Luoyang Aviation Construction Co. v. Korea Kookmin Bank [2023]

Factual Summary:

Underlying Contract: In November 2010, Luoyang Aviation Construction Co., Ltd. (Luoyang Aviation) entered into a steel tubular pile processing trade cooperation with Hyojong Industrial Co., Ltd. (HJ) and Hyundai Engineering & Construction Co., Ltd. (Hyundai). Hyundai had won a bid for part of the Kuwait Bubiyan Seaport Project and subcontracted the steel tubular pile processing work to HJ. To facilitate the project, Luoyang Aviation and HJ's affiliate jointly invested in establishing Qatar Aviation Construction Co. (Qatar Aviation). On 24 November 2010, HJ and Qatar Aviation signed a Subcontract Agreement. In December 2010, Qatar Aviation and Luoyang Aviation signed an Agreement, transferring all rights and obligations under the Subcontract Agreement to Luoyang Aviation.

The Transferable LC: In January 2011, Hyundai (Applicant) applied to Korea Kookmin Bank (Issuing Bank) to issue an irrevocable non-transferable LC in favor of HJ (First Beneficiary). Upon receiving First Beneficiary's amendment request, Issuing Bank notified Commercial Bank of Qatar (Transferring Bank) to amend the LC to a transferable LC.

The Transferred LC: In February 2011, Luoyang Aviation (Second Beneficiary) received the transferable LC for USD 50 million from Transferring Bank. The transferred LC stipulated that Transferring Bank would make sight payment to Second Beneficiary upon receipt of its complying presentation and payment from Issuing Bank.

Delivery of Goods by Second Beneficiary: In April 2011, Second Beneficiary delivered goods valued at USD 4.52 million to Qatar.

Presentations under the LC:

Second Beneficiary through Bank of China (Presenting Bank), made three presentations to Transferring Bank.

First Presentation (9 Nov 2011): Transferring Bank raised no discrepancies, did not forward them to Issuing Bank, and returned the documents to Presenting Bank.

Second Presentation (9 Dec 2011): Transferring Bank forwarded these documents to Issuing Bank on 27 December 2011. On 3 January 2012, Issuing Bank sent a refusal notice to Transferring Bank, stating that the documents were held at the risk and disposal of the presenter. The discrepancies: (1) Packing List not presented; (2) Previously submitted documents re-presented. Transferring Bank forwarded Issuing Bank's refusal notice to Presenting Bank on 6 January 2012.

Third Presentation (30 Dec 2011): Transferring Bank forwarded these documents to Issuing Bank on 25 January 2012. On 1 February 2012, Issuing Bank sent a refusal notice to Transferring Bank, stating that the documents were held at the disposal of the presenter. The discrepancies: (1) Certificate of Conformity not presented; (2) Inspection Certificate not presented. Transferring Bank forwarded Issuing Bank's refusal notice to Presenting Bank on 2 February 2012.

Issues and Reasoning:

The courts' reasoning and conclusions were highly consistent, primarily focusing on the following core issues:

Applicable Law: This case involved a transferable LC subject to UCP600.

For matters not covered by UCP600, where the parties did not agree on the applicable law, the law of the party whose performance most characteristic of the contract or the law most closely connected to the contract could apply.[[6]] As Second Beneficiary's domicile was in Luoyang, Henan, China, the law of the People's Republic of China applied.

Rights of Second Beneficiary: Pursuant to UCP600 Article 38(b),[[7]] Luoyang Aviation had rights as Second Beneficiary.

The relationship between Transferring Bank and Issuing Bank was one of nomination and authorization based on the definitions in UCP600 Article 2[[8]] Article 6(b),[[9]] and Article 14(a)[[10]] and the stipulations contained in the transferred LC:

"41D: Available With [Transferring Bank] by negotiation";
"47A: [Additional Conditions] … Instructions from transferring bank: B) UPON RECEIPT OF CREDIT COMPLYING DOCUMENTS AND ONLY ON RECEIPT OF PROCEEDS THE FIRST ISSUING BANK, WE SHALL COVER YOU AS PER YOUR INSTRUCTIONS LESS OUR REIMBURSEMENT AND SWIFT CHARGES";
"49: Confirmation Instructions" stated "WITHOUT".

