Disclaimer: All the comments provided by the author are his personal views, and do not reflect or represent any entity’s views.

Factual Summary

1. To pay for the purchase of Sarawak round logs, on 1999 Oct. 26, Ultimate Buyer requested BOC to issue a usance L/C of USD1.4 million in favor of Jialing Xin Tuo International Ltd.(Jialing). The L/C was available with any bank by negotiation.(the “master L/C”). Among the required documents was a “Certificate of Origin in triplicate issued by Chamber of Commerce in Malaysia.”.

2. On 1999 Oct. 29, Jialing arranged for its bank, Rabobank to issue a back-to-back L/C in the amount of US$1.315 million, plus or minus 5%, payable at sight in favor of the Ultimate Seller of the logs in Malaysia. Rabobank informed BOC accordingly that the LC had been assigned to it as continuing security for the payment of all amounts due from Jialing to it and that the assignment included all the beneficiary’s ‘rights, title, benefit, and interest both present and future with regard to the said credit.

3. On 1999 Nov. 12, after receipt of the documents presented by the Ultimate Seller, Rabobank presented documents for USD1401495.82 to BOC stating in its covering letter that it had negotiated the documents. In fact, as per Jialing’s instructions that Rabobank should negotiate their documents under the Master L/C and pay their import documents under the back-to-back LC for US$1,316,404.63, Rabobank paid the said amount directly to the Ultimate Seller’s bank on 1999 Nov. 19, seven calendar days after it presented documents to BOC.

4. The payment details should be illuminated here for later comments: “Plaintiff Bank also sent Beneficiary/Intermediate Seller a “Credit Advice” and a “Debit Advice”. The Credit Advice read: Our ref EBP91714 for USDl,401,495.42,Your ref No: INV990018 under Bank of China, Zhejiang Branch L/C No.LC9101152/99 We have today negotiated the above bill for USD1,316,404.63 and T/T remitted to Shin Yang Trading Sdn. Bhd. Malaysia as per your instruction. The Debit Advice read: In accordance with details shown below, we have today debited your Advance Account – Import Loan with us : Amount of Advance Account : USDl,316.404.63 Value Date : 19 Nov 99 Interest Rate : 7.625%”[2]

5. On the fifth banking day following presentation, BOC sent Rabobank a refusal notice which claimed a discrepancy: “Certificate of Origin was not issued by the Chamber of Commerce of Malaysia as per L/C requirements.” and further stated “hold the docs at your risks and responsibilities. Pls advise us your disposal instructions, if any. However, we will release the docs to applicant against payment/acceptance without further notice to you unless your advice to the contrary received by us prior to the payment/acceptance ... ”

6. It is necessary to describe the certificate of origin(C/O) presented in detail for later comments: “it was an exporter’s declaration ‘signed and chopped by the Shipper’ on which had been superimposed two chops of the Chinese Chamber of Commerce, Miri, Sarawak (one of which contains within it handwritten initials or signature), and, more important, a chop signed by the Executive Secretary, The Chinese Chamber of Commerce, Miri, Sarawak, Malaysia which bears the legend: ‘Certified to the best of our knowledge and belief to be correct and without prejudice.’”[3]

7. On 1999 Nov. 22, a China court order was granted prohibiting BOC from effecting payment under the master L/C on the grounds that Jialing was involved in fraud in another separate transaction unrelated to the master L/C.

8. Rabobank brought an action in Hong Kong against Issuer for reimbursement as a negotiation bank which should be immune from such injunction, claiming that it had been wrongfully refused.

Court Judgments

The High Court of the Hong Kong Special Administrative Region Court of First Instance: Even though Issuer’s dishonor of presented documents was in error and it was further precluded from claiming a discrepancy due to a faulty notice of dishonor under UCP500 Article 14(d), Issuer had no obligation to Plaintiff Bank because the bank did not truly “negotiate” (purchase for value) the documents from Beneficiary, and therefore had no standing to pursue its claim on the LC. Furthermore, the proper law to be applied to the LC was the law of the place of performance, as identified by the location of Issuer, and since a Chinese court had issued an injunction

barring payment of the LC based on a separate suit, to force payment in the present court would be illegal.[4]

Comments

1. Which party is the issuer of C/O. The credit clearly required that the issuer of the certificate of origin(C/O) must be Chamber of Commerce in Malaysia(CCM). So the C/O presented should appear on its face to be issued by CCM. According to ISBP Paragraph 25, the C/O may appear to be issued by CCM by use of the letterhead of CCM, or, if there is no such letterhead, by being completed and/or signed by or on behalf of CCM. There are four issues that merit further analyses.

The first one is, what conduct may be deemed as “completing” or “signing” a document. UCP500 Article 20(b) stipulates many ways of “signing”: a document may be signed by handwriting, by facsimile signature, by perforated signature, by stamp, by symbol, or by any other mechanical or electronic method of authentication. Thus, we have a clear interpretation of “how to sign a document” under UCP500 basing on international standard documentary credit practice. But what is “complete a document”? UCP or international standard documentary credit practice is silent on it. Instead, it should be given its ordinary and natural meaning. So “complete a document” may be interpreted as “finish making, doing or producing a document”,[5] which means to make, do or produce the last part of the document. For an instance, if a document bears Copany A’s signature with the date of signing as 2006.Apr. 1, and Company B’s signature with the date of signing as 2006.Apr.2, we may say that it is Company B who completes the document. Additionally, apart from signing or a clear statement such as “A has completed the document” , it is hard to find other ways that may signify completing a document and who completes a document. It seems to me that in practice always when the document bears CCM’s signature and/or stamp the document may appear to be completed by CCM. Therefore, the conduct of “completing a document” usually includes the conduct of “signing a document”. In this connection, it seems to be a weakness of such wording of ISBP Paragraph 25 by saying: “ if there is no such letterhead, by being completed and/or signed by or on behalf of …(emphasis added by the author) ” Whatever the wording is, the usual practical way of identifying the issuer is to see who signs the document when the document bears no letterhead.

