Abstract:
When the beneficiary under the letter of credit presented the original marine paper bill of lading as per the documents required by the letter of credit to the issuing bank, the letter of credit terms also require the cargo carrier to first issue an electronic release bill of lading that records the true date of shipment and release the goods to the consignee designated by the issuing bank in LC. Subsequently, when the beneficiary submits the original paper marine bill of lading with an inaccurate recorded date of shipment to the issuing bank for payment within the validity period of the letter of credit and the latest shipment date, can the issuing bank claim that the beneficiary committed LC fraud based on the inaccurate date of shipment recorded in the paper original marine bill of lading ("forwarded dated bill of lading") and refuse to pay? However, if the beneficiary has already delivered the goods to the designated consignee of the issuing bank according to the instructions of the letter of credit terms through the electronic release bill of lading, and if the beneficiary cannot obtain the payment under the letter of credit due to LC fraud, does the beneficiary have the right to claim the return of the delivered goods from the issuing bank? Or if the issuing bank cannot return the goods, can the beneficiary request the issuing bank to refund the value of the goods, and the interest for the delayed payment?
Cases Summary
Topics: Surrendered Bills of Lading; Bill of Lading Date; Backdating B/L; LC Fraud; Applicable Law; China Law; UCP600 Article 14; UCP600 Article 16; PRC Letter of Credit Provisions Article 8; Contract Law of the PRC, Article 107; Civil Procedure Law of the PRC, Article 170
Type of Lawsuit: Beneficiary sued issuing bank for wrongful dishonor.
Parties:
Plaintiff/Beneficiary/Seller – Ningbo Nanheng Import & Export Co., Ltd.
Defendant/Issuing Bank – Shinhan Bank Corp.
Applicant/Buyer – Jungwoo Interactive Corporation
Freight Forwarder – KNG Shipping Air Co. Ltd.
Underlying Transaction: Sale of crab seafood products.
Instruments: This case involved seven letters of credit with a total amount of USD 2,266,433.82 resulting in seven first-instance judgments[2] and seven second-instance judgments.[3] As the facts and reasoning across the seven cases were similar, this summary is based on one representative judgment.
Procedural History:
First Instance Judgment: The Ningbo Intermediate Court[4] found that Issuing Bank failed to effectively prove Beneficiary committed fraud. It ordered Issuing Bank to pay the LC amount of USD 373,044.80 plus interest and exchange rate losses, but dismissed the claim for legal fees.
Second Instance Judgment: Issuing Bank appealed to the Zhejiang High Court, arguing: (1) Beneficiary submitted a false bill of lading; (2) Invoice date was contradictory; (3) There was no real transaction; and (4) Documents from a Korean prosecutor's investigation show the goods were released from the warehouse without authorization. Beneficiary defended, stating the transaction was genuine, Issuing Bank was aware of the "delivery before payment" transaction model, and that the goods had been delivered to Freight Forwarder.
Decision: The Zhejiang High Court dismissed Issuing Bank's appeal and upheld the original judgment. Issuing Bank was ordered to pay the LC amount of USD 373,044.80 plus interest and exchange rate losses.
Factual Summary:
On 30 August 2019, Ningbo Nanheng Import & Export Co. of China signed a sales contract with Jungwoo Interactive Corporation of South Korea, agreeing to sell crab seafood products to Jungwoo for USD 481,481 backed by payment by sight letter of credit.
On 5 September 2019, Shinhan Bank (Issuing Bank) issued an LC for USD 375,881 subject to UCP600 on behalf of Jungwoo Interactive Corporation (Applicant) in favor of Ningbo Nanheng Import & Export Co. (Beneficiary).
The LC called for: “+ SIGNED COMMERCIAL INVOICE IN TRIPLICATE + PACKING LIST IN TRIPLICATE + FULL SET OF CLEAN ON BOARD OCEAN BILLS OF LADING MADE OUT TO THE ORDER OF SHINHAN BANK SEOUL MARKED FREIGHT PREPAID AND NOTIFY APPLICATION.”
Additional Conditions required: “DOCUMENTS MUST BE PRESENTED PRIOR TO CREDIT EXPIRY DATE, DESPITE THE PERIOD FOR PRESENTATION IN DAYS + SHIPPING KOREAN AGENT FOR THE CARRIER MUST BE NOMINATED AS KNG SHIPPING AIR CO. LTD …”
On 6 December 2019, Beneficiary presented documents under the LC, including an ocean bill of lading and commercial invoice, among others. Issuing Bank refused payment on the grounds of a forged bill of lading, claiming that the carrying vessel, "STAR SKIPPER", listed on the B/L was not at Ningbo Port on the stated loading date (20 November 2019) and that the B/L information did not match the carrier's official records. Issuing Bank alleged that Beneficiary committed letter of credit fraud. Beneficiary sued issuing bank for wrongful dishonor.