Transferring Bank undertook document examination and sight payment responsibilities. However, it was not a confirming bank and did not have a direct honor obligation under the LC; its payment obligation to Second Beneficiary arose only upon receipt of a complying presentation and payment from Issuing Bank.

Pursuant to UCP600 Article 38(h)[[11]] and Article 7(a),[[12]] a second beneficiary under a transferable LC has the right to substitute its own invoice and draft, and this transferable credit was available with Transferring Bank by sight payment. Second Beneficiary presented documents to the Transferring Bank which complied with the LC terms and UCP600 so Issuing Bank was obligated to honor the Second Beneficiary's complying presentation.

Issuing Bank had already made payments to First Beneficiary through Transferring Bank. According to UCP600 Article 38, after a transferable LC is effectively transferred, the right to avail oneself of the original LC is transferred to the second beneficiary. The first beneficiary has no right to present documents independently; it only has the right to substitute the second beneficiary's documents and earn the price difference. Transferring Bank, knowing of the existence of the Second Beneficiary, should have, upon receipt of the First Beneficiary's documents, returned them or notified the Second Beneficiary to present documents. Facts ascertained by the Second Instance Court indicated the possibility of collusion and fraud between Transferring Bank and the First Beneficiary. However, Issuing Bank could not rely on alleged fraud by the Transferring Bank or collusive fraud between the Transferring Bank and the First Beneficiary as a defense against its payment obligation to the Second Beneficiary.

Discrepancies Raised by Issuing Bank:

The court examined and rejected all of Issuing Bank's grounds for refusal:

"All documents must be mailed in one lot"
The court held that according to UCP600 Articles 6(d)[[13]] and (e),[[14]] beneficiary may make presentations multiple times before the expiry date and there is no requirement for a single presentation. Furthermore, "all documents must be mailed in one lot to [Issuing Bank]" was a requirement under the original LC directed at Transferring Bank's presentation to Issuing Bank, not at the Second Beneficiary. Therefore, this cited discrepancy was invalid. Second Beneficiary's multiple presentations to Transferring Bank complied with the terms of the transferred LC.

First Presentation:

The First Instance judgment held that according to UCP600 Articles 16(a),[[15]] (c),[[16]] (d),[[17]] and (f),[[18]] Transferring Bank, as Nominated Bank, upon receipt of the documents, did not determine the presentation was discrepant and did not refuse in the manner required by UCP600. Therefore, Issuing Bank was precluded from claiming the presentation was discrepant and should honor.

The Second Instance judgment held a different view, finding that Transferring Bank did not actually forward the documents from Second Beneficiary's 9 November 2011 presentation to Issuing Bank. As Issuing Bank did not actually receive Second Beneficiary's presented documents, it had no obligation to honor this presentation.

Second Presentation:

(1) Discrepancy "Packing List not presented"
Regarding the documents presented by Second Beneficiary, Transferring Bank did not raise the discrepancy "Packing List not presented"; it was raised by Issuing Bank only upon refusal. Therefore, the packing list should be considered lost between Issuing Bank and Transferring Bank, and Issuing Bank remained obligated regarding the documents, according to UCP600 Article 35.[[19]]

Documents presented by Second Beneficiary included a Packing List and its description of contents was the same as that in the LC. Therefore, according to UCP600 Articles 14(a), (d),[[20]] and (f),[[21]] as long as the packing list content appeared to fulfill its function and did not conflict with other stipulated documents or the LC, it constituted a complying presentation. Issuing Bank's cited discrepancy, "Packing List not presented", was invalid.

(2) Discrepancy "Previously submitted documents re-presented"
According to UCP600 Article 14(a): "A nominated bank acting on its nomination, a confirming bank, if any, and the issuing bank must examine a presentation to determine, on the basis of the documents alone, whether or not the documents appear on their face to constitute a complying presentation" and UCP600 Article 16(c)(ii): "The notice must state each discrepancy in respect of which the bank refuses to honour or negotiate", Issuing Bank must state in its refusal notice which specific document contained the discrepancy and the specific aspect in which it failed to comply with the LC terms, applicable UCP600 articles, and international standard banking practice. As Issuing Bank's claim did not clearly, completely, and specifically state the inconsistencies between documents or between documents and the LC, "Previously submitted documents re-presented" did not constitute a valid discrepancy under UCP600 Article 16.