The second point that should be drawn attention to is, in the above mentioned example, as Company B appears to complete the document, it may be deemed as the issuer of the document, however, as Company A appears to sign the document, it may also be deemed as the issuer of the document, or when two named persons’ or companies’ signature appear in a document, both of them may be deemed as the issuer of the document.

The third one is the issue of “agent”. According to ISBP Paragraph 25, a document without letterhead appears to have been completed and/or signed by A on behalf of B will be deemed as issued by B. This rule complies with the law of agency that “recognizes that the agent has power to affect the principal’s legal position by acts which, though performed by the agent, are to be treated in certain respects as if they were acts of the principal”.[6] We may see such rule applied in a ICC official opinion[7] in which ICC concluded that “if a credit calls for a certificate issued by a shipping company, banks will accept a certificate issued by the shipping company, or, unless expressly stipulated to the contrary in the credit, by the shipping company’s agent and that in the particular case presented the document was acceptable as an agent has the power to bind his principle.” In a case of England, [8] the court held the same position. In the case, the credit required a Certificate of Inspection issued and signed by the credit applicant at his discretion on the goods quality and quantity in good order before shipment, whilst the certificates of inspection presented were signed by Grundkotter (the beneficiary) on behalf of Montrod (the applicant). Both the issuing bank and the court held that the certificates of inspection presented were facially compliant. However, according to some ICC opinions, this rule seems not to apply to all cases. In case 226 of ICC Publication No.489, a credit required a certificate of inspection signed by the applicant. The certificate of inspection presented was signed by a representative of the applicant. ICC Group of Experts concluded that “the credit indicated that the certificate of inspection should be issued by Mr. Credit Applicant. Therefore, the inspection certificate should have been issued by Mr. Credit Applicant and not his representative.”[9] In another ICC official opinion[10], credit called for an Inspection Report by Lloyd's agent, consequently, a certificate of appointment was issued by Lloyd's agents detailing the name of the surveyors who were entrusted with the inspection of the goods. In addition to this document, a report was attached issued by the nominated surveyors. ICC concluded that the report issued by surveyors acting for Lloyd's agent would not be acceptable under the terms of the credit. From the above contradictory opinions and judgment, it seems too controversial to settle the issue of “agent”. However, in the point of view of the author, unless the credit expressly excludes agent’s acts or for the purpose of doing an act which the principal is required, by or pursuant to any statute, to do in person, the principal may issue or sign a document by means of an agent. It may seem that the principal issues or signs a document in a special way or method by authorizing another person or entity to act on behalf of him basing on both agency law and international standard banking practice which may be incorporated into the credit as an implied terms or deemed as evidence of trade usage.

The fourth one is the issue of “letterhead”. This issue gives rise to two problems:1) A document with a letterhead of Company A is signed by Company B. Who is deemed to issue the document? 2) A document with a letterhead of Company A is signed by Company A indicating Company A is agent for Company B. Who is deemed to issue the document? Regarding the first one, according to ISBP Paragraph 25 and ICC official opinion R291[11], Company A should be deemed as the issuer. Especially in ICC official opinion R448,[12] ICC concluded that as to certificate of origin, a document issued on the letterhead of the beneficiary or any other party but within the body there is evidence of completion and/or signature of a chamber of commerce would not be seen to comply with a requirement of "issued" by a chamber of commerce. However, we have to take note of an exception in insurance documents: ISBP para. 184 stipulates insurance documents must appear on their face to have been issued and signed by insurance companies or underwriters or their agents. But, para. 185 stipulates that an insurance document is acceptable if issued on an insurance broker's stationery provided the insurance document has been signed by the insurance company or its agent or by the underwriter or its agent. It followed that an insurance document issued on the letterhead of broker but signed by insurance company can be deemed to be issued by insurance company. This obviously contradicts the para.25 which says the named person or entity indicated in a document’s letterhead or stationery will be deemed as the issuer regardless of who signs the document. In the eyes of Mr. T.O.Lee, the world famous documentary credit expert, “this again is to reflect the current practice in the insurance trade.”[13] Here the specific trade usage prevails the general principle.

As to the second problem, although according to ISBP para. 25 Company A is deemed as the issuer, but with an indication of “as agent on behalf of Company B”, his acts bind and entitle his principal Company B, so it follows that Company B is the issuer who is legally responsible for the contents of the document.

In light of the above analyses, it follows that the following C/O are acceptable:

1) C/O bearing the letterhead of CCM;

2) C/O bearing the letterhead of a party as agent for or on behalf of CCM;

3) C/O bearing no letterhead but the written/facsimile signature of CCM;

4) C/O bearing no letterhead but the stamp/chop of CCM;

5) C/O bearing no letterhead but the symbol of CCM;

6) C/O bearing no letterhead but other mechanical or electronic method of authentication of CCM;

7) C/O bearing no letterhead but the written/facsimile signature of a party as agent for or on behalf of CCM;

8) C/O bearing no letterhead but the stamp/chop of a party as agent for or on behalf of CCM;

9) C/O bearing no letterhead but the symbol of a party as agent for or on behalf of CCM;

10) C/O bearing no letterhead but other mechanical or electronic method of authentication of a party as agent for or on behalf of CCM.

