Documentary credit law in China (Fr)
Kenneth WEISSBERG, Lawyer at the Court of Paris; with the support of Xing HU, Graduated from Xiamen University (China) and Paris X and Paris II Universities
"The life and blood of international commerce" (1) is the term used by English courts to characterize documentary credit.
Documentary credit can be defined as "the operation by which a banker, intervening on the order of a buyer for the financial settlement of a commercial transaction, most often international, promises to pay the seller against delivery of documents" (2).
According to Dean Jean Stoufflet, the documentary credit technique is "the greatest success of international trade in terms of banking mechanism" (3).
Other authors have called it "a true masterpiece of banking technique" (4).
Indeed, in international affairs, due to the geographic distance of the contracting parties who often do not know each other and it is difficult for them to trust the first operation.
The exporter is hesitant to undertake the manufacture or delivery of a product if he is not sure of being paid. For its part, the importer is reluctant to pay funds to the exporter before being sure that the shipment has been completed within the prescribed time.
Documentary credit, by involving the independent and solvent intermediaries that are the banks, therefore constitutes a means of payment which has the advantage of reconciling the divergent interests of the buyer and the seller.
The seller is guaranteed to receive against delivery of certain documents, the price due to him due to the delivery of the goods within the agreed time.
The buyer, on the other hand, will only have to pay for the goods ordered if it has actually been sent to him.
As such, it can be considered that documentary credit is an instrument of confidence based on the international banking system.
Thus the myriad of commercial transactions and the development of international exchanges make documentary credit one of the most important instruments of international trade.
Consequently, the monumental development of international trade in China is necessarily accompanied by the development of documentary credit, we can even say that in China the use of documentary credit is an essential operation for carrying out commercial transactions with foreign partners. .
In the international business community, documentary credit has been subject to regulations issued by the International Chamber of Commerce (ICC), an international private organization which has drawn up uniform rules applicable by traders coming from very economic and legal systems different. The effectiveness of these rules has been demonstrated in practice and sanctioned by case law. These “Uniform Customs and Practice for Documentary Credits” (RUU) were published for the first time in 19335. Regularly revised to follow and support developments in practice, their latest version the “RUU 600” replacing the previous version the RUU 500 dating from 1993 entered into force on July 1, 2007. The UCP as lex mercatoria therefore receives its full application in China since the parties' right to choose the rule of law applicable in international transactions involving is recognized the use of documentary credit.
On the other hand, at the national level, there were 4 years ago in China, as in many other countries, including France, no legal or regulatory provision governing documentary credit. Chinese state law which is intended to apply to supplement any gaps in the UCP is made up of the provisions contained in the Law on General Principles of Civil Law, the Law on Contracts, the Law of Sureties and the Law of Civil Procedure. However, since these provisions are generally very vague and are therefore open to interpretation by the judge, and the case law is not a real source of law in China, since 1995, disputes concerning documentary credits have been abundantly raised before the People's Court of China.
Until 2004, the Supreme Court of China has ruled on more than one hundred cases, not to mention hundreds of questions relating to documentary credits posed to the Supreme Court by lower courts. For example, the China Banking Regulatory Commission and commercial banks have also questioned the enforcement of court rulings on documentary credits, since legal explanations or regulations from the Supreme Court are one of the sources of most important rights in the Chinese legal system.
Having regard to these various questions raised in practice, particularly with regard to the law applicable to documentary credit, the criterion of document verification, fraud etc., the Supreme Court of China, after having made a global study and discussions with lawyers, practitioners, banks and CCI experts in China, drawing inspiration from the RUU500, adopted on October 24, 2005 the Rules of the Supreme Court on some questions concerning credit disputes documentary, which entered into force on January 1, 2006. Although the general provisions provided for in the aforementioned laws are still applicable, the Regulations provide judges and thus practitioners with more accuracy and precision in the event of diverging interpretations and also completes gaps under the UCP. However, this Regulation is not without faults, especially since the entry into force of RUU 600.
