Cassation judgment No. 04/KT-GDT dated june 23, 2005 regarding dispute over credit agreement

THE SUPREME PEOPLE’S COURT

CASSATION JUDGMENT NO. 04/KT-GDT DATED JUNE 23, 2005 REGARDING DISPUTE OVER CREDIT AGREEMENT

On June 23, 2005, the cassation trial was conducted at the office of the Supreme People’s Court to hear the case of dispute over credit agreement between:

Petitioner:  Vietnam Maritime Commercial Joint Stock Bank (hereinafter referred to as Maritime Bank);

headquartered at: 5A Nguyen Tri Phuong, Hai Phong City.

Respondent:  Hai Phong Commercial Company.

headquartered at: 22 Ly Tu Trong, Hai Phong City.

FINDING THAT

On December 14, 1995, Hai Phong Commercial Company and SUNKYUNG Co., Ltd (Korea) entered into a sales contract of 5,000 tonnes of steel plates (±10%), with a deferred payment period of 360 days and total contract value of USD 1,734,400. Following the above-mentioned contract, on December 18, 1995, Hai Phong Commercial Company applied for issuance of Letter of Credit (L/C) to Maritime Bank - Hai Phong Head Office.  Hai Phong Commercial Company undertook to pay a deposit of 5% of L/C and pledge the whole import consignment up as security for the payment.

Accepting the request of Hai Phong Commercial Company, on December 22, 1995, Maritime Bank issued Hai Phong Commercial Company with an irrevocable and deferred payment L/C to import 5,000 tonnes of steel plates No. 0087 LCUHATRA 1295 valued at USD 1,734,400 (±10%), with deferred payment at 360 days after the date of bill of lading (B/L). The actual B/L date is December 31, 1995, the actual value of consignment, based on the bill of exchange and invoice is USD 1,746,882.48. On December 22 and 23, 1995, Hai Phong Commercial Company paid a deposit of 5% equivalent to VND 956,000,000, the Bank exchanged it to USD 86,735.62.

When the consignment arrived Hai Phong Port, Hai Phong Commercial Company received it. Then the Company and the Bank coordinated in management and sale of the consignment. Since the sale progress went behind the given schedule, when the payment of L/C was due, Hai Phong Commercial Company had not sold out the cargo and had had not enough money to pay the foreign party. As the foreign party delivered the cargo later than schedule mentioned in the contract, the entire L/C was renewed by the foreign party until February 16, 1997. On December 16, 1997, however, Hai Phong Commercial Company still had not sold out the cargo and had had not enough money to pay. So, it requested for the second renewal. The foreign party only accepted renewal of partial L/C of USD 546,882.48. The payment which was due on February 16, 1997 was USD 1,200,000.Taking account of the proceeds from the import consignment paid to the Bank and the deposit paid earlier, Hai Phong Commercial Company had just paid USD 877,920. Consequently, on February 18, 1997, Maritime Bank - Hai Phong Head Office granted Hai Phong Commercial Company a forced loan of USD 322,080.76 to cover the amount of USD 1,200,000 to be paid the foreign party. Such forced loan was mentioned in the credit agreement No. 027-02/97 dated February 18, 1997 (first time). When the payment of USD 546,882.48 was due, Hai Phong Commercial Company still had had not enough money. So, on May 16, 1997, Maritime Bank - Hai Phong Head Office had no choice but grant the Company another forced loan of USD 546,882.48, as indicated in the credit agreement No. 009-05/97 dated May 16, 1997 (second time).

All of proceeds from the import consignment from February 18, 1997 paid to Maritime Bank - Hai Phong Head Office by Hai Phong Commercial Company was only enough to fully pay the principal and interest of the credit agreement No. 027-02/97 dated February 18, 1997 and partial principal and interest of the credit agreement No. 009-05/97 dated May 16, 1997. The outstanding debt is USD 268,905.

Because of the loss in sale of imported steel consignment, Hai Phong Commercial Company requested the Bank to reschedule the debt to 5 years with a specified repayment plan from 1999 to 2003. Despite the plan, Hai Phong Commercial Company has not paid any amount of such debt to Maritime Bank since 1999.

On October 21, 2003, Maritime Bank filed a lawsuit petition with the People’s Court  of Hai Phong City, claiming the repayment of principal of USD 268,905 and interest of USD 269,615.21 from Hai Phong Commercial Company.

