Basic legal nature of letter of credit.
According to UCP500, a letter of credit generally refers to an agreement that a bank (issuing bank) promises to pay, honor or negotiate with a third party (beneficiary) or other designated parties (such as a paying bank, a confirming bank or a negotiating bank) on its own initiative or at the invitation of a customer (applicant) under the condition of fully observing the terms of the letter of credit. The principle of independence and abstraction of letter of credit is the most basic legal principle in the legal relationship of letter of credit, which includes two aspects and runs through the legal relationship of letter of credit, and has universal guiding significance for the behavior of all parties to letter of credit.
First of all, the independent abstraction means that the letter of credit and the basic contract are independent of each other. According to article 3 of UCP500, "a letter of credit is different from a sales contract or other contracts on which a letter of credit is issued. Even if these contracts are quoted in the letter of credit, the bank has nothing to do with them and is not bound by them. Therefore, the bank's commitment to pay, accept and pay the draft or negotiate and/or perform any other obligations under the letter of credit is not bound by the claims or defenses put forward by the applicant because of its relationship with the issuing bank or beneficiary. In any case, the beneficiary shall not take advantage of the contractual relationship between banks or between the applicant and the issuing bank. " Article 3 means to explain that the letter of credit is independent of the basic contract and other relevant documents. Even if the letter of credit mentions these contracts, the bank is not bound by them and can ignore them. The applicant, beneficiary and intermediate bank shall not use any defense against the issuing bank except the inconsistency of documents. Similarly, the issuing bank shall not use the defense other than the inconsistency of documents to deal with other parties to the letter of credit.
Secondly, the face-to-face compliance or literal meaning of the letter of credit, that is, the certified documents must meet the face-to-face requirements of the letter of credit. When banks handle letter of credit business, they only rely on documents, not goods. It only examines whether the documents submitted by the beneficiary conform to the terms of the letter of credit to decide whether they fulfill their payment obligations. Article 4 of UCP500 clearly stipulates that "in the letter of credit business, the parties concerned deal with documents, not goods, services or other performance related to documents". In the letter of credit business, as long as the beneficiary submits the documents that meet the terms of the letter of credit, the issuing bank will bear the responsibility for payment, and the importer will also accept the documents and pay the bills to the issuing bank. If the importer finds that the goods are defective after payment, he can claim compensation from the responsible party against the documents, which has nothing to do with the bank. However, it is worth noting that according to articles 13 and 14 of UCP500, although banks are obliged to "reasonably and prudently examine all documents stipulated in the letter of credit", such examination is only used to determine whether the documents appear to meet the terms of the letter of credit, and the issuing bank only "pays, undertakes the responsibility of deferred payment, accepts bills of exchange or negotiates with documents that appear to meet the draft letter of credit." Similarly, the issuer also undertakes the obligation to accept the documents according to whether they are in conformity with the terms of the letter of credit on the surface, and pay the bank that performs the above obligations. For the same reason, article 15 of UCP500 stipulates that "banks are not responsible for the format, completeness, accuracy, authenticity, forgery or legal effect of any documents, or for the general and or special conditions stipulated or attached to documents; Nor is it responsible for the description, quantity, weight, quality, state, packaging, delivery, value or existence of the goods represented by any document, or the integrity or behavior and or omissions, solvency, performance ability or reputation of the consignor, carrier, transporter, consignee or insurer of the goods or any other person. "
The principle of independence and the principle of abstraction of letters of credit are mutually conditional, complementary and integrated. This principle requires: (1) The status and responsibility of the bank are independent and primary, and the bank has no right to invoke any defense other than document inconsistency to refuse payment. This is essentially different from the subordinate position and secondary responsibility of the guarantor in the sense of ordinary legislation. (2) The letter of credit is independent of the basic contract or other contracts. The parties to the letter of credit (including applicant, issuing bank, beneficiary and other intermediary banks, such as advising bank, negotiating bank and reimbursing bank, etc.). The latter shall not be invoked to modify or supplement the former, nor shall the latter's defense be invoked to relieve the bank's payment responsibility and the applicant's compensation responsibility, or thus force the bank to pay and the applicant to compensate. (3) All parties to the letter of credit only handle documents, not related documents. As long as the beneficiary delivers the matching documents, the bank's payment responsibility and the applicant's compensation responsibility are determined. On the other hand, even if the basic contract is fully performed, the beneficiary has no right to receive payment from the bank, and the bank that pays the non-conforming documents under this condition has no right to receive payment or compensation.
