Sat 21 April 2018
By HEI Zuqing
ANZ Bank, Shanghai Branch v. Ningbo Haitian International Trade Co.,(the ANZ case) decided by the Supreme People’s Court of the People’s Republic of China, involved a contract for LC financing instead of the trade of goods. The beneficiary was paid by the nominated bank and the issuing bank undertook to reimburse the nominated negotiating bank 90 days later. It was determined by the court to have constituted a fraud committed upon the issuing bank. It was also held that the payment by the nominated negotiating bank to the beneficiary was not in good faith. As such, the nominated negotiating bank could not obtain the payment from the issuing bank. Good faith is central to this LC case. It was decided by the court that the nominated negotiating bank failed to act in good faith. In my opinion the decision is correct, but some experts do not like to inject the concept of good faith into LC law and practice.
This case was governed by the requirement of good faith for negotiation. The Rules of the Supreme People’s Court Concerning Several Issues in Hearing Letter of Credit Cases (2005) Article 10(iv) (Persons Protected from Suspension of Payment Order) provides that where the negotiating bank has negotiated in good faith, payment under a credit when fraud is established shall not be suspended. As such, the court in this case looked at the requirement of good faith for negotiation. The nominated negotiating bank is entitled to protected status only if it has acted in good faith. The nominated negotiating bank, who handled this LC, had knowledge that the actual buyer and seller were associated companies and the contact person of the applicant was also the contact person of the beneficiary. It was aware that the beneficiary was actually just a shell company controlled by the same owner. The transactions were intentionally structured in order to obtain financing for the same goods multiple times and the nominated negotiating bank assisted in creating the structure. As such, the negotiation payment by the nominated negotiating bank to the beneficiary in the case was not made in good faith.
The obligation of good faith cannot be disclaimed for any duty of a nominated bank. Letter of credit fraud was present in the ANZ case, but as the nominated negotiating bank was in violation of its obligation of good faith, it should not be protected notwithstanding that complying documents were presented and the issuing bank undertook to reimburse the nominated negotiating bank. In view of this, the court in the ANZ case is correct that the risk of the fraud should be allocated to the negotiating bank.
Good faith is essential to the nominated bank’s right to reimbursement for negotiation, but UCP does not define good faith. Courts have stated that good faith “is relevant only after an issuing bank has established a valid claim of fraud” as it “does not create a cause of action” and for a claim of breach of good faith, the cause of action should be stated. As such, it is a matter that is left to law, not UCP rules. Good faith is stipulated or defined in certain laws. The United Nations Convention on Independent Guarantees and Standby Letters of Credit does not define good faith, but UN LC Convention Article 14 (Standard of conduct and liability of guarantor/issuer), states “the guarantor/ issuer shall act in good faith”. The Chinese Rules on Letters of Credit also do not define good faith, but the rules require that the nominated person, issuing bank, confirming bank, and negotiating bank should act in good faith. In the Tunisian Commercial Code, Article 724 provides that the bank should handle negotiated documents in good faith. US UCC Article 5 (Letters of Credit) includes the concept of good faith. US UCC 5-102(a)(7) (Definitions) states that ‘Good faith’ means honesty in fact in the conduct or transaction concerned.” The definition is purposely kept narrow to fit LC transactions.
However, some experts are unwilling to introduce the good faith concept into LC law and practice. Good faith is not merely honesty in fact and it is more than that. It also represents a serious challenge to the principle of strict compliance. The concept of good faith also involves imprecision as it is different from fraud and depends on the facts of each case. Therefore there should be evidence of a lack of good faith and proof of a breach of good faith must be both significant and clearly established. In view of this, good faith is too indefinite. There are grave and underestimated perils in bringing the concept into LC law and practice.
The principle of good faith is fundamental to letters of credit. In the ANZ case, the negotiating bank acted in a manner that there was a breach of good faith. The negotiating bank designed the financing method through a self-sale and self-purchase contract and it knew that the contact person of the applicant was also the beneficiary. The negotiating bank also knew that the warehouse receipts under the letters of credit were circulated repeatedly and the negotiating bank was aware. The breach of good faith was established by this clear evidence of the negotiating bank’s conduct. The case was correctly decided that the negotiating bank did not act in good faith.