In the First Instance Economic Judgment No. 02/KTST dated March 8, 2004, the People’s Court of Hai Phong City judged:

Compel Hai Phong Commercial Company to repay the debt of USD 394,665.08 to Maritime Bank under the credit agreement No. 009-05/97 dated May 16, 1997.

including: USD 260,533.38 of principal and USD 134,31.70 of interest.

On March 12, 2004, Hai Phong Commercial Company filed an appeal against the entire First Instance Economic Judgment.

On March 15, 2004, the Chief Procurator of the People’s Procuracy of Hai Phong City issued an appeal No. 176/KN-REVENUES against the First Instance Economic Judgment No. 02 dated March 8, 2004 of the People’s Court  of Hai Phong City, requesting the Supreme People's Court to conduct an appellate trial, quash the First Instance Judgment No. 01 dated March 8, 2004 of the People’s Court of Hai Phong City, suspend the case and refer it to the investigation agency for further consideration.

In the additional appeal No. 406/KN-BS dated July 8, 2004, the Chief Procurator of the People’s Procuracy of Hai Phong City upheld the appeal No. 176/KN-KT dated March 15, 2004 of the People’s Procuracy of Hai Phong City and added that the foreign trade contract No. SKTG/HR 951214 dated December 14, 1995 is a null and void economic contract and recommend to bring Hai Phong Export and Import Company to the legal proceedings as the person with relevant rights and obligations.

In the Appellate Economic Judgment No. 154/KTPT dated September 10, 2004, the Appellate Court of the Supreme People’s Court in Hanoi judged: uphold the First Instance Judgment, compel Hai Phong Commercial Company to repay the debt of USD 394,665.08 to Maritime Bank under the credit agreement No. 009-05/97 dated May 16, 1997, including USD 269,533.38 of principal and USD 134,131.70 of interest equivalent to VND 6,210,449,698.88 (Six billion two hundred ten million four hundred forty nine six hundred ninety eight point eighty eight dong) of the State Bank of Vietnam.

After the appellate trial was conducted, Hai Phong Commercial Company filed a complaint, National Assembly delegation of Hai Phong City, the People’s Committee of Hai Phong City and Legal Committee of the National Assembly issued requests to review the case under cassation procedure.

In the appeal No. 05/KN-AKT dated January 28, 2005, the Chief Procurator of the Supreme People’s Procuracy judged:  The forced loan Maritime Bank granted to Hai Phong Commercial Company under the credit agreement dated May 16, 1997 came from the L/C No. 0087 LCUHATRA 1295 dated December 22, 1995 Maritime Bank issued to Hai Phong Commercial Company. However, the issuance of such L/C by Maritime Bank constituted the following violations:

Pursuant to Clause 3 Article 12 of Regulations on management of foreign loans and repayment thereof issued together with Decree No. 58/CP dated August 30, 1993, one of the conditions for a state-owned enterprise to apply for a foreign loan is: “subject to evaluation of plan and approval for loan amount by the President of the People’s Committee of central-affiliated city (for local enterprise)…”. As a local state-owned enterprise, Hai Phong Commercial Company must obtain the evaluation of plan and approval for loan amount by the President of the People’s Committee of Hai Phong City. However, in fact, Maritime Bank issued the L/C to Hai Phong Commercial Company without any evaluation of plan and approval for loan amount by the President of the People’s Committee of Hai Phong City.

Article 12 of Regulations on Guarantees and Cross-Guarantees for Foreign Loans issued herewith Decision No. 23/QD-NH14 dated February 21, 1994 of the Governor of the State Bank stipulates: “…For state-owned enterprises, an asset to be put up as security must obtain prior written consent of the owner (or owner’s representative) of the asset - viz the finance authority”. Hai Phong Commercial Company is a state-owned enterprise, so all assets under its management are owned by the state. The consignment of 5,000 tonnes of steel plates put up as security to open the deferred payment L/C was not actually asset of the Company (the Company was only the import trustee), moreover, it is also state-owned asset. So, putting up such consignment as security must obtain a prior written consent of the finance authority of Hai Phong City. Maritime Bank violated the said Regulation when accepting such 5,000 tonnes of steel plates as security to open the L/C without any consent of the finance authority of Hai Phong City.