The principle of independence and abstraction of the letter of credit establishes the absolute responsibility of the issuing bank to honor the documents conforming to the letter of credit, and it prohibits the refusal of payment by the defense other than the inconsistency of the documents. Therefore, any defense based on the breach of the basic contract or related disputes, even if it involves the fundamental breach of the basic contract, the invalidation of the contract or the non-performance of facts or laws, cannot exempt the applicant from the payment responsibility to the issuing bank. As an international trade practice, this has been accepted by all countries in the world.
Letter of Credit Fraud and Related Legislation
Everything has two sides. As a mature commercial system in the field of international trade payment, letter of credit has been playing an irreplaceable role in this field since its emergence. Because of the superiority of bank credit, it provides security for the smooth progress of international trade, and banks can also provide financing convenience for buyers and sellers with the help of letters of credit (Note: Practical Course of Import and Export Trade edited by Wu Baifu, Shanghai People's Publishing House, p. 28 1-283. ) and so on. To give full play to these functions is to respect and implement the independence and abstraction of letters of credit. Without this, banks, as intermediaries, will inevitably be entangled in specific transaction disputes between buyers and sellers, and the whole letter of credit system will lose its foundation and die out. But unfortunately, it is the principle of independence and abstraction itself that produces the consequence of denying itself and further eroding the whole letter of credit system-letter of credit fraud. The general form of letter of credit fraud is that the beneficiary forges documents that meet the terms of the letter of credit, or even makes fake documents to defraud money from the bank. Because banks only pay by seemingly consistent documents and don't ask about the authenticity of the documents on the surface, speculators often succeed. Moreover, letter of credit fraud has the characteristics of low risk, low cost and high income, which has led to the increasingly popular trend of letter of credit fraud in recent years.
It is impossible to find the answer to the letter of credit fraud from within the letter of credit system, because the root of letter of credit fraud is the principle of independence and abstraction, and this principle is the core of the letter of credit system. If the principle of independence and abstraction is denied because of fraud, it is equivalent to denying the whole credit system. The author believes that the solution lies in the prevention of risks in advance and the relief of domestic laws afterwards. Precautions in advance are beyond the scope of this article and will not be discussed here.
For the domestic remedies of letter of credit fraud, a few countries rely on relevant professional legislation, such as the United States; The practice of other countries generally refers directly to the general legislation on civil fraud in domestic law, but all adopt the way that the court directly issues a payment stop order to the issuing bank or the paying bank within its jurisdiction to prohibit its payment. In this regard, China has not yet enacted special legislation. The only legal document in this respect is the Summary of the Symposium on Foreign-related Economic Trials in Coastal Areas of China issued by the Supreme People's Court 1989 (hereinafter referred to as the Summary).
Fraud makes everything invalid, which is one of the most basic legal principles of civil and commercial law, and letter of credit fraud is no exception. All countries agree that based on the need of maintaining social justice and good business ethics, the principle of independent abstraction can be softened or excluded under the condition of letter of credit fraud. Therefore, the application principle of fraud exception under the abstract principle of independence of letter of credit appears, which is called fraud exception principle for short.
Can the court issue a stop payment order as long as fraud is found? Looking at the legislation and common practices of various countries, this is not the case.
U.S. Uniform Commercial Code 5- 1 14 (2) stipulates that unless otherwise agreed, if the documents seem to conform to the terms of the letter of credit, but in fact they do not conform to the guarantee or ownership certificate (7-507) is transferred to investment securities (8-306), or the documents are forged, cheated or traded. As for the customer, if the issuing bank is in good faith, it can pay, regardless of the customer's forgery, fraud or other notice of defects that are not displayed on the surface of the document. However, the competent court may prohibit its payment.