As mentioned above, this underlying transaction involved seven LCs and was a long-term arrangement. Due to financing difficulties faced by the Korean buyer, the parties agreed to adopt a 'Delivery Before Payment' method. Specifically, the Korean buyer would first obtain and sell the goods through the Issuing Bank via surrendered bills of lading and then use the proceeds from the sale to pay the deposit required by the Issuing Bank as security for payment. Subsequently, the Beneficiary would cooperate by submitting ocean B/Ls to obtain payment under the LCs from the Issuing Bank, based on the Applicant’s payment progress. Prior to this, the Chinese seller, Korean buyer, and Korean bank had already completed several transactions and the leader of the Korean bank’s branch was fully aware of and understood the facts related to such financing arrangements.
The fundamental cause of the incident in this case was the Applicant’s failure to repay the Issuing Bank’s advances in a timely manner, resulting in a breach in the funding chain. This raised concerns at Issuing Bank’s headquarters. Following an internal investigation, the Issuing Bank filed a report with the Korean police, leading to the arrest of Issuing Bank’s branch leader and Applicant’s manager. Simultaneously, the Issuing Bank initiated litigation in Korean courts seeking an injunction against payment under the LCs. However, the Korean court ruled that no LC fraud existed in the case and refused to issue an injunction. This was because the goods involved in the case actually existed and the issue arose solely from errors in the financing and payment arrangements between the parties, as all relevant parties under the LCs were actually aware of this specific financing arrangement in advance.
Court’s Rulings:
Applicable Law. Should the determination of letter of credit fraud be governed by Chinese law or South Korean law?
Chinese law applied because the place where the alleged fraudulent act occurred -- the place of document issuance -- was in China. Both parties had also agreed to apply Chinese law during the original trial.
Whether Fraud Occurred. Was the bill of lading submitted by Beneficiary forged? Was the underlying transaction genuine? Did Issuing Bank know of, or participate in, the "delivery before payment" arrangement? According to Article 8 of the PRC Letter of Credit Provisions, does a false document necessarily constitute fraud?
Genuineness of Underlying Transaction
The Zhejiang High Court ascertained that the surrendered B/Ls No. 339, No. 340, and No. 341 submitted by Beneficiary during the second trial indicated the shipper as Ningbo Yongzheng International Freight Agency Co., Ltd., the consignee as KNG, and the Date of Laden on Board the Vessel and the Date of Issue as September 15, 2019. Except for the date, these three surrendered B/Ls were consistent with B/L No. 9039 presented by Beneficiary to Issuing Bank in terms of the Ocean Vessel and Voyage No., loading and discharge ports, as well as the description and quantity of the goods.
Although the B/L No. 9039 submitted by Beneficiary contained an incorrect loading date, the surrendered B/Ls, export customs declaration, and Korean import declaration records were consistent with each other and evidenced that Beneficiary had actually shipped and delivered the goods to Freight Forwarder. Therefore, the underlying transaction was actually performed and Beneficiary lacked the subjective intent to defraud the LC proceeds.
"Delivery Before Payment" Arrangement
A clause in the LC required the carrier's Korean freight agent to be designated as Freight Forwarder. Furthermore, according to the warehouse release application and certificate of contents issued by Issuing Bank, the release of goods to the consignee required Issuing Bank consent. These facts indicated that Issuing Bank exercised actual control over the goods. The Applicant, Issuing Bank, and Beneficiary were involved in multiple consecutive transactions of the same type during the same period. Combined with similar past transaction patterns between the parties, it could be determined that Issuing Bank was clearly aware of this transaction arrangement. Issuing Bank essentially secured the Applicant's payment by controlling the goods under the LC and its interests were not actually harmed by this model.
When Fraud Occurred
The underlying transaction was genuinely performed and Beneficiary lacked the subjective intent to defraud. Fraud did not occur where Beneficiary presented documents, but actually occurred where Applicant paid the issuing bank to retrieve the documents (the Korean prosecutor alleged Freight Forwarder released the goods without authorization), which was unrelated to Beneficiary.
Compensation for Losses. Should exchange rate losses be compensated?
Issuing Bank's unjustified refusal caused Beneficiary to suffer exchange rate losses, for which compensation should be awarded.
Legal Analysis by Jin:
Issuing Bank’s Refusal.
The Chinese court needed to address the question: If the Beneficiary, in addition to delivering a surrendered bill of lading, also submits to the designated person—after a period of time following shipment—an ocean bill of lading with an inaccurate shipment date when claiming payment, may the Issuing Bank refuse payment or apply to the court for an injunction on the grounds of LC?