Third Presentation:

(1) Discrepancies "Certificate of Conformity not presented, Inspection Certificate not presented"
The court found that Second Beneficiary's third presentation only replaced the invoice and packing list, indicating it did not replace the previously submitted Certificate of Conformity and Inspection Certificate. Issuing Bank's first refusal notice dated 3 January 2012, did not cite these (Certificate of Conformity and Inspection Certificate) as discrepancies, so it could be concluded that these documents had been presented.

According to UCP600 Article 14(b): "A nominated bank acting on its nomination, a confirming bank, if any, and the issuing bank shall each have a maximum of five banking days following the day of presentation to determine if a presentation is complying. This period is not curtailed or otherwise affected by the occurrence on or after the date of presentation of any expiry date or last day for presentation."

Furthermore, UCP600 Article 16(c) requires the refusal notice must state "each discrepancy" on which the bank refuses to honor. Accordingly, the discrepancies cited by the Issuing Bank for this presentation could only be limited to the replaced documents (invoice and packing list). It could not raise new discrepancies in the other documents that were not stated in its first refusal notice. Since Issuing Bank did not list the discrepancies concerning the Certificate of Conformity and Inspection Certificate in its first refusal notice, pursuant to UCP600 Article 16(f), it was precluded from claiming that the presentation was discrepant on those grounds. Therefore, the court found Issuing Bank's claimed discrepancies "Certificate of Conformity not presented, Inspection Certificate not presented" to be invalid.

Underlying Transaction and LC Fraud

Whether the actually delivered goods "Hot Rolled Coils" differed from the "Steel Tubular Piles" required by the Credit:
According to UCP600 Articles 14(a), (d), and (f), when examining documents, banks must determine, based on the documents alone, whether they appear on their face to constitute a complying presentation.

The "Description of Goods and/or Services" in the transferred credit held by Second Beneficiary was "THE SUPPLY OF STEEL TUBULAR PILE FOR XXXX SEAPORT PROJECT PHASE1 (CONTRACT NO. XXXX)". This clause did not specify whether the goods to be delivered were "Hot Rolled Coils" or "Steel Tubular Piles", nor did it contain details like type, specifications, or quantity. It was deemed to impose no requirement. The "Description of Goods" on the commercial invoice and packing list provided by Second Beneficiary was exactly same as the "Description of Goods and/or Services" in the transferred LC and did not conflict with the Certificate of Conformity or Inspection Certificate.

Therefore, as the credit did not explicitly specify the goods as "Hot Rolled Coils" or "Steel Tubular Piles", the court only needed to decide whether Second Beneficiary's presentation complied with the credit terms. Pursuant to UCP600 Article 4(a),[[22]] the principle of autonomy of the LC provides that an issuing bank cannot utilize defenses from the underlying contract against the beneficiary. Issuing Bank's grounds for refusal were not stated when refusing Second Beneficiary's presentations but were raised only after Second Beneficiary initiated litigation. According to UCP600 Article 16(c), Issuing Bank was deemed to have waived its right to raise additional discrepancies. Therefore, Issuing Bank's grounds for refusal regarding inconsistent goods information were invalid.

Whether Second Beneficiary Committed LC Fraud:
The case involved a genuine underlying transaction; the goods (steel tubular piles) under the underlying contract were received by end-user Hyundai (Applicant) which issued a satisfactory inspection certificate; Second Beneficiary performed its supply obligation under the contract; the documents it presented were generated based on its supply activities; and there was no subjective intent or objective act to forge documents or present documents with false contents to defraud proceeds under the LC.

Court Judgment:

First Instance (Luoyang Intermediate Court): Held that Issuing Bank's grounds for refusing Second Beneficiary's three presentations under the LC were invalid and its defenses were insufficient. Issuing Bank was obligated to honor Second Beneficiary's complying presentation, based on the amount of USD 4,280,456.51 claimed in Second Beneficiary's final presentation. Interest on losses was payable from the day following Issuing Bank's refusal of that presentation until actual payment.

Second Instance (Henan High Court): Held that the LC had a genuine transactional background. Second Beneficiary performed its contractual supply obligations, the presented documents were based on the supply activities and there was no intent or act of fraud. Issuing Bank's evidence failed to prove fraud. Issuing Bank's grounds for refusal were invalid and its defenses were insufficient. The court ruled that Issuing Bank was obligated to honor Second Beneficiary's complying presentation, based on the amount of USD 4,280,456.51 claimed in the final presentation.