In China, on the basis of affirming the absoluteness of the principles of independence and abstraction, the Summary establishes the following framework conditions of the fraud exception principle: (1) The court freezing order is only applicable to the fully proved letter of credit fraud; (2) The freezing order should not restrict the right of payment of the legal holder under the certificate; (3) The release of freezing order not only considers the interests of fraud victims, but also pays attention to the adverse effects of freezing order on bank credit. (4) The time of issuing the freezing order should be no later than the time when the issuing bank assumes the external payment responsibility, not the time when the external payment has not been made.
Looking at the above specific provisions, there is at least one case where the court cannot issue a stop payment order.
In other words, the court cannot prohibit the issuing bank or the paying bank from paying the bona fide holder. The protection of bona fide holders can be found in the specific provisions of various countries' negotiable instruments law, civil and commercial law and UCP500. Its theoretical basis lies in the non-causation and literariness of bills, that is, the legal relationship on bills is only a simple money payment relationship, and the reasons for this payment relationship or the acquisition of bill rights can be ignored. The content of the rights and obligations of a negotiable instrument depends entirely on the meaning contained in the instrument, and cannot be interpreted arbitrarily or determined according to any other documents other than the instrument. Its purpose is to ensure the smooth circulation of bills and businesses. The so-called bona fide holder, also known as the legal holder, must pay the consideration when obtaining the bill. Except for the special provisions of the law, such as the article 1 1 in Bill Law, China, it also meets the following conditions: (1) The bill it has obtained is seemingly complete and qualified; (2) When he becomes the holder, the bill has not yet matured. If the bill has expired, it has been refunded, but he knows nothing about the refund; (3) When the bill was transferred to him, the transferor was not found to have any defects in the ownership of the bill (the defects in the ownership of the bill refer to the ownership of the bill obtained by means of fraud, coercion, violence, intimidation or breach of trust) (Note: International Bill Law Theory and Practice, edited by zhaowei, China University of Political Science and Law Press, 1995, pp. 59-60). )。 According to the general provisions of the negotiable instrument law, the rights of bona fide holders are superior to those of their predecessors and are not affected by debt disputes between the parties to the instrument. At the same time, article 9 of UCP500 stipulates that the issuing bank and the confirming bank are obliged to "pay the draft drawn by the beneficiary and/or the documents submitted under the negotiation letter of credit, and have no recourse against the bona fide holder."
On the other hand, the U.C.C has no clear stipulation on whether the court can issue a stop payment order after the usance letter of credit accepts the bill of exchange, but the minutes clearly prohibit it. A usance letter of credit refers to a letter of credit in which the paying bank performs the acceptance procedures for the draft after receiving the usance draft and the documents that meet the requirements of the letter of credit and before paying on the maturity date of the draft. According to the new regulation of Article 9 of UCP500, "A letter of credit shall not require the applicant to pay by draft", and the payer will be limited to the issuing bank or other designated banks. Acceptance is a unique system of long-term bills, which is of great significance for determining the relationship between rights and obligations on bills and protecting the interests of the parties to the bill, especially the payee. A bill of exchange is a kind of other-paid securities, which is issued by the drawer and used to "entrust" the payer to pay the face value and the payee. Because the drawer's behavior of issuing tickets by "entrusting" payment is a unilateral legal act in nature, rather than an entrusted contract act in civil law, it can only set rights for the payee, but not make the payer assume obligations. In other words, the drawer's act of issuing tickets is not legally binding on the payer, and the payer can accept or not accept the entrustment of the drawer. Even if there is money exchange between him and the drawer, there is an agreement to bear the payment. It is precisely because after the payee obtains the bill, if there is no acceptance (or non-acceptance) by the payer, the rights of the payee are always in an uncertain expectation state, which will inevitably have an adverse impact on the interests of the payee, and will also reduce the credit function of the bill and affect its normal circulation. Therefore, acceptance is of great significance to protect the interests of the payee and enhance the credit function of the bill. For the payer, acceptance is his voluntary commitment to pay the face value and the payee on the due date. Before acceptance, the payer has no obligation to accept, but once accepted, the payer has the obligation to determine the due date of payment. Even if there is no capital relationship or payment agreement between the drawee and the drawer or he does not know the drawer's entrustment before acceptance, as long as he accepts, he has the obligation to pay, and acceptance is the only requirement for the drawee to undertake the payment obligation. In the practice of L/C business, the acceptance of the usance draft presented by the beneficiary or the bona fide holder by the issuing bank or the paying bank means that it undertakes the obligation of certainty of payment due, and this payment obligation is the first.