In this case, the LC required the Beneficiary to submit an ocean B/L. The goods in question do, in fact, exist and had already been collected by the Issuing Bank’s designated person. Additionally, the liner that actually carried the goods also existed. However, the only inconsistency was on the B/L submitted by the Beneficiary; the shipment date recorded was inaccurate—the carrying vessel was not at the port indicated on the B/L on the referenced date and loading records showed that no goods were loaded on that shipment date.
The Beneficiary acted in this manner because the Chinese seller could more easily obtain financing from a Chinese bank, whereas the Korean buyer had more difficulty obtaining financing from a Korean bank. Therefore, the parties agreed that the Korean buyer would first obtain and sell the goods through the Korean Issuing Bank via surrendered B/Ls and then use the proceeds from the sale to pay the deposit required by the Issuing Bank as security for payment. Subsequently, the Beneficiary would cooperate by presenting ocean B/Ls to obtain payment under the LCs from the Issuing Bank, based on the Applicant’s payment progress.
Because the timing of the Applicant’s receipt of funds after reselling the goods was uncertain, if the repayment came in later than expected, the Chinese Beneficiary/Seller would have to adjust the shipment date stated on the bill of lading to a slightly later date in order to meet the latest shipment date required under the LC and thereby obtain payment from the Issuing Bank. Moreover, the Chinese Beneficiary/Seller, Korean Applicant/Buyer, and Korean Issuing Bank had already previously completed several similar transactions so the Issuing Bank was fully aware of and familiar with this financing structure and operational arrangement in advance.
As previously stated, the problem in this case arose because the Applicant failed to repay the Issuing Bank’s advance in a timely manner, resulting in a break of the funding chain. This triggered an alert at the Issuing Bank’s head office. After an internal investigation, the Issuing Bank reported the matter to Korean police, resulting in the arrests of a leading official at the Issuing Bank’s branch and a top manager of the Applicant. At the same time, Issuing Bank filed an action in a Korean court seeking an injunction to stop payment under the LC. However, the Korean court held that there was no LC fraud because the goods actually existed. The dispute was over the parties’ financing and payment arrangements having gone wrong. The Korean court was satisfied that all parties to the LC had in fact been aware of this special financing arrangement in advance. The court therefore refused to grant an injunction to stop payment under the LC.
Based on the facts of this case, the Korean Issuing Bank refused to pay on the grounds that the documents under the LC contained incorrect information and that the Beneficiary’s conduct constituted LC fraud. As a result, the Beneficiary sued the Korean Issuing Bank in China, requesting that the court either: (1) order the Issuing Bank to honor the LC, if LC fraud is not proven; or (2) require the Issuing Bank to return the goods that were released under the surrendered bill of lading; or if the goods cannot be returned, return payment of the goods along with related interest and expenses. The Beneficiary took this action because the process of releasing the goods directly to the person designated by the issuing bank via a surrendered bill of lading, storing them in a cold warehouse, and then releasing them to the final Korean buyer was an operational arrangement expressly set out by the Korean Issuing Bank in the LC provisions.
Legal Consequences of Issuing Paper Bill of Lading and Surrendered Bill of Lading with Inconsistent Shipment Dates
The Zhejiang High Court affirmed that the Beneficiary committed LC fraud by submitting an ocean B/L with an inaccurate shipment date. On the shipment date stated in the B/L, the carrying vessel was not present at the port and the loading records at the port did not evidence that the goods listed on the B/L were shipped. Therefore, the Beneficiary’s conduct constituted LC fraud.
However, the Zhejiang High People's Court found that irrespective of the Beneficiary providing false documents, if the Issuing Bank was indeed a victim of the LC fraud, it could seek protection under Article 8 of the PRC Letters of Credit Provisions. In this case, however, it has been established that multiple transactions existed among the Applicant, Issuing Bank, and Beneficiary in which the Issuing Bank first received and controlled the goods under the LC and then arranged payment using false documents. The court expressed that under the circumstances where the Issuing Bank had already received the goods in this case and delivered them to the Applicant, invoking the principle of independence of the LC to refuse payment on the grounds that the documents submitted by the Beneficiary did not correspond to the actual goods would violate the principle of good faith. Therefore, the Issuing Bank should pay the Beneficiary the amount under the LC and the interest accrued thereon.