Concerning the field of application of the Rules of the Supreme Court on some questions concerning the litigation relating to the documentary credit, its first article provides that the Regulation applies to the litigation relating to the emission, the notification, the modification, the revocation , the negotiation and the lifting of the documentary credit. Here, the word "revocation" means the application of the Regulations to revocable documentary credits. The term revocable credit designates documentary credit which can be amended or canceled by the issuing bank at any time without the beneficiary's agreement or information6.
In practice, however, revocable credits have disappeared for several years. Drawing lessons from this development, the RUU 600 no longer refer to the concept of revocable credit. Developed under the influence of the RUU 500, the Regulations did not take into account this development, which on the other hand gives the issuing or confirming bank the possibility of making the irrevocability of their payment commitment subject to the conditions causes the very principle of this commitment. These so-called “soft clauses” would have the consequence of making revocable documentary credits and therefore considerably harm the beneficiary's interest. Indeed, only the irrevocable credit is a real guarantee for the beneficiary insofar as this type of credit constitutes a firm commitment of the issuing banker. The revocability of the documentary credit is contrary to the very principle of this guarantee, consequently it would be preferable for the Regulation to remove in its field of application the revocation of the documentary credit to be compatible with the RUU 600 and to really reflect commercial practice.
This article is limited to presenting two essential points of documentary credit provided for by the Regulations which cause in practice more problems, namely the verification of documents (I), and fraudulent documentary credit (II), as well as some reflections on these points with regard to the rules of RUU600.
I.- Verification of documents
Document verification is an essential mission of the banker in the context of a documentary credit. As Mr. Affaki notes, "in an operation which is marked by the separation between the underlying commercial contract and the banking intervention, the outcome of this intervention is exclusively a function of documents and not of the realization of facts which may be reflected there ”(7). It is an important and growing source of litigation in the practice of documentary credit. This situation obviously affected the safety of the technique. It appeared that more than 70 % of the first presentations were irregular. Most of the difficulties relate to issues of document compliance. It is therefore one of the objects of the Regulation to minimize the risk of rejection for irregularity of documents.
A.- The criterion of verification
Section 5 of the Regulations provides that the issuing bank is required to honor its commitment to documentary credit when the documents presented are apparently in conformity with the terms of the credit, and all documents are apparently compatible with each other. It appears that the criterion of document verification in China is the criterion of strict compliance of documents with the stipulations of documentary credit. It is obvious that the banker cannot know all the commercial uses and consequently the beneficiary cannot ask him to consider as conforming documents which are not strictly identical to the stipulations of the credit.
Thus a bank does not have to interpret the designation of a commodity, even when the terms used in documents separate from those of credit, for trade professionals strictly equivalent. In a judgment of the Guansu Court of Appeal on June 25, 2007, the Court supported the refusal of payment by the confirming bank, considering that the name of the goods "grapes" stipulating on the invoice does not conform to the name " dried currents ”appearing in the documentary credit, although in international trade it is almost the same goods. It should therefore be noted that the criterion of substantial conformity has not been retained by the Chinese People's Court, which is contrary to the case-law of certain countries and in particular of the United States. Consequently, article 5 of the Regulation limits the banker's obligation to a control of appearance of conforming presentation. This is a protective rule for the verifying banker who does not benefit the beneficiary.
Nevertheless, the principle of strict conformity has been greatly attenuated by the Regulation, which is also the trend in case law, since Article 6 paragraph 2 specifies that in the event that the apparent conformity of the documents with respect to the credit stipulations and the inter-documentary compatibility are not strictly satisfied, since there is no ambiguity or contradiction between them, the People's Court may consider that the documents are in conformity. Thus the Shanghai Court of Appeal overturned a decision dismissing the responsibility of an issuing bank vis-à-vis the beneficiary, describing it as a "purely formal" divergence which would not create ambiguity in the fact that on a document of transport, the names of the recipient of the goods and that to receive notification of the arrival of this goods, appeared in inappropriate boxes and do not correspond to the stipulation of documentary credit.