However, does this mean that even if there is fraud, the issuing bank can't refuse to pay and the court can't issue a stop payment order? From the point of view of negotiable instrument law, it is not. In the process of bill circulation, there is a bill defense system. According to this system, the debtor of a bill can put forward relevant facts or reasons according to the provisions of the bill law, deny the request made by the holder of the bill and refuse to perform the obligations of the bill. These corresponding facts or reasons are called defences. Bill defense is divided into material defense and personal defense. (Note: Theory and Practice of International Negotiable Instruments Law, edited by zhaowei, China University of Political Science and Law Press, 1995, p. 128- 132. Among them, the right of defense enjoyed by the debtor of the bill against the direct party of the bill based on fraud is one of the defenses against the causal relationship in the defense of the person. The defense of causation refers to the defense between the bill debtor and the bill obligee based on certain causation. Although the bill is negotiorum gestio, it only exists between the parties to the bill, and there is no causal relationship; If there is a direct causal relationship between the parties to the bill, the causal relationship can still be defended. Paragraph 2 of article 13 of China's negotiable instrument law stipulates that "the debtor of a negotiable instrument may defend the holder who fails to perform the agreed obligations and is directly related to his creditor's rights." At the same time, article 10, paragraph 1 also stipulates that "the issuance, acquisition and transfer of bills should follow the principle of honesty and credit, and have true trading relationship and creditor-debtor relationship." Accordingly, when the causal relationship is illegal or invalid, that is, it violates the principle of good faith, the bill debtor can raise a defense against his direct bill creditor, regardless of acceptance or not. In the letter of credit business, when the documents are presented by the beneficiary who issued the draft instead of the negotiating bank who has paid, the issuing bank can raise a defense based on the fraud of causation. Even after the acceptance bill is drawn, as long as it can be proved that the beneficiary has committed fraud, he still enjoys the right of defense. Of course, the court with jurisdiction also has the right to issue a payment stop order to the issuing bank before the issuing bank makes payment according to the request and facts of the parties. Therefore, in my humble opinion, there is no legal basis for the provision in the abstract that the court cannot issue a stop payment order for accepted bills under forward letters of credit.
Problems that should be paid attention to when the court issues a stop payment order
As can be seen from the above discussion, in most cases, the court can issue a stop payment order for fraudulent letter of credit. However, the author believes that the court should take a cautious attitude when issuing a stop payment order. It is pointed out that the freezing problem should not only consider the interests of fraud victims, but also pay attention to the adverse effects of freezing orders on bank credit. Unless there are sufficient reasons for fraud, the court should not interfere with the letter of credit business.
First of all, fraud should be strictly explained. According to the prevailing theory in the field of civil law in China, fraud must meet the following conditions: the fraudster must be intentional. The so-called "intentional" means that the parties know that deception may make the other party fall into a wrong understanding, and then hope that the other party will fall into a wrong understanding. Fraud includes positive behavior, such as fabricating false information and distorting the real situation, or negative behavior, such as concealing the real situation. From this, it can be judged that the scope of "fraud" defined according to this concept is bound to be very broad. Moreover, because this definition does not consider the particularity of letter of credit business, it lacks pertinence.