Retrial (Supreme People's Court): Ruled to dismiss Issuing Bank’s application for retrial. 

[[1]]: Judgment of the Supreme People’s Court of the PRC, dated March 4, 2025, Case No. (2023) Zui Gao Fa Min Shen No. 2092 [PRC], Chief Judge: Ma Dongxu, Judges: Chen Hongyu, Li Guangqin

[[2]]: Attorney Saibo JIN is an expert in handling Independent Letter of Guarantee disputes, and was invited to participate in drafting and revising the judicial interpretation “Provisions of Supreme People's Court on Several Issues Relating to the Hearing of Disputes over Independent Letter of Guarantee”. Since August 2023, designated as a member of the Technical Advisory (TA) of the Banking Commission (BC) of the International Chamber of Commerce (ICC). Former member of the Task Force of Demand Guarantee and an expert in DOCDEX Letter of Credit and Independent Letter of Guarantee dispute resolution at the ICC. Vice Director of the East Asia Committee of the Institute of International Banking Law & Practice (IIBLP), member of the Modification Committee of the International Standby Practices (ISP98) of the IIBLP, and member of the Editorial Committee of the electronic publication "Documentary Credit World" (DCW) of the IIBLP. Member of both the Letter of Credit and Independent Letter of Guarantee expert groups of ICC China. Attorney Jin Saibo has handled numerous litigation and arbitration cases related to Letters of Credit and Independent Letter of Guarantee, bulk commodity trading including disputes involving steel, copper oxide, aluminum oxide, palm oil, and ship sales. Twice elected as Vice Director of the Financial and Securities Special Committee of the All China Lawyers Association, arbitrator of the China International Economic and Trade Arbitration Commission, arbitrator of the Beijing International Arbitration Center, and arbitrator of many other arbitration institutions. Previously appointed as an expert of the Expert Committee on Civil and Administrative Supervision Cases of the Supreme People's Procuratorate. Invited to provide opinions and suggestions on the drafting and revision of judicial interpretations of the Guarantee Law part of the Civil Code. Member of the sixth and fifth working groups of the United Nations Commission on International Trade Law (UNCITRAL) for the Model Law on Secured Transactions and the Model Law on Insolvency. Observer of the drafting working group of the Model Law on Factoring (MLF) of the International Institute for the Unification of Private Law (UNIDROIT). Member of the Legal Committee (LC) of the Factors Chain International (FCI). Member of the Academic Committee of the Commercial Factoring Committee of the Service Trade Research Institute of the Ministry of Commerce. Haosheng LIN assisted with preparing the English version of this case summary. Lin is an associate attorney at Beijing Jincheng Tongda & Neal Law Firm

[[3]]: Intermediate People's Court of Luoyang, Henan Province (18 November 2019), Case No: (2016) Yu 03 Min Chu No. 336 [PRC]

[[4]]: High People's Court of Henan Province (17 April 2023), Case No: (2022) Yu Min Zhong No. 31 [PRC]

[[5]]: Supreme People's Court of People's Republic of China (4 March 2025), Case No: (2023) Zui Gao Fa Min Shen No. 2092 [PRC]

[[6]]: Law of the People's Republic of China on the Application of Laws to Foreign-related Civil Relations Article 41: The parties concerned shall negotiate and choose the applicable laws for the contracts. If the parties concerned have not made a choice, for the party whose fulfilment of obligations can best realise the contract features, the laws of his regular residence or other laws which have the closest relationship to the contract shall apply

[[7]]: UCP600 Article 38(b): Transferable credit means a credit that specifically states it is "transferable". A transferable credit may be made available in whole or in part to another beneficiary ("second beneficiary") at the request of the beneficiary ("first beneficiary")

Transferring bank means a nominated bank that transfers the credit or, in a credit available with any bank, a bank that is specifically authorized by the issuing bank to transfer and that transfers the credit. An issuing bank may be a transferring bank

[[8]]: UCP600 Article 2: Nominated bank means the bank with which the credit is available any bank in the case of a credit available with any bank

[[9]]: UCP600 Article 6(b): A credit must state whether it is available by sight payment, deferred payment, acceptance or negotiation

[[10]]: UCP600 Article 14(a): A nominated bank acting on its nomination, a confirming bank, if any, and the issuing bank must examine a presentation to determine, on the basis of the documents alone, whether or not the documents appear on their face to constitute a complying presentation

