Simply sort out the legal relationship between the parties under the letter of credit

Author | Zhiheng (Jinan) Law Firm, Attorney Jing Fengjuan

Common settlement methods in international trade include telegraphic transfer (T/T), letter of credit (L/C), D/P, D/A, etc. Among them, letter of credit is a more complex but less risky payment method, which has no cause. As long as the information on the documents submitted by the beneficiary of the letter of credit to the issuing bank is consistent, and all comply with the terms and conditions on the letter of credit and the relevant applicable provisions of the Uniform Customs and Practice for Documentary Credits (UCP600), that is, "the documents are consistent and the documents are consistent", then the issuing bank shall pay the beneficiary the payment under the letter of credit.

Specifically, the applicant will first apply to the issuing bank for the issuance of a letter of credit based on international trade contracts and other information, and the value, quantity, delivery date, shipping marks and other requirements of the goods will be used as the terms of the letter of credit. After the issuing bank approves the approval, the letter of credit will be sent to the advising bank where the beneficiary is located.

The advising bank will pass a copy of the letter of credit and related documents to the beneficiary. The beneficiary of the letter of credit arranges the production, shipment of the goods, and then submits the documents to the issuing bank. The delivery documents under each letter of credit are different, generally including commercial invoices, packing lists, bills of lading, certificates of origin, and some products may also require quality inspection certificates.

The issuing bank will review the documents upon receipt, and if there is agreement between the documents and the letter of credit, the issuing bank will pay the beneficiary. In this case, the title to the goods documents belongs to the issuing bank, not the issuing applicant. Normally, the issuing applicant will pay the issuing bank for the redemption when the goods are about to arrive at the port of destination.

The relationship between the beneficiary of the letter of credit and the applicant is a contract for the international sale of goods

After the two parties reach an agreement on the price, quantity, delivery time, and breach of contract of the goods, an international contract for the sale of goods is formed. The terms of the letter of credit generally include the contents of the contract for the international sale of goods. It is easiest for the applicant of the letter of credit to raise quality objections after the goods arrive at the destination, and then have disputes with the beneficiary of the letter of credit.

If the applicant raises a quality objection, the beneficiary and the applicant need to choose a third-party testing agency recognized by both parties to evaluate and test the quality of the goods, so that the test results issued can be recognized by both parties. If the report issued by the third-party testing agency really contains quality problems, it needs to be objectively determined whether the quality problem is a minor defect of the goods or a fundamental breach of contract, and then decide whether the beneficiary compensates for the loss or the two parties rescind the contract.

The relationship between the beneficiary of a letter of credit and the issuing bank is a foreign-related letter of credit

Disputes between the two are mostly caused by the issuing bank finding discrepancies after receiving the documents under the letter of credit, refusing to pay the payment because the beneficiary believes that there is fraud in the letter of credit, or the issuing bank refusing to pay the payment for the goods without reason after receiving the delivery documents. When the beneficiary actually delivers the goods, various events beyond expectations may occur, such as overloading and short shipping, delay in shipping schedule, etc., resulting in discrepancies on the beneficiary's delivery documents.

At this point, the issuing bank can decide to refuse payment based on the non-compliance of the documents, and sometimes it will contact the applicant to inquire whether to accept the non-compliance. At the same time, the beneficiary can also contact the applicant, that is, the buyer of the goods, to inform the non-compliance, and let the issuing bank take the initiative to communicate with the issuing bank to accept the non-compliance. The issuing bank will generally fulfill the payment obligation after obtaining sufficient payment assurance from the issuing applicant.

However, deductions for discrepancies based on the requirements of the credit are unavoidable. In some cases, the issuing bank will insist that certain discrepancies constitute credit fraud and then refuse to pay the beneficiary. For example, the beneficiary did not ship before the latest shipping date required by the credit due to carrier reasons.

In order to make the documents comply with the terms of the letter of credit, the beneficiary sometimes asks the carrier to reverse the bill of lading. In this case, whether the reverse bill of lading necessarily constitutes a letter of credit fraud needs to be determined by specific analysis of whether the beneficiary has subjective bad faith and whether the interests of the applicant have suffered substantial damage.

However, some issuing banks directly determine that the beneficiary is fraudulent and refuse to pay the beneficiary, which causes disputes. In addition, in some international sales of goods, there will be banks that are not creditworthy and will refuse to perform payment obligations even if they receive matching delivery documents. Therefore, when the beneficiary of the letter of credit agrees with the applicant to use the letter of credit for settlement, try to clearly require a reputable international bank as the letter of credit issuing bank.

The beneficiary of the letter of credit and the advising bank will form a legal relationship of service contract with notice and modification of the letter of credit as the main content

The advising bank is only obliged to review the letter of credit and amend the apparent authenticity, and to accurately notify the beneficiary of the letter of credit received.

The beneficiary of the letter of credit and the presenting bank will form a service contract legal relationship with the main content of reviewing the bill and mailing the document on behalf of the bank

The presenting bank will review the documents submitted by the beneficiary with reference to the current Uniform Customs and Practice for Documentary Credits (UCP600) of the International Chamber of Commerce, and then send the documents to the issuing bank in accordance with the transaction management. If the presenting bank transmits documents as required by the letter of credit, it will not be responsible for the consequences of delays, loss, mutilation or other errors in the delivery of documents.

The beneficiary cannot claim the liability of the submitting bank for compensation under the above circumstances.

It should be noted that the Uniform Customs and Practice for Documentary Credits (UCP600) does not require the advising bank and the presenting bank to review the credit risk of the issuing bank and alert the beneficiary. If the issuing bank refuses to pay the payment without justifiable reasons after the beneficiary presents the document to the issuing bank, the beneficiary cannot hold the advising bank and the presenting bank jointly and severally liable.

When a Chinese exporter is the beneficiary of a letter of credit, the place of issuance of the documents under the letter of credit is in China, and the beneficiary performs the ** under the letter of credit is also in China. The location of the beneficiary should be the place of performance of the letter of credit. The law of the country that has the closest connection with the letter of credit is Chinese law. Therefore, in this case, the court of our country generally believes that the law of the People's Republic of China can be applied to the disputes over the letter of credit.

Lawyer Profile

Jing Fengjuan lawyer

Zhiheng (Jinan) Law Firm full-time lawyer

National Registered Auctioneer

Senior corporate compliance officer

Areas of expertise:

Contract disputes, private lending disputes and other cases

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