Therefore, in Rabobank case, whether the C/O presented bore a letterhead of the exporter or was on the exporter’s stationery is of significance, particularly according to ISBP para. 25. But from the summarized facts, the C/O should be a neutral document without letterhead. However, the court seemed not to attach importance upon this point. The court also seemed not to try to find whether the form and method of certification adopted by the Chamber of Commerce was the trade usage that should bind both parties of the credit. Although the court’s decision was right, its reasoning was not clearly demonstrated and not be easily followed. In particular, the court indicated that it was not “greatly influenced by the ICC’s ultimate stance on the point. In light of the diametrically opposite positions as were taken, this was not the ICC’s finest hour ... .” However, in the author’s view, the ICC just holds a proper position to submit its opinion regarding whether there is trade usage and international standard banking practice involved in this particular matter, which should be heavily relied upon.

2. Malpractice of inserting a conditional statement of disposition BOC’s refusal notice contained a conditional statement of disposition: “the documents will be released .. to applicant against payment/acceptance without further notice to you unless your advice to the contrary received by us prior to the payment/acceptance.” which is a fatal weakness. Such statement introduces an ambiguity or inherent contradiction of whether or not the documents are held at the disposal of the presenter. In Credit Industriel et Commercial v. China Merchants Bank[14], a similar rejection notice was issued by the issuing bank, and the court judged that the wording indicating the issuer’s intention to release documents without the presenter’s prior approval did not communicate that the issuer held the documents at the presenter’s disposal Thus, such a notice of refusal failed to constitute a valid rejection.

However, in practice it costs a lot of time and energy when the issuing bank contacts the presenter who consequently seeks the beneficiary’s approval to release the documents, and such approval, if any , will be reverted from the beneficiary, then to the presenter, and finally to the issuing bank again. Thus, the beneficiary or presenter will be complaint with the delayed payment, the applicant unpleasant with the delayed delivery and increased costs, and the issuing bank afraid of the damage to his relationship with the applicant. Moreover, in the international trade world the beneficiary is usually willing to release the discrepant documents to the applicant against payment. In order to circumvent such an awkward situation. To settle such problem, many issuing banks elect to move the similar clause into the L/C as an express term to modify UCP500 Article 14(d)(ii) subject to UCP500 Article 1. If the beneficiary rejects to accept such a clause, he may request to amend the L/C. If not, his presentation of the documents means he has agreed to follow the stipulations of the L/C including the above mentioned clause. In ICC R430[15], ICC concluded that when letter of credit incorporating the above mentioned wording or similar effectively creates a new rule for handling the refusal of documents, the presentation of documents by the beneficiary would constitute his agreement to the condition expressed in the credit, and the effect of any such clause included within a credit would be subject to local law. In ICC Unpublished Official Opinion TA.559, ICC also concluded that it is ok for the issuing bank to incorporate such similar wording in the L/C as an amendment of UCP500 article 14(d)(ii) and it is for the beneficiary, nominated bank and/or confirming bank to decide whether or not the terms of a letter of credit are acceptable and whether they will act thereunder. Therefore, transferring such clause to the credit in advance may be an effective alternative for bankers.

In the Rabobank case, it is interesting to see BOC’s argument that “certain banks were or may have been in the habit of doing into the status of a concluded ‘banking practice’ which has the effect of cutting across the specific requirement of Article 14(d)(ii) as laid down within the current UCP 500.” Although this argument was dismissed by the court correctly, it merits further comments here.

In the first place, it is rather difficult to prove the act of inserting such conditional statement of disposition is banking practice or trade usage. According to Chitty on Contracts[16], “to be binding however, the usage must be notorious, cetain, and reasonable, and not contrary to law.” In a ICC Arbitral Award[17], the following rule was demonstrated: “There are three elements in the UCC formulation of usage of trade: (1) regularity of observance, (2) in a place, vocation or trade, (3) justifying the expectation that the usage will be observed in the transaction. For a trade usage to be used in a case there is a fourth requirement: proof of the usage as a fact.” In a case[18], the judge analysed that “Universality, as a requirement of custom, raises not a question of law but a question of fact. There must be proof in the first place that the custom is generally accepted by those who habitually do business in the trade or market concerned. Moreover, the custom must be so generally known that an outsider who makes reasonable enquiries could not fail to be made aware of it. The size of the market or the extent of the trade affected is neither here nor there. It does not matter that the custom alleged in this case applies only to part of the shipping trade within the State of Singapore, so long as the part can be ascertained with certainty, as it can here, as the carriage of goods by sea between Sarawak and Singapore. A good and established custom. . . obtains the force of a law, and is, in effect, the common law within that place to which it extends.” According to Article 1.9 of UNITROIT Principles of International Commercial Contract(2004), if the parties have not agreed to a usage they may be nevertheless bound by it if it "is widely known to and regularly observed in international trade by parties in the particular trade concerned except where the application of such a usage would be unreasonable. This principle is also similar to Article 9 paragraph 2 of United Nations Convention on Contracts for the International Sale of Goods which requires in addition that parties `knew or ought to have known' the usage. However, BOC’s expert testimony seemed to fail to persuade the court of considering BOC’s such act was customary banking practice regularly observed and widely known to by the parties under the credit. However, ironically, such practice is prescribed in the latest UCP500 Revision draft which may be deemed to reflect the international standard banking practice to great extent.

