"All the interview answers here provided by Jia hao are only his personal views and understandings, do not reflect or represent any entity's positions or interpretations."

Q1: Jia, may I first of all congratulate you for being part of this work. Can you start by explaining what topics are covered by the rules?

Thanks, Kim. Although I was not involved in drafting the work, as far as I know, the preliminary strategy and survey for such work was started early in 2001 by the No. 4 Civil Division, Supreme People’s Court(SPC). Basing on a large sum of case summaries and reviews including China’s and other countries’, consulting experienced L/C lawyers, and discussing with seasoned bankers on many controversial issues, SPC worked out the first draft. Then basing on feedbacks and comments from banks, judges, lawyers, scholars and traders, four revision drafts had been made out successively. And also with reviews and revisions, the final and the current draft were drawn up. The Provisions as judicial interpretations to provide guidance to China’s courts in dealing with L/C related cases mainly cover: application of UCP, L/C’s independence rule, documents examination standard under L/C, fraud rule including the specific judicial procedures involved, issuing bank’s rights and obligations under L/C, guarantee involved in L/C and so on. Among them, in my view, the issue of fraud rule merits more concerns as it is one of the most sophisticated and comprehensive in the world.

Q2: Why was there a need for such rules?

With more and more LC related cases appeared in China since 1995(it is reported that up to the end of 2004, the LC related cases amount to over 100), in order to meet the demands for further economic reform and developments as well as the challenges brought by China’s accession to WTO achieved in 2001, the Provisions are formulated for the purporse of bring more guidance and certainty into China’s adjudication on L/C related cases. It is a big step for China’s L/C law to be in line with the international LC law and practice.

Q3: In the introduction there is a specific reference to the UCP – and article 2 even goes as far as to say that the UCP will apply even if it has not been agreed between the parties. Why is it necessary to state this?

Yes, both Article 2 and Article 6 stipulate the automatic application of UCP unless otherwise stipulated in the credit. It is glad to say that China is in the lead in this respect like Bolivia, Egypt, Honduras and Hungary all of which stipulate automatic application of UCP in their statutes.

As we all know, as UCP is not law with no legal force, so when it is not incorporated into the credit, whether it is still applicable and binding parties of the credit are uncertain and arguable. The positions of scholars, experts and judges are unfortunately not unanimous. The prevailing theory is, only when UCP proves to be evidence of trade usage that is widely known and regularly observed in international trade, it may be deemed as implied terms binding the parties of the credit. However, whether UCP reflects trade usage as descriptive or as prescriptive is also arguable and need to prove as questions of fact. So it is a good solution to endow UCP legal force by statutes. In this way, UCP becomes a normative custom that may promote more consistency and faciliate China’s international trade better.

From another perspective, this express stipulation follows with and observes the Article 142 of the General Principles of Civil Law of China that provides: ”......International practice may be applied on matters for which neither the law of the People’s Republic of China nor any international treaty concluded or acceded to by the People’s Republic of China has any provisions.”

By the way, one point should be mentioned that the Provisions do not indicate which revision of UCP shall be applied. In my view, the prevailing revision of UCP shall be applicable.

Additionally, it seems to be a flaw in Article 2: when a standby credit is silent on the applciable rules, according to this article, is UCP500 or ISP98 or both of them applicable to it?

Q4: Article 8 and 9 touches on a delicate topic; namely the one on “injunctions” or “an order to suspend payments”. Why are those two articles necessary?

These two articles reflect the well-established “fraud exception rule” in the L/C law world. The purpose of such fraud exception rule is clear and simple: to stop fraudsters from getting benefits by use of letters of credit. However, courts should not interfere with the payment of a letter of credit merely because there is a dispute over the underlying contract. So the standard of L/C fraud should be established clearly.

Article 8 listed some specific circumstances where the fraud exception rule will be applied. With careful views, it is not difficult to see the article is basing on the experience of other jurisdictions particularly that of revised Uniform Commercial Code Article 5(UCC5) and the position taken in the UNCITRAL Convention on Independent Guarantees and standby letters of credit (UNCITRAL Convention), to list the types of conduct that should be taken as constituting L/C frauds that may invoke fraud exception rule as UNCITRAL Convention does, reflecting a general standard of fraud similar to material fraud as embodied in UCC5.

However, in my view, the standard of fraud provided in this article is less strict than that of UCC5. In UCC5 , s 5-109, the standard is that “ a required document is forged or materially fraudulent, or honour of the presentation would facilitate a material fraud by the beneficiary on the issuer or applicant”, and the official comment on it further explains that “the fraudulent aspect of a document should be material to a purchaser of that document or that the fraudulent act be significant to the participants in the underlying transaction”. But the first circumstance listed in article 8 (incorporation of false contents in any of presented documents) seems not to meet the requirement. For example, packing list presented shows 100 cartons of cargoes, but actually shipped 90 cartons. Such false contents may be deemed as L/C fraud subject to fraud exception rule according to this article, but may not constitute material fraud under UCC5 according to the illuminated example in its official comment. Such loose standard reflected in circumstance 1 will lead to great chance for the abuse of the fraud rule that will seriously impair the independence rule of L/C. So in my opinion, this circumstance should be properly interpreted bearing mind of material fraud standard, instead of with strictly literal interpretation.