From this point of view, the Regulations try to maintain a balance between the interests of the banker and the beneficiary while preserving the principle of strict compliance of documents with the stipulations of the credit. However, provisions of the Regulations written in a very general way are susceptible to different interpretations, especially compared to RUU600 which provides detailed provisions by different types of documents. As a result, these provisions do not provide clear answers to assist the courts in deciding.
B.- Consequences of non-conformity of documents
The regularization of rejected documents is always possible as soon as the credit has not expired and the irregularities are liable to be corrected. On the other hand, when the regularization of documents is not possible, article 7 of the Regulations authorizes the issuing bank, in its sole discretion, to request the agreement of the originator to accept irregular documents.
However, the authorization to lift irregular documents given by originator does not oblige the issuing banker to pay the credit to the beneficiary. When the issuer has refused to lift irregular documents, the beneficiary's request for payment, which invokes the acceptance of the irregularities by the originator, must be rejected by the court.
This is contrary to French case law, since in a judgment of March 11, 2003, the Paris Court of Appeal decided that the bank was obliged to pay in circumstances where the originator, meanwhile declared in receivership , had agreed to the payment of irregular documents. However, it should be remembered that the bank has no obligation to request from the originator any possible lifting of irregular documents even if the latter, without being questioned by the bank, intends to accept the documents. The formality of the documentary credit authorizes the banker, whatever the position of the principal on the execution of the basic contract, to refuse to honor his commitment since the documents presented in support of the request are not strictly meet the specifications of the letter of credit 8.
Some Chinese lawyers consider however that this article, authorizing the banker to refuse irregular documents even with the agreement of the principal, for consequence of harming the interests of the principal and the beneficiary, and considerably increasing the cost international transactions, emphasizing the principle of the autonomy of documentary credit. This article does not take into account the purpose of the documentary credit, which is to ensure the payment of the commercial transaction whose good progress and good result, goal pursued by the parties, namely the originator and the beneficiary of the credit documentary.
II.- Documentary credit fraud
Fraud is the only exception that can hinder the free play of documentary credit mechanisms. In particular, it hinders the payment of documents which appear to be regular (9). Although the maxim fraus omnia corrumpit is generally accepted by all legal systems, in the area of documentary credit, the qualification of fraud and its taking into account are highly variable (10). Given the differences in fraud between the different legal systems, the RUU600 deliberately leaves the problem to national law.
On this issue, which creates as much difficulty as verifying documents in practice for both the banker and the Court, the Regulation therefore clarifies the classification of documentary credit fraud and its effect vis-à-vis the bankers, the donor and the beneficiary. However, this qualification is questionable, according to many lawyers and practitioners, because its scope considered too broad.
A.- The broad scope of the qualification of fraud
Article 8 provides that fraud is established when the beneficiary:
- counterfeits or falsifies documents or presents documents which it knew to be false from the outset;
- in bad faith does not deliver the goods or delivers the goods devoid of any value;
- presents false documents without any real transaction with the collusion of the principal or a third party;
- or by other frauds concerning documentary credit.
Under this article, it is interesting to note that by listing the cases of fraud, it does not give its definition or characteristics, which suggests that the article applies to all frauds. provided for in these four cases, contrary to American or French case law which requires that fraud be substantial or manifest.
This would widen the scope of the fraud exception principle and lead to even more refusal of payment by the banker who could easily invoke fraud, and consequently jeopardize the efficiency and speed of documentary credit. With regard to the first and third cases, that is to say the beneficiary forged or falsified documents or presenting documents which he knew to be false from the outset; and the beneficiary, with the collusion of the principal or a third party, presenting false documents without any real transaction, we can see that these are the most common frauds in practice, and which are relatively easy to establish.