Secondly, even though such act is deemed as “banking practice or trade usage”, as the court held that it cannot override the contractual incorporation within this credit of the provisions of the UCP 500. As Benjamin’s Sale of Goods[19] observed from a case[20] that “when the U.C.P. are incorporated in a letter of credit they become express terms of the facility. They are to be read together with, and be given the same prominence as, the express terms set out in the documents.”, the customary banking practice or trade usage cannot prevail the express terms, and on the contrary, will be superseded by the express terms.[21]

Another point that merits attention is, quite different from UCP500 article 14(e), ISP98 Rule 5.07 stipulates that “failure to give notice of the disposition of documents in the notice of dishonor does not preclude the issuer from asserting any defense otherwise available to it against honor.” “The Official Commentary On the ISP” explains that “the documents presented under a standby are typically not inherently valuable and are considered the property of the presenter in the event of dishonor, a recital of the willingness of the examiner to act at the presenter’s instruction is unimportant and unnecessary. … in addition, in view of the fact that many notices under standbys are telephonic, invoking the preclusion rule for a failure to give a recital regarding disposition would lead to unnecessary disputes.”[22] In C.I. Union de Bananeros de Uruba, S.A. v. Citibank, N.A.[23], the court also considered that the dishonored documents under a standby had no inherent value, i.e. because they consisted primarily of mere copies, and did not include, e.g., an original negotiable bill of lading which controlled the disposition of merchandise.

3. Whether it is beyond reasonable time In the case，the court noted that this second notice “came too late” since it came on the 7th banking day, the outer limit of time permitted by UCP500.[24] It is commonly understood that UCP500 article 13(d)(i) just stipulates an unreasonable time, that is, it is absolutely unreasonable if a bank examines and refuses documents for more than seven banking days following the day of receipt of the documents. As to within how many days it is reasonable, there is no clear stipulation in sub-article 14(d)(i). The time needed for checking documents depends upon a variety of factors including the number, length and complexity of documents required by the credit, work load and the speed and procedures of handling documents in a bank, numerous possible but uncertain delays and interruptions during the period of handling the documents, the nature of the discrepancies (whether the discrepancies are easy or difficult to be identified), the experience of the particular document examiner, whether there is a delay due to seeking applicant’s waiver of the documents, etc. So there is no general application rule to judge whether the refusal time is reasonable, instead it depends upon specific circumstances. Therefore, in the author’s opinion, this issue is improper to be submitted for summary judgment as it depends upon detailed evidences and cross examination. [25]

Another factor should be taken into consideration is whether the issuing bank has sought the applicant’s waiver before sending its refusal notice, because the “Statement of Practice” on reasonable time established by IFSA in the USA addresses that “If an issuing bank decides to approach the applicant for a waiver of the discrepancies identified by the bank, then the time for giving notice to the presenter runs to the close of the seventh banking day after presentation, unless the applicant sooner communicates its decision not to waive or the bank sooner decides to dishonor notwithstanding the applicant's waiver.” According to such statement, seven banking days will be automatic reasonable time for issuing bank to refuse due to its waiting for the applicant’s reaction. However, as such statement is not incorporated into the credit, it should prove to reflect trade usages or standard banking practice of which the parties knew or ought to have known and which are widely known to in international trade and are therefore applicable and binding to the parties under the credit as implied terms that may supplement to interprete the relative express credit terms and UCP articles. Unfortunately, in the recent US case, [26] the court considered such statement of practice as only local custom and practice and did not try to consider the issue of “reasonable time” together with UCP and such statement of practice on the whole. The court’s such ruling was nonetheless challenged by IIBLP and James G. Barnes, Baker & McKenzie.[27]

In the author’s view, regarding the issue of “reasonable time”, there is no inconsistency between UCP500 and such statement, as UCP500 is silent on what is a reasonable time and the statement of practice just gives its considered interpretation by the US LC community. So between UCP500 and the statement of practice on reasonable time by IFSA, there does not exist any problem that UCP500 or the statement prevails the other. Instead, the problem lies in whether the statement can prove successfully as trade usage or customary banking practice that may be interpreted as implied terms of the credit. If not, we should scrutinize whether such statement of practice makes a good sense, or establishes sufficient reasonableness. In the comments on the above case, IIBLP enlightened the reasonableness in such statement of practice that “unlike the timing factors which affect the examination of documents and listing of discrepancies, the time it may take the applicant to respond is not based on factors that are known to the bank, so the only non-arbitrary limitation the bank may impose on the applicant is to respond within the seven day ceiling set (arbitrarily) in the UCP. The test remains reasonable time not to exceed seven banking days, but the factors bearing on reasonableness are not based on what the bank can do but on what is a reasonable amount of time for the bank to allow the applicant to take in deciding whether to waive discrepancies.” [28] James G. Barnes, Baker & McKenzie also commented that “Since the bank will not know how much time the applicant may reasonably take in the circumstances applicable to it (the applicant is not simply examining documents on their face) and is not in control of the timing factors (like who at the applicant's business needs to decide to pay when payment is not required), the bank has no basis for limiting its approach to the applicant to, say, three business days.”[29]

Therefore, when the credit lacks agreement both in express terms and implied terms for determination of the time of refusal, the “reasonableness test” is inevitable and requires a flexible interpretation and application in individual cases, which cause complexity and uncertainty in banking practice. In light of this crux, the latest UCP500 Revision draft is specifically designed to avoid such “reasonableness test” by removing the wording “reasonable time” and instead stipulating a fixed period of time as 5 banking days for bankers’ examination and refusal of documents.

Whether the ruling in Rabobank case touched on the issue of “reasonable time” in a proper way or not, some banks’ “usual” practice of sending refusal notice on the very seventh banking day in any circumstance is risky as it will be challenged rigorously by “reasonableness test” in courtroom. So under UCP500, it is prudent and sound banking practice of sending refusal notice within “safe harbor days”, namely, three banking days according to IFSA’s “statement of practice” and ISP98 sub-rule 5.01(a)(i).

