transaction and the foundation of the details of the contract, especially the need to verify the details. China there are many so-called basic transaction is actually the transactions between associated enterprises or more is the so-called carry trades, in the current domestic enterprise funds tight situation, is to use credit cards or standby letter of credit to obtain financing, in order to alleviate the financial difficulties of domestic enterprises. This standby letter of credit transactions may not true trade background, or even just fictitious transaction documents and files, resulting in the underlying transaction is false or forged, these false transaction will eventually cause civil disputes and criminal responsibility, led to the financing banks and guarantee bank is involved in legal proceedings. In the examination of these transactions, banks must examine strictly in accordance with the bank's internal audit procedure and legal provisions, and keep all relevant documents, so that in the event of disputes, can fully prove the bank for trade and single false knowledge, keep the bank goodwill position, certainly can not take the initiative to participate in this type of transaction.

Third, terms and conditions set clear of the standby letter of credit. In the standby letter of credit is clear documentation requirements and demand conditions are necessary, but too complicated terms and conditions may lead to self bound foot. Therefore, a simple and practical claim documents and language especially standard text claims is necessary.

Fourth, pay attention to the foreign exchange management department of the standby letter of credit prior approval requirements. The administration of foreign exchange China remains of foreign financing guarantee the implementation of the examination and approval system. So before domestic banks China issue standby letters of credit required to confirm whether the issuing bank has received the prior approval of the administration of foreign exchange China.

3.3 Agreed arbitration clause and China Court on standby in the injunction

By adding a after the arbitration clause carefully designed to dispute the standby letter of credit is the future of arbitration is feasible in the standby letter of credit, of course, it is best to the arbitration clause design in addition to Chinese outside1958"New York Convention" States parties in arbitration, and then according to the provisions of the Convention to Chinese court for recognition and enforcement is the feasible approach. China domestic bank for such an international recognition and enforcement of arbitral awards should be respected and highly acceptable. Although the request the issuing bank within the territory of Chinese join and accept a foreign arbitration in such a standby letter of credit in terms of sometimes in the commercial negotiations may be reluctant to sometimes is very difficult.

In the standby letter of credit with a Chinese domestic arbitration institutions such as Chinese economic and Trade Arbitration Commission for arbitration clause is also a good choice, the key problem is legal and banking practices in the field of standby letter of credit in China arbitration arbitrators have in-depth understanding is not much.

In my more than fifteen years of lawyer occupation career, China court intervention in a preparation or have been on standby letters of credit disputes arbitration procedures of payment that is set case is never known. But I have seen at least two court cases on arbitration in the process of credit had been stopped or freezing of the letter of credit payment,[15] It must be pointed out that these two cases are rare, the court issued this ruling may be on the letter of credit system based on misconceptions. Because this situation is exactly what credit judicial practice of grassroots courts to prohibit and normative interpretation errors.

3.4Better rule standby application: "guarantee law",UCP600, ISP98OrURDG?

Should avoid application China "guarantee law". The key point is Chinese court does not have a complete the standby letter of credit and guarantee of the rule of law. The Supreme Court documents also confirmed this point. To avoid the standby letter of credit is China "guarantee law". Another reason is that the current "guarantee law" is designed to guarantee the design from the property, so the system and the guarantee law rules are designed from the property guarantee. The idea of a judge is completely in accordance with the secured from the property to think.

RecommendedUCP600. "Credit" promulgated judicial interpretation made China Court promulgated "on the ICC uniform customs and Practice for Documentary Credits" i.e.UCPFamiliar with. WhileUCPIt is applicable to the standby letter of credit transaction. The credit system is a series of basic principles such as the principle of independence, the principle of transaction documents, strict compliance principle are China familiar with and strictly abide by the court.

Can also be used "the international standby practices ("ISP98). Chinese courtISP98Other special standby letter of credit rules are not familiar with, the past China court never had a case is applicableISP98The. Anhui Hospital of Hefei demand guarantees in case of disputes, the Issuing Bank Indonesia is open to the standby letter of credit beneficiary of Indonesia is saidISP98But at present, the case is still in trial procedure. But should beISP98Jurisdiction and applicable law in terms of excluded.

Not recommended forURDG758Or other rules. In a standby letter of credit is recommended to avoidURDG758. Not only because of the rules on the guarantee rules, because the rules of jurisdiction and applicable law rules right may lead to the application Chinese method and Chinese court in the dispute exercise exclusive jurisdiction.

4 Conclusion: the standby letter of credit than demand guarantees a better payment certainty

According to the demand of the bank guarantee disputes court report we collected, there are many bond default court case. In these cases, there are many is about guarantee defaults, there are a considerable number of cases is about guarantee instrument case. A standby letter of credit and see the difference between the cable at the bank guarantee, already mentioned in the previous. Overall, compared to the amount of the guarantee dispute cases, the quantity of reserve credit dispute case on a lot less, this also from another level reflects the standby letter of credit, the guarantee instrument than guarantee the security tools in the legal certainty of payment is better.

In the financing of standby letter of credit transaction situation, if the financing guarantee measures for domestic banks to open the China standby letter of credit according to the customer request, if the standby letter of credit terms and conditions especially claims file design enough concise words, once the borrower default caused debit financing banks and to the issuing bank in the legal certainty can be expected. This point to the fact that different kinds and numbers from happening now in China court standby letter of credit disputes litigation cases that, species and quantity compared to guarantee dispute cases, standby letter of credit is the demand of bank guarantee better than see financing anti security measures.

I guess that the middle there may be two reasons: first is the practical operation from the bank, the banking sector will be more China standby letter of credit as the credit instead of letter of guarantee, so to honour obligations more clearly; the second is the standby letter of credit and to guarantee that Chinese of typical security guarantee method for less. The basic framework, resulting in China counter guarantee bank or to the issuing bank to honour a credit less payment or for injunction grounds and in accordance with.

 

 

(in this and related articles in the magazine published published in the author's blog, as the reader of trade and trade financing business and law and extended reading, please visit Jin Saibo Sina blog:Http://blog.sina.com.cn/jinsaibo)

 

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