However, what raises the most problem is indeed the second scenario in which the beneficiary in bad faith does not deliver the goods or delivers the goods devoid of any value. Here, the border between the poor performance of a commercial contract and fraud could raise assessment difficulties. A fortiori, the bad faith of the beneficiary is sometimes difficult to demonstrate. In a Tianjing Court of Appeal Judgment of November 28, 2006, the Court held the issuing bank responsible for the fraud in the circumstances where the seller issued the plant instead of a certain dry medicinal plant fresh medicinal which rotted during its transport from China to Korea, on the grounds that the fresh plant corresponded completely to the stipulation of the documentary credit which did not specify the state should be this plant.
It should however be noted that in this case, the seller's bad faith could have been established from the fact that the fresh plant has practically no medicinal effect and that the beneficiary should have anticipated the possible decay during the long transport.
As for the last paragraph, it groups together all the other frauds which were not provided for in the three cases, which leaves a wide margin of appreciation to the courts. It appears that the acts which could be qualified as fraud do not appear to be well delimited by the Regulation and consequently, the application of the exception principle of fraud often raises a lot of difficulties, the legal uncertainty remaining.
B.- The effect of fraud
Article 9 of the Regulation provides that the fraud provided for in Article 8 authorizes the bankers and the principal to request the Court to suspend the payment of the documentary credit. Thus, it deprives the beneficiary of his rights under the documentary credit and exonerates the responsibility of the realizing banker, whether it is an issuing, confirming, designated or negotiating bank.
Article 10 also specifies that once fraud has been noted by the Court, it must order the suspension or cessation of payment of the documentary credit, except in the following cases when:
- the bank designated in good faith carried out the documentary credit by executing the instruction of the issuing bank;
- the issuing bank or its bank designated in good faith has accepted the documents;
- the bank confirming in good faith has honored its commitment or
- the good faith negotiating bank negotiated the documentary credit.
It is therefore considered that the issuing or confirming banker is obliged to reimburse the intermediary bank authorized to carry out documentary credit if this bank has regularly carried out, before the discovery of the fraud, credit in the light of documents apparently complying with the stipulations of the credit documentary.
The fraud therefore opens a recourse to the banker who paid the documentary credit, even if the banker committed a fault in the verification of the documents and paid the documentary credit without any reserve since she did not discover fraud before payment and so was in good faith. However, what is very unfortunate is that the text does not provide for the cases of documentary credits payable in time where the intermediary bank had paid the beneficiary in advance compared to the date agreed for the realization of the documentary credit. It should therefore be added to this text that the banker who anticipates the realization of documentary credit does so at his own risk.
In the same vein, the originator will have to reimburse the issuing banker who has raised "false" documents when there was nothing to suspect their authenticity. The question arises as to when the originator avails himself of a fraud affecting the documents of a documentary credit in order to paralyze the payment by the bank: does the bank have an obligation to refuse the payment? As the Regulations do not give us an answer, the decisions of the courts are divided on this point.
The Rules of the Supreme Court on some questions concerning litigation relating to documentary credits undoubtedly provide the courts with more precision and certainty in ruling on disputes relating to documentary credits. However, it must be admitted that it is far from complete and that the UCP in its current version remains a very important source of law for Chinese courts, and important foreign case law also has a considerable influence.
(1) Harbottle RD (Mercantile) Ltd. V. National Westminster Bank Ltd., (1978) QB 146, (1977), 2 All. ER862.3 WLR752.
(2) Ch. Gavalda and J. Stoufflet, Banking law: Litec 2005, 6th ed., P. 403.
(3) J. Stoufflet, Documentary credit: Litec 1957.
(4) J.-P. Mattout, International banking law: Bank 2004, 3rd ed., P. 259.
(5) J. Stoufflet, The normative work of the International Chamber of Commerce in the banking field, in Studies offered to Berthold Goldman: Litec, 1987, p. 364 and s.
(6) RUU 500, art. 8
(7) G. Affaki, op. cit., n ° 139.
(8) G. Affaki and J. Stoufflet: Banque et Droit, 2004, n ° 95, P62, obs.
(9) Cass.com. March 4, 1953, S. 1954-1-121, Lescot note
(10) M. Vasseur, notes Cass.com. April 7, 1987, DS 1987, p399