[[11]]: UCP600 Article 38(h): The first beneficiary has the right to substitute its own invoice and draft, if any, for those of a second beneficiary for an amount not in excess of that stipulated in the credit, and upon such substitution the first beneficiary can draw under the credit for the difference, if any, between its invoice and the invoice of a second beneficiary

[[12]]: UCP600 Article 7(a): Issuing Bank Undertaking

a. Provided that the stipulated documents are presented to the nominated bank or to the issuing bank and that they constitute a complying presentation, the issuing bank must honour if the credit is available by:

i. sight payment, deferred payment or acceptance with the issuing bank;

ii. sight payment with a nominated bank and that nominated bank does not pay;

iii. deferred payment with a nominated bank and that nominated bank does not incur its deferred payment undertaking or, having incurred its deferred payment undertaking, does not pay at maturity;

iv. acceptance with a nominated bank and that nominated bank does not accept a draft drawn on it or, having accepted a draft drawn on it, does not pay at maturity;

v. negotiation with a nominated bank and that nominated bank does not negotiate

[[13]]: UCP600 Article 6(d):

i. A credit must state an expiry date for presentation. An expiry date stated for honour or negotiation will be deemed to be an expiry date for presentation.

ii. The place of the bank with which the credit is available is the place for presentation. The place for presentation under a credit available with any bank is that of any bank. A place for presentation other than that of the issuing bank is in addition to the place of the issuing bank

[[14]]: UCP600 Article 6(e): Except as provided in sub-article 29 (a), a presentation by or on behalf of the beneficiary must be made on or before the expiry date

[[15]]: UCP600 Article 16(a): When a nominated bank acting on its nomination, a confirming bank, if any, or the issuing bank determines that a presentation does not comply, it may refuse to honour or negotiate

[[16]]: UCP600 Article 16(c): When a nominated bank acting on its nomination, a confirming bank, if any, or the issuing bank decides to refuse to honour or negotiate, it must give a single notice to that effect to the presenter.

The notice must state:

i. that the bank is refusing to honour or negotiate; and

ii. each discrepancy in respect of which the bank refuses to honour or negotiate; and

iii. a) that the bank is holding the documents pending further instructions from the presenter; or

b) that the issuing bank is holding the documents until it receives a waiver from the applicant and agrees to accept it, or receives further instructions from the presenter prior to agreeing to accept a waiver; or

c) that the bank is returning the documents; or

d) that the bank is acting in accordance with instructions previously received from the presenter

[[17]]: UCP600 Article 16(d): The notice required in sub-article 16 (c) must be given by telecommunication or, if that is not possible, by other expeditious means no later than the close of the fifth banking day following the day of presentation

[[18]]: UCP600 Article 16(f): If an issuing bank or a confirming bank fails to act in accordance with the provisions of this article, it shall be precluded from claiming that the documents do not constitute a complying presentation

[[19]]: UCP600 Article 35 states, in part: If a nominated bank determines that a presentation is complying and forwards the documents to the issuing bank or confirming bank, whether or not the nominated bank has honoured or negotiated, an issuing bank or confirming bank must honour or negotiate, or reimburse that nominated bank, even when the documents have been lost in transit between the nominated bank and the issuing bank or confirming bank, or between the confirming bank and the issuing bank

[[20]]: UCP600 Article 14(d): Data in a document, when read in context with the credit, the document itself and international standard banking practice, need not be identical to, but must not conflict with, data in that document, any other stipulated document or the credit

[[21]]: UCP600 Article 14(f): If a credit requires presentation of a document other than a transport document, insurance document or commercial invoice, without stipulating by whom the document is to be issued or its data content, banks will accept the document as presented if its content appears to fulfil the function of the required document and otherwise complies with sub-article 14 (d)

[[22]]: UCP600 Article 4(a): A credit by its nature is a separate transaction from the sale or other contract on which it may be based. Banks are in no way concerned with or bound by such contract, even if any reference whatsoever to it is included in the credit. Consequently, the undertaking of a bank to honour, to negotiate or to fulfil any other obligation under the credit is not subject to claims or defences by the applicant resulting from its relationships with the issuing bank or the beneficiary.

A beneficiary can in no case avail itself of the contractual relationships existing between banks or between the applicant and the issuing bank