Another two points should be mentioned are:

1) Not like UCC5 and UNCITRAL Convention, Article 8 expressly mentions the identity of the fraudulent party, and consequently will be interpreted that besides the fraudulent nature of the documents presented, the identity of the fraudster should also be considered, that is, the fraud rule in the Provisions is only to prevent the beneficiary or the beneficiary in conspiracy with the applicant or any third party(ies) from defrauding under L/C. This position is similar to that of United Kingdom, which was fully reflected in the arguable case of United City Merchants that the fraud perpetrated by third party other than the beneficiary and without knowledge of the beneficiary can not invoke fraud exception rule.

2) Like UCC5 and UNCITRAL Convention, Article 8 does not mention that the beneficiary’s intention to defraud should be proven.

Additionally, with the three specific types of fraud listed, circumstance 4 under Article 8 shows a blanket clause in order to cover other unexpected circumstances, making the stipulation watertight.

Finally, attention may be drawn to the means of judicial relief provided in Article 9, 10, 11 and 12. These articles provide that only the people’s courts can issue injunction of the proceeds under L/C, whilst the issuing bank can not exercise his own right of dishonour due to the listed L/C fraud in Article 8. This stipulation seems not to comply with international practice such as those reflected in L/C case law, UCC5, and UNCITRAL Convention.

Q5: Coming back to “an order to suspend payments”; in article 8 four fraud scenarios has been listed. Who are to prove the fraud – and how strong must the “evidence” be?

In my opinion, the answer for the first part of the question lies in Article 9 that provides that “The applicant, issuing bank or any other stakeholder(s) may apply for an order to suspend payment under an L/C from a competent People's Court when it discovers any of the circumstances stipulated in Article 8 and determines that the payment will cause irreparable damage to its interests.” And regarding how strong the evidence must be, seems to be a case-by-case issue which also depends on judge’s own judgment to some extent, but the principle may be perceived in Article 8 that provides a specific list which may not be exhaustive but is an impressive and encouraging way that may bring the fraud rule into play well and provide courts with more helpful guidance.

Q6: As far as I can see it follows from article 10 that a nominated bank that has paid is protected in case of fraud. Do you know if that will also apply for Deferred Payment credits – i.e. if the nominated bank has prepaid the beneficiary before maturity – and fraud is determined between time of payment and time of maturity?

A good observation, Kim. Yes, the problem exists. Article 10 reflecting the immunzaion rule of fraud exception seems to adopt the position taken by the English case of Banco Santander SA v. Bayfern Ltd. ,because “according to issuing bank’s instructions” is emphasized in sub-article 1), notwithstanding, the contrary US position makes good commercial sence giving more consideration of the prevailing market practice regarding the discount of the obligation under a deferred payment credit. But this problem may be settled with the adoption of UCP600 in the near future as the latest UCP Revision draft was designed to stipulate that “A nomination by an issuing bank for a nominated bank to accept a draft or incur a deferred payment undertaking includes an authorization for the nominated bank to prepay or purchase a draft accepted or a deferred payment undertaking incurred by the nominated bank.”

Q7: There are also a couple of articles dealing with document examination (article 6 and 7). Somehow they seem to mirror e.g. UCP 500 article 13. Since I assume that the intention is to support the UCP, one may ask why it is necessary to say something which is already in the UCP. Can you elaborate on this?

It is Article 6 that governs the issue of the standard for documents examination. This article in the first place emphasizes application of UCP and other relevant standards as officially promulgated by ICC(in my understanding, including ISBP, ICC official opinions, ICC DOCDEX opinions and the like), when determining the compliance of the documents presented. This is consistent with the principle embodied in Article 2. Further, the second paragraph of this article provides a similar stipulation to ISBP para. 24 in order to avoid the abuse of the strict compliance rule. In a word, this article particularly enlightens and emphasizes that the strict compliance rule should be adhered to, but the “mirror image rule” should be against.

Q8: Will these rules have any affect on the Chinese perception of other ICC documents e.g. Opinions and DOCDEX decisions?

Yes, of course. As Article 6 provides, other relevant standards as formulated by the International Chamber of Commerce will be applicable.

Q9: Do you think that China will benefit from those rules – and if yes in what way?

Absolutely benefit a lot. They undoubtedly stands as the most detailed provisions so far in China with respect to adjudication of L/C related cases, bringing more clarity and certainty into China’s LC litigations. It is also a symbol of China’s L/C law being perfected, and may seem to be a result of China’s fast growing economy in the world.

Q10: Have you had any reactions from other countries regarding their views on those rules?

In one article regarding the promulgation of the Provisions by Mrs. Zhang Yanling, Vice Chairman of ICC Banking Commission and Vice president of BOC, she mentioned that Mr. Georges Affaki, Vice Chairman of ICC Banking Commission gave congratulations to the promulgation of the Provisions and suggested she give a lecture in ICC spring meeting for introducing and helping members understand such Provisions. She said that she felt pleased to take the suggestion for it was undoubtedly a golden chance for others to know more of China’s LC law, LC practice and LC matters through understanding the Provisions. Do you think it to be an exciting reaction?

Q11: Are the banks and L/C users in China familiar with the rules? Are the banks in China promoting them?

I think there should be a process with time, efforts and trainings of familiarizing with the Provisions and then properly observing the Provisions.

Q12: Do you know if the rules have been tried in a court room in China yet?

I don’t know, but I believe it will definitely be.


Thank you so much