4. Whether Rabobank qualifies as a negotiating bank To provide a right answer, we need to know what is a negotiating bank. A negotiating bank is a bank who is authorized by the issuing bank to negotiate and has negotiated, and then is immune to the fraud exception rule. But what is “negotiate”? According to UCP500, negotiation means the giving of value for draft(s) and/or document(s) by the bank authorized to do so. But what is “giving value”? In ICC’s policy statement, Position Paper No.2, “giving value” is further explained as either “making immediate payment” (eg. by cash, by cheque, by remittance through a Clearing System or by credit to an account) or “undertaking an obligation to make payment” (other than giving a deferred payment undertaking or accepting a draft). However, “undertaking an obligation to make payment” is confusing as there is no further ICC official explanation regarding it. However, Gary Collyer, the technical adviser of ICC Banking Commission, in his handout “Review of ICC Opinion” on 2001 Beijing L/C Law and Practice Seminar, explained that “Negotiation is described as the giving of value which encompasses a specific payment to the beneficiary or some form of written statement/undertaking the future payment of that transaction.” In the latest UCP500 Revision Draft, the concept is further revised as “agreeing to advance funds to the beneficiary”. So it seems Position Paper No.2, latest UCP revision draft and Gary’s relevant explanation seem to bring a “promise” concept into the definition of “negotiation”. This is similar to the concept of “consideration” under contract law and that of “value” under bills of exchange law(such as UCC Article 3 and Bills of Exchange Act 1882). However, there is one point that seems to be ignored, that is, the promise which may constitute “giving value”/negotiation should have been performed. The principle, an executory promise is not value, under bills of exchange law, should be also applicable in L/C law. If an executory promise can constitute a negotiation, then is the later payment to perform the promise also a negotiation? If fraud is discovered and an injunction is granted to prevent the issuing bank from payment after such promise but before the performance of such promise, is there an exception for the bona fide holder under LC Law? In my opinion, there is not, because on the one hand the nominated bank has not already effected payment, the law should fairly enjoin the payment at due date so as to avoid losses due to fraud, and on the other hand the nominated bank’s promise can not get better position than the issuing bank's (that is, the L/C) which can not be performed due to the injunction.

Further, without consequent payment, the nominated bank who merely agrees or promises to pay cannot be reimbursed by the issuing bank. [30] Therefore, a mere promise without the following payment performing such promise against compliant documents should not be defined as "negotiation".

Another point should be mentioned is, the performance of the promise must be effected at any time before the issuing bank honors or reimburses (emphasis added by the author), because the nature of “negotiation” is a method of finance.[31] So as long as the payment is effected before maturity, it does not matter whether the payment is made upon presentation of documents or at a future date. In this connection, the “immediate payment” negotiation described in Position Paper No.2 may refer to the former, and the “undertaking an obligation to make payment” may refer to the latter.

However, the author holds the view that why not giving up the concept of “promise”, as what the beneficiary wants under a negotiation L/C is just to obtain prepayment. To void the confusion brought by the wording “undertaking an obligation to make payment”, it is good to define negotiation as “the purchase by the nominated bank of drafts (drawn on a bank other than the nominated bank) and/or documents, by advancing funds to the beneficiary before the issuing bank honors, if the Credit is available by negotiation.”

When we know what negotiation actually means under UCP in light of the above analyses, we may turn now to view the court’s relevant judgment in details. The court held that Rabobank never truly negotiated the documents mainly basing on the following reasons:

1) Rabobank did not credit proceeds to Jialing’s account, instead directly to

the negotiating bank’s account under the back-to-back L/C.

2) Such proceeds was debited from the beneficiary(under Master L/C)’s Advance Account(Import Loan).

3) Such payment was to discharge Rabobank’s own payment obligation under the back-to-back L/C, not to negotiate the export documents under the Master L/C.

However, with due respect, the author does not agree on such ruling as the judge seemed to attach too much importance to the matter of bookkeeping instead of the fact whether Rabobank really used its own proceeds to prepay the export documents or the import documents for the beneficiary. In fact, Rabobank’s payment to the back-to-back L/C beneficiary’s bank is just at the request of Jialing, the Master L/C beneficiary, and will be repaid by the reimbursement due under the Master L/C. In this respect, it is good commercial sense to consider the payment to the order of Jialing same as to Jialing itself. Lawyer Mr. King Tak Fung provides valuable comments that “in many jurisdictions, it is an acceptable practice that the negotiation proceeds be utilized without first crediting to the beneficiary’s account so long as the authorized signer of the beneficiary is duly authorized to give such direct payment instructions to the negotiating bank.”[32] Moreover, the Rabobank’s credit advice[33] demonstrated its intention to negotiate the export documents. Although meanwhile Rabobank’s debit notice[34] indicated that the proceeds was debited from the beneficiary’s account, it is also Rabobank’s money that may be lent to Jialing as margin when issuing the back-to-back L/C or as payment for Jialing under the back-to-back L/C when determining the import documents compliant. Whatever it is, it is the Rabobank’s payment to or to the order of Jialing. Additionally, in the usual back-to-back L/C practice, the back-to-back L/C is issued mainly relying on the reimbursement under the master L/C, so to issue such L/C(it is an irrevocably undertaking of a payment obligation) and honor accordingly may be deemed as “for giving value” due to the risks occurred basing on the “detriment” idea under contract law.

