Specifying the Compensation Liability of an Intermediary Bank for Its Fault
-- Safeguarding the Security of Letter of Credit Trading
——Qixia Lvyuan Fruits & Vegetables Co., Ltd. v. Beijing Branch of Bank of China Co., Ltd. (Retrial review case concerning dispute over transfer of a letter of credit)
On June 7, 2007, Beijing Branch of Bank of China Co., Ltd. (hereinafter referred to as “Beijing Branch”) received a transferable letter of credit (“L/C”) in the format of SWIFT forwarded by Dnieper Credit Bank (Ukraine). The L/C showed that the issuing bank was Lloyd Trade and Savings Commission located in the Republic of Slovakia, the applicant being Tata Lucca Co., Ltd. (Cyprus), the beneficiary being Bain & Company and the transferring bank and notifying bank being Beijing Branch. On the same day, Beijing Branch notified the beneficiary Bain & Company of the L/C and the latter filed an application with Beijing Branch for transferring the L/C with Lvyuan as the secondary beneficiary and designated Qixia Branch of Bank of China Co., Ltd. in Shandong Province (hereinafter referred to as “Qixia Branch”) as the notifying bank. On June 14, 2007, according to the instructions of Bain & Company, Beijing Branch transferred the L/C and forwarded the telegraph text of the L/C in the format of SWIFT. As indicated in the notification on transferring the L/C received by Lvyuan from Qixia Branch, the issuing bank was Dnieper Credit Bank (Ukraine). After submitting the relevant documents, Lvyuan did not receive the funds under the L/C. Upon consultation and inquiry, Lvyuan found that the issuer was Lloyd Trade and Savings Commission located in the Republic of Slovakia, which was not a bank. On the ground that the erroneous information in the L/C made Lvyuan believe that the L/C involved was issued by a bank and losses were caused consequently, Lvyuan filed a lawsuit with the Beijing Second Intermediate People’s Court and requested the Court to order that Beijing Branch should compensate Lvyuan CNY 6,790,344 and the losses of interest and tax rebate of CNY 246,606.06.
In the trial of first instance, Beijing Second Intermediate People’s Court held that Beijing Branch was at fault in erroneously describing the title of the issuer. This was one reason for Lvyuan's losses but not the only reason. Therefore, Beijing Second Intermediate People’s Court delivered a judgment that Beijing Branch should assume the liability of compensation for Lvyuan's loss of CNY 3,400,000 and the interest loss calculated at the interest rate on deposits over the same period, and rejected other claims of Lvyuan. Both Lvyuan and Beijing Branch refused to accept the judgment of first instance and appealed to Beijing High Court. In the trial of second instance, Beijing High Court held that Beijing Branch had a gross negligence in erroneously describing the title of the issuer. There was no evidence in this case to prove that Lvyuan had actual knowledge of the title of the issuer before receipt of the notification on transferring the L/C. There was causation between Lvyuan's losses and Beijing Branch's erroneous notification in forwarding the L/C and Beijing Branch should assume the compensation liability according to the law. Therefore, Beijing Higher People’s Court delivered a judgment that Beijing Branch should pay Lvyuan CNY 6,749,265.85 and the interest loss calculated at the interest rate on deposits over the same period, and other claims of Lvyuan should be rejected. Lvyuan refused to accept the judgment of second instance and filed an application for retrial with the Supreme People's Court. It claimed that since it did not receive the payment for goods, it had to borrow a loan from a bank and there was loss of loan interest; in the meantime, there was loss of export tax rebate. It claimed that the judgment of second instance that did not support the aforesaid two claims for loss compensation lacked evidence in fact-finding and was erroneous in the application of law.
Upon review, the Supreme People's Court held that The Uniform Customs and Practice for Documentary Credits, ICC Publication No. 500 applicable as prescribed in the L/C involved did not specify which type of liability the intermediary bank should assume for its erroneous notification. It was not inappropriate for the original judgment to apply the provisions of Paragraph 2 of Article 106 of the General Principles of the Civil Law of the People's Republic of China on the tort of fault. The fault of Beijing Branch made Lvyuan erroneously believe that the issuer was a bank with good credit, misled the latter into accepting the L/C and consequently suffering from losses. Therefore, Beijing Branch should assume the corresponding compensation liability according to the degree of fault. L/C was document trading independent from the underlying contract. Therefore, the scope of liability assumed by the party to the L/C that violated its obligations should only be limited to direct losses under the L/C. The loss of loan interest and the loss of export tax rebate claimed by Lvyuan were expenses that could be avoided and and interest that could be obtained if the underlying contract could be fulfilled. They were not direct loss under the L/C and were not within the scope of losses that should be predicted by the party to the L/C. There was no causation between the aforesaid losses and the fault of the party to the L/C that violated its obligations. Therefore, these losses should not be compensated in the L/C relationship. The Supreme People's Court delivered a ruling to dismiss Lvyuan's application for retrial.
This case is about a dispute over transfer of a L/C between countries along the “Belt and Road”. Under the circumstance where the Chinese law and the international practice did not specify the scope of liabilities of the intermediary bank for its erroneous notification and there was no contractual relationship between the intermediary bank and the beneficiary, according to the principle of compensation for tort damage, the people's court determined that the intermediary bank had the obligation of accurate notification. Moreover, if the intermediary bank violated such obligation, it should assume the corresponding liability of damages. The aforesaid practice of the people's court undoubtedly has great significance in safeguarding the trading order and security based on L/C. First, the ruling of this case indicated that all relevant parties to the L/C only handled documents other than goods, services, or other activities related to such documents. Therefore, the sole legal basis for judging loss caused by the fault of the intermediary bank must be theL/C itself and the loss could not be calculated based on the underlying contract. This clearly revealed the connotation of the principle of independence of the L/C. Second, when specifying the obligation of the bank, the ruling of this case adopted the principle of forseeability and determined that the scope of damages may not exceed the unpaid amount under the L/C and interest, which has guaranteed the certainty of the scope of compensation liability. The ruling of this case has great significance in unifying the adjudication rules and filling in the legal lacuna, providing strong reference value for similar cases concerning dispute over L/C during the building of the “Belt and Road” in the future.