Maritime Bank even issued the L/C to Hai Phong Commercial Company based on the sales contract No. SKTD/HR 951214 dated December 14, 1995 between Hai Phong Commercial Company and SUNKYUNG LTD (Korea) and the entrusted import contract No. 01/UT dated December 15, 1995 between Hai Phong Export and Import Company and Hai Phong Commercial Company while these economic contracts constituted violations below (null and void economic contracts):

Regarding the sales contract No. SKTD/HR 951214: when both parties entered into the contract, Hai Phong Commercial Company had not obtained the import license of 5,000 tonnes of steel plates (Hai Phong Commercial Company was entrusted to import by Hai Phong Export and Import Company 1 day after under the import license No. 5605TM/XNK dated May 12, 1995 with the expiry date on December 31, 1995 of the Ministry of Trade).

Regarding the entrusted import contract No. 02/UT dated December 15, 1995: Point 1 of Regulation on entrusted import and export between domestic juridical persons issued together with Decision No. 1172TM/XNK dated September 22, 1994 of Minister of the Ministry of Trade stipulates: “Entrusted import and export means a trade activity in the form of engagement and acceptance of import and export services. This activity…conforms to regulations of Ordinance of economic contracts". Therefore, the conclusion and execution of the entrusted import contract No. 02 shall conform to economic ordinances and contracts and Decree No. 17/HDBT dated January 16, 1991 on guidelines for implementation of ordinance of economic contracts. But in the entrusted import contract No. 02, the section of number, date, etc. of the letter of authorization to the signatory of Hai Phong Export and Import Company was left blank (the signatory did not have a letter of authorization). The conclusion of above entrusted import contract constituted violation of Article 9 of Ordinance on Economic Contracts and Article 6 of Decree No. 17/HDBT dated January 16, 1991 on signatories of economic contracts and authorization sign economic contracts.

Besides, regarding the issuance of L/C No. 0087 LCUHATRA 1295 dated December 22, 1995 to Hai Phong Commercial Company, Maritime Bank also had the following violations:

- In the request to issue L/C to Hai Phong Commercial Company No. 705/KDTH dated December 20, 1995 presented to the President of the Board of Directors of Maritime Bank, the General Business Department of Maritime Bank - Hai Phong Head Office, below the financial situation report of Hai Phong Commercial Company (working capital, accounts receivable, liabilities of bank loans), recorded as follows:  “Hai Phong Commercial Company is a class-A client etc. Although the client has high debt balance, their business plan is feasible for the opening of an L/C. The sales contract was concluded. The proceeds from the sale are committed to be transferred to the Bank’s account as security for payment upon expiry of the L/C”. These remarks are poorly-grounded because at the time when Hai Phong Commercial Company applied to Maritime Bank for issuance of L/C, it was not the owner of the consignment of 5,000 tonnes of steel (only the import trustee) and had no right to sell that consignment. The General Business Department of Maritime Bank - Hai Phong Head Office ignored regulations on deferred payment L/C practices No. 132/QD dated May 23, 1995 of Maritime Bank to request the head of the Bank to issue an L/C to Hai Phong Commercial Company. In the Appellate Judgment, there was a consideration for the issuance of L/C to Hai Phong Commercial Company as follows:  “Moreover, pursuant to Dispatch No. 170/CV dated December 30, 1998 of Hai Phong Commercial Company, on January 5, 1996, the Company signed a sales contract of the entire consignment with Hanoi Material Business Company No. 04/HDKT and Appendix No. 01/PLHD”. This consideration is poorly-grounded and not accordant with the facts of the case, because: If Hai Phong Commercial Company had the right to sell the consignment, the contract No. 04 dated January 5, 1996 existed after the L/C was issued.

In the sales contract No. SKTD/HR 951214 dated December 14, 1995, Article 11 stipulates: “promissory note secured to sale: The seller will open a promissory note of 2% of the consignment value at the buyer’s bank within 7 days after receipt of an acceptable L/C to secure the sales”. Maritime Bank’s failure to request SUNKYUNG LTD to open a promissory note at the Bank under the sales contract with Hai Phong Commercial Company constituted a violation against deferred payment L/C practices of Maritime Bank (Article 9 of Decision No. 132/QD dated March 25, 1995).