Nevertheless, whether or not the court had given a proper interpretation of negotiation, should Rabobank credit the proceeds to Jialing’s settling account indicating as negotiation funds and then debit such account to pay under the back-to-back L/C, it may be ruled to be a qualified negotiating bank who may win the case. Therefore, the banks should scrutinize their internal documentations and operation procedures to see whether the former is carefully drafted without legal weaknesses and the latter in line with international standard banking practice so as to satisfy the relevant legal and banking requirements.

5. Applicable law This case also touched on the issue of applicable law, nonetheless, with a judgment that may invoke arguments. In practice, parties to a L/C rarely stipulate a choice of law, other than a reference to the UCP which unfortunately does not deal with conflict of law issues. Hence, in this case, the choice of law issue appeared regarding what is the proper law of the contractual relationship between the issuing bank and the correspondent/nominated bank that did not confirm the L/C. The general rule involved is that the applicable law should be that of the site having the closest and most real connection with the transaction，and the “ closest and most real connection” is interpreted always as the law governing where the party performing the central obligation has its residence or establishment. [35] As such, the most important factor to determine the proper law, is the locus solutionis (the place of performance). In the L/C transactions, the locus solutionis in respect of characteristic performance coincides with the locus solutionis in respect of payment.[36] Basing on such prevailing principle, it is accepted by majority of the scholars that the contractual relationship between the issuing bank and a correspondent bank was generally accepted to have its closest connection to the law of the country in which the correspondent bank at which payment was to be made was situated.[37] This principle can be also seen from a large number of cases.[38] The advantage of having the law of the correspondent bank as the applicable law, is the consistency with the economic function of letters of credit and the central obligation principle because payment is effected by the correspondent (confirming or advising) bank to the beneficiary in his own country.[39]

However, one point that merits much attention is, the correspondent bank here should be a nominated bank for sight payment, deferred payment, negotiation or acceptance regardless of whether it confirms the L/C or not, instead of a mere advising bank or a third bank, because such advising bank has no substantial role in the L/C operation but simply to advise the L/C and such a third bank pays without the issuing bank’s authorization, when they pay at their own risk usually feeling comfortable as an assignee, their position will be the same as that of the beneficiary, standing in the shoes of the beneficiary. It then follows that the proper law of the relationship between such banks and the issuing bank is same as that of the relationship between the beneficiary and the issuing bank. [40] In light of the above lines, it is more watertight to conclude that the place of payment may be interpreted as the place of availability of the L/C for determining the proper law of the relationship between the issuing bank and the correspondent bank.

However, with due respect, the author finds the court’s relevant judgment on the choice of law seemed to deviate from the above-introduced prevailing principle that has been supported by strong case laws and authoritative literatures. The court seemed to apply different rule under free negotiation L/C from that applied under restricted negotiation L/C, relying heavily on the position demonstrated in the authoritative L/C literature, Documentary Credit.[41] The lawyer, King Tak Fung also observed such deviation and considered it unfortunate that the authors of Documentary Credit did not cite any authorities on this important issue to support their view.[42]

In light of the above analyses, the author hold the view that, in the Rabobank case, as the L/C allowed free negotiation with an expiry place in the beneficiary’s country, the proper law governing the relationship between BOC and Rabobank should be the law of the place at which the documents were presented to Rabobank for negotiation, i.e., the Hong Kong law.

REFERENCES

[1] Cooperatieve Centrale Raiffeisen-Boerenleenbank BA. (Rabobank) v. Bank of China 848 HKCU 1 (High Ct. 2004) [Hong Kong] summarized by Annual Survey of Letter of Credit Law & Practice 2005, edited by James E. Byrne, Christopher S. Byrnes, IIBLP, P269-276.

[2] Annual Survey of Letter of Credit Law & Practice 2005, edited by James E. Byrne, Christopher S. Byrnes, IIBLP, P271

[3] Annual Survey of Letter of Credit Law & Practice 2005, edited by James E. Byrne, Christopher S. Byrnes, IIBLP, P272.

[4] Annual Survey of Letter of Credit Law & Practice 2005, edited by James E. Byrne, Christopher S. Byrnes, IIBLP, P270.

[5] According to Collins Cobuild English Dictionary, HarperCollins,2000; The New Oxford Dictionary of English, Oxford University Press,1998.

[6] F.M.B. Reynolds: Bowstead and Reynolds on Agency(16th Edition), Sweet & Maxwell,1996, P3.

[7] Opinions of the ICC Banking Commission 1987-1988, edited by Bernard Wheble, ICC Publication No.469,1989, P22,R157.

[8] MONTROD LIMITED v. GRUNDKOTTER FLEISCHVERTRIEBS GMBH AND STANDARD CHARTERED BANK([2001] EWCA Civ 1954)

[9] Case Studies on Documentary Credits, ICC Publication No.489, edited by Jan Dekker,1991, P68.

[10] ICC Banking Commission Collected Opinions 1995-2001, edited by Gary Collyer & Ron Katz, ICC Publication No.632,2002, P269 R450.

[11] Ibid., P371-372.

[12] Ibid, P266-267

[13] For more discussion, see Mr. T.O.Lee’s informative website http://www.tolee.com/html/query_inconsistent_unreasonable_opin.htm

[14] [2002] EWHC 973 (Q.B. Comm. 2002) [England]

[15] ICC Banking Commission Collected Opinions 1995-2001, edited by Gary Collyer & Ron Katz, ICC Publication No.632,2002, P216-217.

[16] Chitty on Contracts(28th Edition)Sweet & Maxwell Limited 1999,P652

[17] ICC Award No. 6955, YCA 1999, at 107, 124 et seq.

