Letters of credit (L/C) worldwide are governed by the International Chamber of Commerce’s (ICC’s) rules for documentary credits; the current version is UCP 600. (UCP refers to the Uniform Customs and Practice for Documentary Credits.) An estimated 15 per cent of world trade, or around US$1 trillion per year, is financed based on L/Cs. The ICC rules have introduced a measure of uniformity into a field that was once fractured by individual country rules, which rendered L/C practice different from one country to another.
So when western companies deal with the People’s Republic of China (PRC) and have to enforce the UCP rules in the PRC courts, how might they fare?
Article 8 provides that L/C fraud is deemed to be established if any one of the following situations occurs:
- The beneficiary forges documents or submits documents with false contents.
- The beneficiary fails to deliver goods maliciously or delivers goods with no value (which we do not believe should be interpreted us meaning of zero value but, rather, so inferior as to render them useless to the buyer).
- The beneficiary and the applicant or other third party conspire to present fraudulent documents without a genuine underlying transaction.
- Other circumstances that involve L/C fraud.
The applicant, the issuing bank or another interested party might, if any circumstance occurs as stipulated in Article 8 of these provisions and if the circumstance might cause irreparable damages to it, apply to the People’s Court (which has jurisdiction over the matter) for suspending payment under the L/C.
Once the People’s Court confirms the existence of L/C fraud, it must suspend or terminate the payment obligation under the L/C unless any one of the following situations exists:
- The party nominated or authorised by the issuing bank has made payment in good faith pursuant to the instruction of the issuing bank.
- The issuing bank or the party nominated or authorised by the issuing bank has accepted (and purchased) the draft under the L/C in good faith.
- The confirming bank has performed its payment obligation in good faith.
To protect any innocent third party that wasn’t a party to, and had no knowledge of, the L/C fraud, Article 10 expressly sets out the situations in which the court will not order suspension or termination of L/C payments. Typical situations include those in which payments have been duly effected by the issuing bank, paying bank, confirming bank and/or nominated bank (including the negotiating bank) in good faith.
So China is now one of the few countries with specific legislation in relation to L/Cs and is therefore, to some extent, a safer place to rely on L/Cs than before. There is always room for improvement but trade with China, at least as far as L/Cs are concerned, is a reasonably well-regulated environment.