At present, there is no unified understanding of this issue among countries. U.C.C defines fraud as "fraud in transactions". As to whether "fraud in transaction" refers to the fraud of the beneficiary to the issuing bank or the fraud of the beneficiary to the applicant, that is, the buyer, U.C. has not clearly defined it. In the case of Shaffer v. Shaffer V. Brooklyn Park Garden Apartments, the US court found that the beneficiary fraudulently declared the application in the supporting documents submitted to the bank. And in Bother Bank &; In the case of Trust Co v. Union Plants National Bank, the court held that the statement issued by the beneficiary according to the requirements of the letter of credit indicating that he is entitled to payment is not regarded as "fraud in the transaction" because its purpose is inconsistent with the applicant's original intention. The above cases reflect the principled position of "the letter of credit is independent of the basic transaction" adhered to by American courts. In the case of United Bank v. Cambridge Sporting Goods Company, when the court found that the beneficiary delivered "worn, unlined, damaged and moldy boxing gloves" instead of "new boxing gloves" as required by the contract, it was deemed to have constituted "transaction fraud" and issued an injunction to the bank. In the case of NMC Enterprise v. CBS, the court issued an injunction according to the similar circumstances of the contract (note: Thomas D. Crandall, M.J. Herbert, Larry Lawrence: Uniform Commercial Code). In these two cases, the court considered the letter of credit together with the basic contract. For the determination of fraud, American courts believe that the following two conditions must also be met. First, fraud must be committed by the beneficiary, not by any other third party; Second, the beneficiary must take the initiative to cheat and undermine the purpose of the whole transaction.
The above cases reflect the attitude of American courts in dealing with letter of credit fraud cases, which not only maintains the principle of fairness, but also takes into account the normal trading order and bank credit. At the same time, it also limits the parties and harm of credit fraud. All these are worthy of our reference in future legislation and judicial practice.
In addition to the above factors, the author thinks it is necessary to distinguish between civil fraud and criminal fraud in order to avoid criminal proceedings rashly intervening in related cases. (Note: Zhu Lin's research on civil fraud system is contained in Volume IX of the Civil and Commercial Law) Criminal fraud refers to fraud that can constitute a crime of fraud, which has already constituted a crime and has strong social harm; Civil fraud is a kind of civil illegal behavior, and its social harm is relatively small. Although civil fraud and criminal fraud have the same elements and characteristics. For example, the subjective psychological state of the actor is intentional, and everyone hopes to achieve certain and beneficial interests. Objectively, both cheat others by fabricating facts or concealing the truth. But there are obvious differences between the two. First of all, formal fraud needs or may damage the property interests of fraudsters. Although the laws of different countries have different provisions on the degree of damage, they all take causing damage as a necessary condition. However, civil fraud does not require the victim or the third party to suffer property losses. However, in the case of losses, the victim can claim damages in addition to invalidation or revocation. Secondly, because civil fraud does not require the victim to suffer losses, there is no attempted fraud in civil law. Only by obtaining a large amount of public and private property can we constitute the crime of fraud. Therefore, when a large amount of money is not obtained due to reasons beyond the will of the offender, it still constitutes an attempted crime of fraud. Third, in civil fraud, the fraudster generally assumes contractual obligations while obtaining illegal benefits. And most of its illegal interests are obtained by fulfilling certain civil obligations. Criminal fraudsters take possession of other people's finances without any intention to fulfill their obligations, that is, they directly obtain illegal benefits through fraud without fulfilling any obligations. In the Supreme People's Court and the Supreme People's Procuratorate's "Answers to Several Questions about the Specific Application of Law in Handling Economic Crime Cases (Trial)", one of the boundaries between criminal fraud and civil fraud is whether the actor has the ability to perform, guarantee and perform certain obligations. From the above analysis, we can see that most letter of credit fraud belongs to the category of civil fraud; Only when the court fails to prevent the fraudulent beneficiary from obtaining the money in time or by issuing a stop payment order or freezing the property, the fraudulent behavior of the beneficiary constitutes the crime of criminal fraud.