[18] Kum and Another v. Wah Tat Bank Ltd. (1971)1 Lloyd’s Rep. 445

[19] Benjamin’s Sale of Goods(5fth Edition) Chapter 23-009, P1667.

[20] FORESTAL MIMOSA LTD. v. ORIENTAL CREDIT LTD.（1986）VOL 1 Lloyd’s Rep. 329

[21] Chitty on Contracts(28th Edition)Sweet & Maxwell Limited 1999,P654: “A custom or usage can only be incorporated into a contract if there is nothing in the express or necessarily implied terms of the contract to prevent such inclusion, and it can only be incorporated if it is not inconsistent with the tenor of the contract as a whole.” UCC 1-205: “ ……(4) The express terms of an agreement and an applicable course of dealing or usage of trade shall be construed wherever reasonable as consistent with each other; but when such construction is unreasonable express terms control both course of dealing and usage of trade and course of dealing controls usage of trade.” Official Commentary on UNITROIT Principles of International Commercial Contract(2004): “……The reason for this is that they bind the parties as implied terms of the contract as a whole or of single statements or other conduct on the part of one of the parties. As such, they are superseded by any express term stipulated by the parties……”

[22] Professor James E. Byrne: The Official Commentary on the International Standby Practices IIBLP 1998, P222.

[23] (Index No. 602314/1999 (N.Y. Sup. Ct., 12 April 2000) [U.S.A.])

[24] Annual Survey of Letter of Credit Law & Practice 2005, edited by James E. Byrne, Christopher S. Byrnes, IIBLP, P272.

[25] May refer to Hellenic Republic v. Standard Chartered Bank, 631 NYS2d 320(App. Div. 1995): Issues of whether issuer examined documents within a reasonable time and whether it gave notice of defects without delay should not be resolved on a motion for summary judgment.

[26] DBJJJ, Inc. v. National City Bank (19 Cal.Rptr.3d 904 (Cal. Ct. App. 2004) [U.S.A.])

[27] For detailed discussion, see Annual Survey of Letter of Credit Law & Practice 2005, edited by James E. Byrne, Christopher S. Byrnes, IIBLP, P283-285.

[28] Ibid., P284.

[29] Ibid., P285.

[30] May see Banco Santander v. Banque Paribas(Case No: QBCMF 1999/0673/A3): (Whether one is considering a "deferred payment undertaking", "accepted drafts" or "negotiation", reimbursement would only arise on payment although the word payment does not appear in Article 14 a i. Reimburse means repay a person who has expended money, and it is simply meaningless to suggest that there can be an obligation to reimburse a "deferred payment undertaking".)

[31] Please see the ICC’s comments on UCP500 revision draft 2. Also see: Banco Santander v. Banque Paribas(Case No: 1998 folio No. 794); Banque Nationale de Paris v. Credit Agricole Indosuez 2000-4 SLR 254 (27 June 2000) [Singapore]( Unlike in the situation of a deferred payment credit, a negotiating bank is permitted to make payment to the beneficiary without waiting for maturity of the credit. It buys over the documents on presentation and that is the essence of negotiation.); King Tak Fung:Leading Court Cases on Letters of Credit,ICC Pub. No.658 2004,P69.

[32] King Tak Fung:Leading Court Cases on Letters of Credit,ICC Pub. No.658 2004,P70.

[33] For the details of the credit advice, see P2, para.4.

[34] For the details of the debit advice, see P2, para.4.

[35] For the detailed discussion as to Quebec and Common Law Rules, American Rules, European Rules(Rome Conventions), English Rules, French Rules, German Rules, Austrian Rules, Swiss Rules, see Audi Y. Gozlan: International Letters of Credit: Resolving Conflict of Law Disputes, Kluwer Law International,1999, P16-35.

[36] However, IIBLP commented on Sinotani Pacific Pte. Ltd. v Agricultural Bank of China, 1999-4 SLR 34(CA July 15,1999) that “By selecting "the place of payment" as the focus of its choice of law analysis in a straight credit, the court adds confusion to an already convoluted opinion.”, instead, it stressed “the value and necessity of adoption of the UN Convention on Independent Guarantees and Stand-by Letters of Credit”, of which Art.22 stipulates “Failing a choice of law in accordance with article 21, the undertaking is governed by the law of the State where the guarantor/issuer has that place of business at which the undertaking was issued.”

[37] Dicey and Morris: Conflict of Laws P1425; Richard King of Inner Temple: Gutteridge & Megrah’s Law of Bankers’ Commercial Credits(8th Edition), 2001, P300( …In this event it is submitted that the presumption must be that matters connected with the performance by the banker of his contract under a commercial credit are to be regulated by the law prevailing at the place of performance, ie. the law of the territory in which the seller’s draft is presented to the bank for acceptance or payment.), P304(…In normal circumstances this will be the law of the place at which the credit is available for negotiation of documents and payment….); Schmitthoff: Schmitthoff’s Export Trade(10th Edition), London Sweet & Maxwell 2000, P190; Schmitthoff: Conflict of Law Relating to Letters of Credit: an English Perspective in Select Essays on International

Trade Law: (Performance will be effected at the site of the correspondent bank (ie payment), therefore the law of the country of the correspondent bank will be the law of the place of performance of the contract between the banks. According to private international law of contract in general, there is a strong presumption in favour of the lex (loci) solutionis, the law of the place where performance must be effected.) Ventris: Bankers’ Documentary Credits P76-77(if a party approaches another to render a service to him, then the former must be expected to abide by the laws of the latter.); Paul Todd: Bills of Lading and Bankers’ Documentary Credit,LLP London Hongkong 1998, P293; Sarna: Letters of Credit P214(the Canadian legal position on the law applicable to the relationship between the issuing and correspondent (“nominated”) bank is in conformity with the English rules in this regard, in spite of the Rome Convention of course not being applicable in Canada.); Purvis and Darvas: Commercial Letters of Credit, P153(Australian legal position is: the law applicable to the relationship between the issuing and correspondent bank is governed by the law of the country where the “seller’s draft is to be paid”); Oelofse: Documentary Letters of Credit, P526(American case law seems to lean in favour of applying the law of the place of payment as far as the relationship between the correspondent and issuing bank is concerned.)

