The Interpretation of the Supreme People's Court of Several Issues Concerning the Trial of Cases Involving Letter of Credits Disputes was implemented at the start of this year.This body of law (“the Provisions”) is significant in that it helps standardize PRC Courts’ application of law in international trade disputes, helps to bring order and standardization into the finance and legal environments, and also helps elevate the image of law of China for the rest of the world.

1、Background

As trade has grown in recent years, so, too, has the number of disputes.Since Chinese law has not previously contained any detailed provisions on credit disputes, nor uniform standards for applying Uniform Customs and Practice for Documentary Credits (known as UCC500 1993), Chinese courts often differed in how they ascertained facts, applied laws and divided liabilities when hearing such cases. This did not generate confidence from the international trade and finance communities, so the Supreme People’s Court enacted these laws to help rectify the problems.

2、Contents

Although there are only 18 articles, the regulation scope covers the entire process of a letter of credit, from issuance, notification, modification and withdrawal to confirmation, negotiation and payment.It also includes discussion on security and further refinance. The parties to a dispute are entitled to choose the applicable laws, and courts to refer to international practices when trying disputes over credit.

The Provisions also set forth the independence of credits and standards for examination of documents. Article 5 states that a legal credit relationship is independent from the underlying transaction. Banks are liable for payment only if the presented documents conform to the terms and conditions of the credit. Article 6 stipulates the standard for examination of documents. Attention should also be paid to the fact that the Provisions adopt the language of “appear on the surface to be in accordance….”, which is the same as is used in the Uniform Customs and Practice for Documentary Credits.This is an important difference from the traditional wording of “strict compliance”, because it allows “discrepancies appearing on the face” which could not cause different meanings to the credit and documents.

The Provisions also set forth four kinds of circumstances of credit fraud and exceptions tocredit fraud. According to the Provisions, conditions for courts to rule to terminate payment are stricter, which means that the stop-payment rule is only subject to substantive trial and ascertaining credit fraud.

China’s continuing growth in import and export trade have made it necessary to streamline and standardize the application of laws surrounding international trade disputes. The recent enactment of these Provisions is a step toward accomplishing this goal, while at the same time instilling greater confidence in the PRC legal system.

── Jason Ju