At the same time, even if the criminal fraud case is established, it is theoretically feasible to restrict the export of loans under letters of credit through reconnaissance measures. However, "because international economic crimes involve the criminal jurisdiction of various countries and international criminal judicial assistance, it is almost impossible for China's procuratorial organs to exercise jurisdiction over letter of credit fraud crimes outside China in accordance with the principle of protective jurisdiction or personal jurisdiction" (Note: The Study on Stopping Payment of Loans under Letters of Credit was published by Xiang Minghua in the Study of Law and Business 1997.
Based on the strict definition of fraud, the party applying for a stop payment order should bear a strict and heavy burden of proof. It must be able to prove that: (1) fraud has occurred, not fraud as expected. (2) The beneficiary participates in fraud, knows about fraud or bears other personal responsibilities for fraud, otherwise the beneficiary will not lose his right to receive payment under this certificate due to the fault of a third party. (3) It will suffer irreparable losses due to fraud, otherwise, the applicant should use other remedies to obtain compensation. If the applicant can prove any of the following circumstances, the damage can be considered irreparable. 1) The cost of recovering the loss will exceed the loan, 2) the financial situation of the beneficiary indicates that he will not be able to compensate the applicant for the loss, and 3) the judicial injustice in the defendant's place leads to irreparable loss. 4) The applicant for injunction shall provide sufficient guarantee (Note: The Research on Stopping Payment and Payment under Letter of Credit was published by Xiang Minghua in the 4th issue of Research on Law and Commerce, 1997).
Legal nature of stop payment order
As the main remedy to solve the problem of letter of credit fraud, there is an essential difference between stop payment order and freeze order. Stop payment order refers to the order that the court prohibits payment in the form of judgment or ruling, or the issuing bank pays the beneficiary or improper holder. Freezing order is one of the property preservation measures in China's civil procedure law, which refers to a measure that the court freezes the property involved by the respondent according to its authority or the application of the parties. In the case of letter of credit fraud, the bank is not the party, the respondent should be the beneficiary of the fraud, and the amount that the applicant applies for freezing is the unpaid loan. This part of the money is the property of the applicant when the applicant pays the deposit for opening the letter of credit; In the absence of deposit, according to the financing function of the letter of credit and the primary payment obligation undertaken by the bank, what should be paid is the bank's funds. Both cases do not meet the freezing conditions. Because the applicant's application for freezing his own property does not conform to the actual situation, the court has no right to freeze the property of a third party irrelevant to the case. Therefore, it is not appropriate to issue a "freezing order" in this case.
Stop payment orders have different legal nature and legal basis according to the time when they are issued. First of all, the order to stop payment issued by the court before and during litigation is essentially a pre-litigation preservation or litigation preservation measure and a relief measure in procedural law. According to the provisions of Articles 93 and 94 of China's Civil Procedure Law, the people's court may, at the request of interested parties or litigants, take preservation measures for relevant property before or during litigation. The characteristics of these two preservation measures are as follows: as long as the interested parties or parties claim that the situation is urgent and do not preserve it immediately, their legitimate rights and interests will suffer irreparable losses, and such relief will be obtained by providing guarantees; At the same time, these two kinds of preservation measures are temporary, that is, in the case of pre-litigation preservation, the interested party does not file a lawsuit within 15 days after making the preservation request, or in these two cases, the final judgment of the court is inconsistent with the preservation measures, and the corresponding preservation measures will be lifted immediately.
The second category is the stop payment order as the final judgment of the court. This kind of stop payment order is a substantive relief measure taken by the court to solve the fraud of letter of credit according to relevant substantive laws, mainly civil law and relevant special laws.
Because it is quite easy to obtain a stop payment order in procedural law, it is easy to be abused by the parties concerned, which will affect the normal conduct of international trade and the reputation of China Bank. When using this kind of stop payment order, the court should make necessary examination of the basic facts of the case in order to minimize or avoid the negative impact.
To sum up, whether fraud can be invoked to issue a stop payment order in the letter of credit system is essentially a check and balance between the commercial system and the concept of fairness. In adjudicating such cases, the court should carefully integrate facts and laws and take into account the interests of all parties.