[38] Bank of Baroda v Vysya Bank Ltd [1994] 2 Lloyd’s Rep 87( This case concerned a dispute

between an issuing and a confirming bank); European & AsianBank AG v Punjab & Sind Bank [1981] 2 Lloyd’s Rep 651, and confirmed [1982] 2 Lloyd’s Rep 356; Banco de Vizcaya v. First National Bank of Chicago, 514 F. Supp. 1286(1981); Bank of Cochin v. Manufacturers’ Hanover Trust, 612 F. Supp. 1533(D.C.N.Y. 1985)(The relationship in dispute was that between the issuing bank and the confirming bank); Bank of Credit & Commerce Hong kong Ltd. v. Sonali Bank, 1995 1 Lloyd’s Rep. 227(the court held that the relationship between the issuing bank and the confirming bank was governed by Hong Kong law, i.e., the law of the confirming bank’s site.); Cantrade Privatbank AG Zurich v. Bangkok Bank Public Company Ltd., 681 N.Y.S.2d 21 (1998) [U.S.A.]

[39] Eesa Allie Fredericks: The Conflict of Laws in Respect of Documentary Letters of Credit in International Trade Financing, a dissertation for degree of master of law in Rand Afrikaans University 2001

[40] May see the case: Sinotani Pacific Pte. Ltd. v Agricultural Bank of China, 1999-4 SLR 34(CA July 15,1999), in which a third bank, Kredietbank NV’s Singapore Branch, was involved in discounting, but was not taken into consideration in the choice of law analysis by the court.

[41] Raymond Jack, Ali Malek, David Quest: Documentary Credit(3rd Edition), Butterworths Longdon,2001, P406-407, para 13.34(a): “…it follows that in this respect an advising bank nominated by the credit to negotiate is in a different position to that of a bank which negotiates under a freely negotiable credit: the former’s relations with the issuing bank to which it must present the documents which it has negotiated are governed by the law of the place where it is situated; the latter’s relations with the bank to which it must present the documents are governed by the law of the place where that bank is situated….”

[42] King Tak Fung: Leading Court Cases on Letters of Credit,ICC Pub. No.658 2004,P200.

BIBLIOGRAPHY

1. Annual Survey of Letter of Credit Law & Practice 2005, edited by James E. Byrne, Christopher S. Byrnes, IIBLP.

2. Collins Cobuild English Dictionary, HarperCollins,2000.

3. The New Oxford Dictionary of English, Oxford University Press,1998.

4. F.M.B. Reynolds: Bowstead and Reynolds on Agency(16th Edition), Sweet & Maxwell,1996.

5. Opinions of the ICC Banking Commission 1987-1988, edited by Bernard Wheble, ICC Publication No.469,1989.

6. Case Studies on Documentary Credits, ICC Publication No.489, edited by Jan Dekker,1991.

7. ICC Banking Commission Collected Opinions 1995-2001, edited by Gary Collyer & Ron Katz, ICC Publication No.632,2002

8. Chitty on Contracts(28th Edition), Sweet & Maxwell Limited 1999.

9. Benjamin’s Sale of Goods(5fth Edition), Sweet & Maxwell, 1997.

10. Professor James E. Byrne: The Official Commentary on the International Standby Practices IIBLP 1998

11. King Tak Fung:Leading Court Cases on Letters of Credit,ICC Pub. No.658 2004.

12. Audi Y. Gozlan: International Letters of Credit: Resolving Conflict of Law Disputes, Kluwer Law International,1999.

13. Dicey and Morris: Conflict of Laws, volume 2 Sweet & Maxwell London 2000

14. Richard King of Inner Temple: Gutteridge & Megrah’s Law of Bankers’ Commercial Credits(8th Edition), 2001.

15. Leo D’arcy, Carole Murray, Barbara Cleave: Schmitthoff’s Export Trade(10th Edition), London Sweet & Maxwell 2000.

16. Schmitthoff: Conflict of Law Relating to Letters of Credit: an English Perspective in Select Essays on International Trade Law, Chia Jui Chang ed., Dordrecht, Niihoff, 1988.

17. Ventris F M Bankers’ Documentary Credits Lloyd’s of London Press Ltd

1983.

18. Paul Todd: Bills of Lading and Bankers’ Documentary Credit,LLP London Hongkong 1998

19. Purvis R N and Darvas R The Law and Practice of Commercial Letters of

Credit, Shipping Documents and Termination of Disputes in International

Trade Butterworths Sydney-Melbourne-Brisbane 1975.

20. Oelofse A N The Law of Documentary Letters of Credit in Comparative

Perspective Interlegal Pretoria 1997.

21. Eesa Allie Fredericks: The Conflict of Laws in Respect of Documentary Letters of Credit in International Trade Financing, a dissertation for degree of master of law in Rand Afrikaans University 2001.

22. Raymond Jack, Ali Malek, David Quest: Documentary Credit(3rd Edition), Butterworths Longdon,2001.