Comment by Jin:
Implications for the Industry and Surrendered Bills of Lading
The Technical Advisory Team of the ICC Banking Commission drafted an opinion regarding surrendered bills of lading in 2024-2025 based on a query submitted by the ICC Denmark National Committee. The draft opinion sparked considerable debate both within the ICC Banking Commission and among ICC National Committees. At the ICC Banking Commission’s February 2025 Meeting in Dubai, I was the Technical Advisor responsible for presenting the Technical Advisory Team’s views on the draft opinion. My personal view is that the banking industry should exercise necessary caution regarding such uncommon international shipping practices that may be region-specific—for example, requiring the beneficiary to submit a surrendered bill of lading as a document under a LC. When an LC calls for a surrendered B/L and an original B/L, not only are the LC terms often unclear about what constitutes a surrendered B/L, but in practice, the international transport industry does not have well-defined global rules or operational standards regarding surrendered bills of lading or their relationship to an original bill of lading.
After the Dubai meeting, the Technical Advisory Team sought feedback from three key transport industry organizations about the subject, but received responses that were general. Furthermore, ICC Denmark, which had submitted the query, elected to withdraw their query. Consequently, the Technical Advisory Team decided to pursue addressing this issue in a future Technical Advisory Briefing.
Based on the lessons learned from this case, my conclusion as a lawyer is that issuing banks must exercise necessary caution when dealing with document requirements such as surrendered bills of lading, which are inherently unclear in their specifications. As illustrated in this case, the Korean issuing bank ultimately received support from the Chinese court regarding the matter of the ocean bill of lading because industry rules and practices concerning ocean B/Ls are well-established in both shipping practice and law. However, with surrendered bills of lading, the relevant shipping practices, rules and law are far less clear. Depending on the applicable shipping practice rules and the governing law applied by an adjudicating court, unexpected consequences may arise.
[1] Judgment of the High People's Court of Zhejiang Province of the PRC, dated December 10, 2021, Case No. (2021) Zhe Min Zhong No. 156 [PRC], Chief Judge: Mao Qing, Judges: Qiu Jianfeng, Huang Qin.
** Attorney Saibo JIN is an expert in handling Independent Letter of Guarantee disputes, and was invited to participate in drafting and revising the judicial interpretation “Provisions of Supreme People's Court on Several Issues Relating to the Hearing of Disputes over Independent Letter of Guarantee”. Since August 2023, designated as a member of the Technical Advisory (TA) of the Banking Commission (BC) of the International Chamber of Commerce (ICC). Former member of the Task Force of Demand Guarantee and an expert in DOCDEX Letter of Credit and Independent Letter of Guarantee dispute resolution at the ICC. Vice Director of the East Asia Committee of the Institute of International Banking Law & Practice (IIBLP), member of the Modification Committee of the International Standby Practices (ISP98) of the IIBLP, and member of the Editorial Committee of the electronic publication "Documentary Credit World" (DCW) of the IIBLP. Member of both the Letter of Credit and Independent Letter of Guarantee expert groups of ICC China. Attorney Jin Saibo has handled numerous litigation and arbitration cases related to Letters of Credit and Independent Letter of Guarantee, bulk commodity trading including disputes involving steel, copper oxide, aluminum oxide, palm oil, and ship sales. Twice elected as Vice Director of the Financial and Securities Special Committee of the All China Lawyers Association, arbitrator of the China International Economic and Trade Arbitration Commission, arbitrator of the Beijing International Arbitration Center, and arbitrator of many other arbitration institutions. Previously appointed as an expert of the Expert Committee on Civil and Administrative Supervision Cases of the Supreme People's Procuratorate. Invited to provide opinions and suggestions on the drafting and revision of judicial interpretations of the Guarantee Law part of the Civil Code. Member of the sixth and fifth working groups of the United Nations Commission on International Trade Law (UNCITRAL) for the Model Law on Secured Transactions and the Model Law on Insolvency. Observer of the drafting working group of the Model Law on Factoring (MLF) of the International Institute for the Unification of Private Law (UNIDROIT). Member of the Legal Committee (LC) of the Factors Chain International (FCI). Member of the Academic Committee of the Commercial Factoring Committee of the Service Trade Research Institute of the Ministry of Commerce. The Chinese abbreviation of this case was completed by Lawyer Lin Haosheng, and the English translation was completed by Lawyer Gu Haoran.
[2] (2020) Zhe 02 Min Chu No. 279, (2020) Zhe 02 Min Chu No. 280, (2020) Zhe 02 Min Chu No. 281, (2020) Zhe 02 Min Chu No. 282, (2020) Zhe 02 Min Chu No. 283, (2020) Zhe 02 Min Chu No. 284, (2020) Zhe 02 Min Chu No. 285
[3] (2021) Zhe Min Zhong No. 153, (2021) Zhe Min Zhong No. 154, (2021) Zhe Min Zhong No. 115, (2021) Zhe Min Zhong No. 155, (2021) Zhe Min Zhong No. 156, (2021) Zhe Min Zhong No. 157, (2021) Zhe Min Zhong No. 158
[4] (2020) Zhe 02 Min Chu No. 283 [PRC]