HEI Zuqing is a Research Fellow with the Institute of Free Economic Zone at Tianjin Normal University and Graduate Mentor at Nankai University. He had worked at Bank of China and Societe Generale. He can be reached at: firstname.lastname@example.org
This article is originally published by Documentary Credit World(USA) on March 2018(Volume 22, Number 3)
 ANZ Bank, Shanghai Branch v. Ningbo Haitian International Trade Co., Supreme People’s Court (2013) Min Shen Zi No.1385 [China], summarized at 2015 Annual Review of International Banking Law & Practice 362.
 “LC Rules & Laws Critical Texts For Independent Undertakings”,7th Edition, Professor James E. Byrne, Ed., IIBLP, 2018, p. 311.
 See: James E Byrne, “Negotiation in Letter of Credit Practice and Law: The Evolution of the Doctrine”, TEXAS INTERNATIONAL LAW JOURNAL. 42 TEX. INT’L L.J. 561., reprinted at 2009 Annual Review 64.
 James E. Byrne, “Contracting Out of Revised UCC Article 5 (Letters of Credit)”, 40 Loy. L.A. L. Rev. 297 (2006), reprinted in 2008 Annual Survey of Letter of Credit Law & Practice 54.
 See: Banco Nacional de Mexico, S.A. v. Societe Generale, 820 N.Y.S.2d 588 (App. Div. 2006) [USA], abstracted at 2007 Annual Survey of Letter of Credit Law & Practice 136.
 See: Bath Iron Works Cop. v. WestLB AG, 02 Civ 2272 (RCC), 2004 U.S. Dist. LEXIS 19206 (S.D.N.Y., Sept. 8, 2004) [USA], abstracted at 2005 Annual Survey of Letter of Credit Law & Practice 256.
 See: Shell Oil Company v. Banque Paribas, C.A. No. H-94-1081 [USA], text at 1996 Annual Survey of Letter of Credit Law & Practice 626. (Plaintiff has failed to state a cause of action for breach of the duty of good faith, Defendant does not breach its duty of good faith.)
 See: United Nations Convention on Independent Guarantees and Standby Letters of Credit, Article 14, http://www.uncitral.org/uncitral/en/uncitral_texts/payments/1995Conventi...
 Rules of the Supreme People’s Court Concerning Several Issues in Hearing Letter of Credit Cases (2005), Article 10.
 See: Tunisian Commercial Code, Articles Related to “Documentary Credit”, “LC Rules & Laws Critical Texts For Independent Undertakings”,7th Edition, Professor James E. Byrne, Ed., IIBLP, 2018, p. 341.
 US UCC Article 5, “LC Rules & Laws Critical Texts For Independent Undertakings”, 7th Edition, Professor James E. Byrne, Ed., IIBLP, 2018, p. 235.
 Boris Kozolchyk, “The UNIDROIT Principles as a Model for the Unification of the Best Contractual Practices”, 46 Am. J. Comp. L. 151 (Winter 1998), reprinted in 1999 Annual Survey 123.
 Roy Goode, “Abstract Payment Undertakings in International Transactions”, 22 Brooklyn J. Int'l L. 1 (1996), reprinted in 1997 Annual Survey 89.
 John F.Dolan, “Non-Novel Issues of Letter of Credit Law: An Essay”, 2010 Annual Review 74.
 Otter Group Pty. Ltd. v. Wylaars,  VSC 98 [Australia], abstracted at 2014 Annual Review 507(judge observed that there was no evidence of lack of good faith.) and Doosan Babcock Ltd. v. Comercializadora de Equipos y Materiales Mabe Limitada,  EWHC 3201 (TCC) [England], abstracted at 2014 Annual Review 437.
 Team Telecom International v. Hutchison 3G UK Ltd., 2003 EWHC 762 (Q.B. Div’l Ct.) [England], abstracted at 2004 Annual Review 335.
 John F. Dolan, “Bad Faith and Unconscionability”, 2013 Annual Review 102; Nareerux Import Co.v. Canadian Imperial Bank of Commerce, O.J. No. 3824 (2007) [Canada], abstracted at 2008 Annual Review 301.
 See: Itec Refining & Marketing Co. v. Astra Oil Co.,(March 28, 2013) (Siciliano, Berg, and Langlois, Arbs.) [USA], quoting Professor James E. Byrne’s expert report at 2014 Annual Survey of International Banking Law & Practice 483.