Retrial case concerning dispute over issuance of a letter of credit

Accurately Applying the Principle of Contract Interpretation and Clarifying the Nature of the Right of the Holder of the Bill of Lading
--Liwan Subbranch, Guangzhou Branch of China Construction Bank Co., Ltd. v. Guangdong Lanyue Energy Development Co., Ltd. et al. (Retrial case concerning dispute over issuance of a letter of credit)

[Basic Facts]
In December 2011, Liwan Subbranch, Guangzhou Branch of China Construction Bank Co., Ltd. (hereinafter referred to as “Liwan Subbranch”) and Guangdong Lanyue Energy Development Co., Ltd. (hereinafter referred to as “Lanyue Energy Company”) concluded a Contract on Trade Financing Quota and a Special Agreement on Issuance of a Letter of Credit and the relevant appendixes. It was stipulated that Liwan Subbranch provided Lanyue Energy Company with the trade financing quota not exceeding CNY550 million, including issuance of a usance letter of credit (“L/C”) with equivalent quota. Guangdong Yuedong Electric Power Design Engineering Co., Ltd. (hereinafter referred to as “Yuedong Electric Power Company”) and other guarantors concluded guarantee contracts. In November 2012, Lanyue Energy Company filed an application with Liwan Subbranch for issuing a usance L/C of CNY85.92 million. For the purpose of issuing the L/C, Lanyue Energy Company submitted the Trust Receipt to Liwan Subbranch and they concluded a Contract on Pledge of Margins. The Trust Receipt confirmed that from the date of issuance of receipts, Liwan Subbranch obtained the ownership of documents and goods involved under the aforesaid L/C, Liwan Subbranch was the settler and beneficiary, and Lanyue Energy Company was the trustee of the trusted goods. After the issuance of the L/C, Lanyue Energy Company imported 164,998 tons of coal. Liwan Subbranch accepted the L/C and paid CNY84,867,952.27. After performing the obligations of issuing the L/C and making payment, Liwan Subbranch obtained the full set of documents, including the bill of lading involved. Due to deterioration of business operations, Lanyue Energy Company failed to make payment against the documents. Therefore, in the trial of this case, Liwan Subbranch still held the bill of lading and the relevant documents. The coal under the bill of lading was seized by the People's Court of Gangkou District, Fangchenggang City, Guangxi Zhuang Autonomous Region due to other disputes. Liwan Subbranch filed this lawsuit with the Intermediate People's Court of Guangzhou City, Guangdong Province and requested the Court to order that Lanyue Energy Company should pay off the principal of CNY84,867,952.27 under the L/C and the interest thereof; confirm that 164,998 tons of coal under the L/C was owned by Liwan Subbranch and Liwan Subbranch enjoyed the priority of compensation from the disposal of coal under the bill of lading; and Yuedong Electric Power Company and other guarantors should assume the guarantee liability.

[Adjudication]
The judgment of first instance rendered by the Intermediate People's Court of Guangzhou City, Guangdong Province supported the claim of Liwan Subbranch that Lanyue Energy Company should repay the principal and the interest and the guarantors should assume the corresponding guarantee liability. However, on the ground that the delivery of the Trust Receipt and the bill of lading could not be against a third party, the Intermediate People's Court of Guangzhou City rejected the claim of Liwan Subbranch for confirmation of the coal ownership and the priority of compensation. Liwan Subbranch refused to accept the item of the judgment of first instance that Liwan Subbranch's claim for confirmation of the coal ownership and the priority of compensation should be dismissed, and it appealed. The Higher People's Court of Guangdong Province rendered a judgment of second instance to dismiss the appeal and affirm the original judgment. Liwan Subbranch refused to accept the judgment of second instance and filed an application for retrial with the Supreme People's Court. The Supreme People's Court brought this case to trial.
In the retrial, the Supreme People's Court held that: A bill of lading had dual attributes including certificate of creditor's rights and certificate of ownership, but it did not mean that the holder of the bill of lading would necessarily enjoy the ownership of goods under the bill of lading. As for the holder of the bill of lading, whether it could obtain the real right and which type of real right it could obtain depended on the contractual stipulations of the parties. Liwan Subbranch has performed the obligations of issuing the L/C and making payment and obtained the bill of lading under the L/C. However, since the parties had no intention of transferring the ownership of goods, it could not be determined that Liwan Subbranch obtained the bill of lading, namely, ownership of goods under the bill of lading. In the Trust Receipt, guarantee was provided by transferring the ownership of goods under the bill of lading. Since the transfer of guarantee did not conform to the statutory principle of real rights, the effect of the real rights could not be produced, and the transfer of guarantee was obviously different from pledge of movables or pledge of rights, the Trust Receipt should not serve as the basis for identifying the establishment of the contract on the pledge of rights in the bill of lading. It was stipulated in the Special Agreement on Issuance of a Letter of Credit that when Lanyue Energy Company breached the contract, Liwan Subbranch enjoyed the guarantee rights and had the right to dispose of documents and goods under the L/C. Therefore, according to the overall interpretation of the contract and characteristics of L/C trading, it was indicated that the true intentions of the parties on the guarantee rights and the disposal rights included the right of setting pledge of the bill of lading. This case satisfied two essential conditions for the establishment of pledge of right, namely, a written pledge contract and a publication of real rights. As the holder of the bill of lading, Liwan Subbranch enjoyed the right of pledge of the bill of lading. Therefore, on October 19, 2015, the Supreme People's Court rendered a judgment upon retrial and confirmed that Liwan Subbranch enjoyed priority of compensation from money paid in the disposal of goods in the bill of lading under the L/C involved.

[Significance]
This case was about dispute over issuance of a foreign-related usance documentary L/C and the issue was the nature of rights of the holder of the bill of lading. In the trading of international sales of goods by means of a documentary L/C, there was no final conclusion on which types of rights enjoyed by the issuing bank that legally held a bill of lading after payment for goods under the bill of lading in judicial practice and opinions varied. The judgment of this case has given clear answers to the legal attribute of the bill of lading, the legal significance of the trust receipt, which types of rights enjoyed by the holder of the bill of lading, and other difficult and complex problems. It has key guidance significance in unifying the application of law in this field. First, the judgment of this case specified that the bill of lading corresponding to the documentary L/C had such dual attributes as certificate of creditor's rights and certificate of ownership. The specific rights of the holder of the bill of lading depended on the causal legal relationship based on which the bill of lading was forwarded. Therefore, debate on the nature of the certificate of the bill of lading that has long puzzled the judicial practice was clarified. Second, the judgment of this case treated the Contract on Trade Financing Quota, the Special Agreement on Issuance of a Letter of Credit, and the Trust Receipt as a whole, explored the true intentions of the parties by means of contract system interpretation and in light of the underlying mechanisms and conventions, so that the issuing bank enjoyed the right of pledge of the bill of lading, the autonomy of the parties was truly respected, and the priority of compensation of the issuing bank was safeguarded according to the law. In the construction of the “Belt and Road,” as the “life blood of international commercial transactions,” the documentary L/C has played vital functions in safeguarding transaction security and monetary circulation. By means of unifying adjudication rules, settling disputes, and concluding cases, the judgment of this case has improved the documentary L/C trading and security system, effectively avoided puzzles to international trade due to absence of rules, and fully reflected the spirit of strict judicial justice.