In international commercial transactions, payment via L/C (Letter of Credit) is very common. So how is the L/C legally valid in Vietnam and how the independence of the L/C compared to the purchase contract understood and explained is, TNTP will share our view through Precedent 13/2017 /AL was approved by the Council of Judges of the Supreme People’s Court on December 14, 2017 in this week’s article.
PRECEDENT 13 SUMMARY
- On June 7, 2011, Company A (the Buyer) and Company B (the Seller) signed an international sale and purchase contract. Payment method 98% L/C deferred within 90 days of delivery day based on bill of lading.
- On June 7, 2011, the Buyer requested Bank E branch D to open deferred payment L/C No. 1801 to complete the purchase procedure.
- After receiving the goods, the Buyer checked the quality and volume of the shipment at the Port of Discharge, Cat Lai Port, Ho Chi Minh City with the supervision of Vinacontrol, and found that the goods did not meet the quality standards (with the inspection certificate of Vinacontrol).
- After many times of contacting the Seller to solve the problem of the quality of the shipment but failed, the Buyer filed a lawsuit to the People’s Court of Ho Chi Minh City asking the Seller to take back the shipment, not agree to pay for the Seller, and at the same time requests the Court to apply temporary urgent measures to force Bank E to suspend payment to the Seller the amount of USD 1,313,308.85 of L/C No. 1801.
- After the first instance and appellate Courts had conducted the trial, the Judicial Council of the Supreme People’s Court considered it according to cassation procedures. In the judgments of the Supreme People’s Court, there are two contents related to the validity of the L/C that have been recorded as precedent:
“ Thus, according to the Buyer’s application for opening L/C and the issued L/C content, L/C No. 1801 is a separate transaction for the Sale and Purchase of Goods Contract dated June 7, 2011; is governed by and applied in accordance with UCP 600. Under the provisions of UCP 600, Joint Stock Commercial Bank E as the Issuing Bank must make payment when determining that the presented documents are appropriate at the Bank…
 … The Court of First Instance held that the method of payment by L/C No. 1801 was an integral part of the Sale and Purchase of Goods Contract dated June 7, 2011; therefore, when this contract is completely canceled, the parties are not required to continue to perform the obligations agreed in the contract; then decided that L/C No. 1801 is no longer valid for payment and Joint Stock Commercial Bank E has no obligation to pay Bank N according to the above L/C; and at the same time forcing Joint Stock Commercial Bank E to pay the Buyer a deposit amount of USD 1,313,308.85 is not enough basis and not in accordance with the provisions of UCP 600″
COMMENTS ON THE CONTENTS OF THE PRECEDENT 13
1. Precedent defines UCP as international commercial practice
UCP stands for Uniform Customs and Practice for Documentary Credits, first issued by the International Chamber of Commerce (ICC) in 1933.
Before Precedent 13/2017, Vietnamese law did not have an official source that clearly affirms that UCP is an international commercial practice. Article 19 of Decision 226/2002/QD-NHNN stipulates: “Payment by letter of credit: opening, issuance, amendment, notification, confirmation, verification of documents, payment rights and obligations … of the parties involved in the payment of the letter of credit shall comply with the general rules of documentary credit issued by the International Chamber of Commerce (ICC), agreed to be applied by the parties to the payment, and in accordance with the current regulations of Vietnamese law.” Thus, at this time, the Regulations of the State Bank also recognized the application of the general rule on documentary credit issued by the ICC. However, the regulation does not confirm that the UCP is an international commercial practice.
Therefore, the fact that Precedent 13/2017 affirms that UCP is an international commercial practice helps to form a clear legal basis for UCP.
2. Precedent determines the applicability of UCP under Vietnamese law
Precedent 13/2017 not only affirms that UCP is an international commercial practice, but Precedent 13/2017 also applies UCP to regulate relations between parties. In the content of Precedent 13/2017, it states: “…disputed letter of credit is governed and applied under UCP 600” showing that Precedent 13/2017 has applied UCP regulations.
The Civil Code 2015 and the Maritime Code 2015 only stipulate: “The parties are entitled to agree on practices to regulate the relationship of goods purchase and sale”. However, not all practices agreed by the parties can be applied in Vietnam. Because, according to the Civil Code 2015, practices, although agreed by the parties, can only be applied if they are not contrary to the basic principles of Vietnamese law. Therefore, Precedent 13/2017 applying UCP to settle disputes in Vietnam shows that according to Precedent 13/2017, UCP is an international commercial practice applied by Vietnam in the process of settling international commercial disputes.
3. The precedent determines the independence of the L/C letter of credit from the contract of sale and purchase of goods
Precedent 13/2017 commented: “The first instance court said that the method of payment by L/C No. 1801 is an integral part of the Goods Sale Contract dated June 7, 2011; therefore, when this contract is completely canceled, the parties are not required to continue to perform the obligations agreed in the contract; since then, the decision L/C No. 1801 is no longer valid … is insufficient and inconsistent with the provisions of UCP 600.” And in Article 4 of UCP 600 specifically: “In essence, credit application is a separate transaction from the sales contract or other contracts that may be the basis of the credit …”.
Thus, the Precedent has confirmed that the L/C is a separate transaction, independent of the Goods Sale Contract. The cancellation of the Contract does not affect the validity of the L/C.
Above is a Comment on Precedent No. 13/2017/AL of TNTP. Hope that this article is useful for you.