China and the Fraud Rule in LC's

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Standard of Fraud

The fraud rule is developed to prevent fraudsters from using letters of credit to unjustly enrich themselves. It is applied when fraud is found in the transaction . . . .

In the P.R.C., fraud is defined under Article 68 of the Interim Opinions of the Supreme People’s Court Concerning the Implementation of the General Principes of the Civil Law of the P.R.C. (IOGPCL) as “one party intentionally telling the other party a lie or concealing the truth of a fact in order to induce the other party to come to a decision it would otherwise not come to.”

However, this standard can be tough to apply. It is not quite like U.S. fraud rules because it seems the causation bar in the IOGPCL seems higher: to cause a party to do something it would otherwise not do. Of course, it is vague, so the article lays out some examples:

(i) The beneficiary has forged documents or presented documents containing fraudulent information;

(ii) The beneficiary has intentionally failed to deliver goods or delivered goods with no value;

(iii) The beneficiary has conspired with the applicant or a third party and presented fraudulent documents whereas there is no actual underlying transaction; or

(iv) Other circumstances that constitute letter of credit fraud.

Parties Immune from the Fraud Rule

A people’s court shall make a ruling to suspend the payment or a judgement to permanently stop the payment under a letter of credit when fraud is established, unless one of the following has happened:

(i) The nominated person or the person authorised by the issuing bank has paid in good faith in accordance with the instructions of the issuing bank;

(ii) The issuing bank or its nominated or authorized person had accepted the draft under the letter of credit in good faith;

(iii) The confirming bank has paid in good faith; or

(iv) The negotiation bank has negotiated in good faith.

Jurisdiction

The following courts can hear foreign-related commercial cases or are competent courts that can hear letter of credit cases:

a). People’s courts of the Economic and Technological Development Zones approved by the State Council;

b). Intermediate people’s courts of the capital cities of provinces, autonomous regions and municipalities directly under the control of the Central Government;

c). Intermediate people’s courts of the Special Economic Zones and Municipalities financially directly report to the Central Government;

d). Other intermediate people’s courts specially designated by the SPC for the jurisdiction of foreign-related commercial cases; and

e). High People’s Court.

Currently, all letter of credit cases in the SPC are under the jurisdiction of the No. 4 Civil Division.