Associated with the honour of L/C No. 0087 LCUHATRA 1295 of Maritime Bank, there were certain issues that the Court of First Instance and the Court of Appeal accepted without clarification:

On December 9, 2003, Maritime Bank sent the document No. 1575/TGD9 to the People’s Court of Hai Phong City stating as follows: “The date of B/L is January 16, 1996” (this document was not included in the case file by the Courts).  However, on March 5, 2004, Maritime Bank sent the dispatch No. 187 for revision of error in the dispatch No. 1575: “The date of B/L is December 31, 1995”. This revision is only the act to legalized the Bank’s honour of the L/C. The First Instance Judgment and Appellate Judgment had not verify this matter to determine the accurate date of B/L before accepting the revision of Maritime Bank in the document No. 187/TGD dated March 5, 2004. This was not an impartial decision.

Pursuant to L/C No. 0087 LCUHATRA 1295, the latest date of shipment is December 31, 1995 and the expiry date for sending of the documents is January 30, 1996 (according to the postmark sent from Korea). It means that if the seller does not send the documents before January 30, 1996, the L/C will expire and this L/C conforms to UCP 500 in 1993, ICC”.

Point a Article 43 of UCP 500 stipulates “In addition to stipulating an expiry date for presentation of documents, every Credit which calls for a transport document(s) should also stipulate a specified period of time after the date of shipment during which presentation must be made in compliance with the terms and conditions of the Credit. If no such period of time is stipulated, banks will not accept documents presented to them later than 21 days after the date of shipment. In any event, documents must be presented not later than the expiry date of the Credit”. According to the receipt of documents sent by DHL Express from Korea to Maritime Bank, the sending date of documents was February 10, 1996, 11 days after the expiry date of L/C No. 0087 LCUHATRA 1295. Pursuant to Point a Article 43 UCP 500, in this circumstance, Maritime Bank may not accept documents in any event. Accepting documents presented later than the expiry date of L/C and undertaking to honour the seller's claim under the L/C which expired 11 days thereafter, Maritime Bank violated UCP 500 and the L/C No. 0087 LCUHATRA 1295.

In the request for cassation review of Appellate Economic Judgment No. 154/KTPT dated September 10, 2004 filed by Hai Phong Commercial Company, there is an accompanying agreement dated April 16, 1996 between Hai Phong Commercial Company and Maritime Bank. According to this agreement, Hai Phong Commercial Company transferred the whole of ownership and right to benefit from the cargo insurance to the Bank; the delivery of cargo shall be done only if an order of mortgage release with adequate seal and signature of the (Deputy) Director of Maritime Bank - Hai Phong Head Office is issued. Accordingly, Hai Phong Commercial Company no longer had the right of disposal of the consignment, such right was assigned to Maritime Bank. So, it seems unfair on Hai Phong Commercial Company to make it incur all the losses in the sale of the consignment as stated in the First Instance Judgment and Appellate Judgment.

In this case, the role of Hai Phong Export and Import Company should have been considered. In specific, Hai Phong Export and Import Company entrusted the import of 5,000 tonnes of steel plates to Hai Phong Commercial Company (under the import license No. 5605-TM/XNK dated May 12, 1995), expired on December 31, 1995) according to the entrusted import contract No. 02/UT dated December 15, 1995. Under this contract, Hai Phong Commercial Company will receive an entrustment commission of USD 8,000 within 7 days upon release of the consignment assessment result (Article 4). However, according to the working minutes between Hai Phong Commercial Company and Maritime Bank dated August 30, 1997, the record of costs incurred from the cargo receipt to November 21, 1996 states: “the entrustment cost paid to Hai Phong Export and Import Company is VND 60,000,000". This proves that Hai Phong Export and Import Company benefited from the import although it refused to receive the consignment under the dispatch dated April 12, 1996 (this document was enclosed with the claim and was not included in the case file by the Courts). The Courts based on dispatch No. 417/CV-KD4 dated December 19, 1995 of Hai Phong Export and Import Company signed by Mr. Nguyen Duc Vinh (manager of general business and service department No. 4) to claim that Hai Phong Export and Import Company had agreed to let Hai Phong Commercial Company directly manage and sell the consignment. This claim was not accordant with Article 5 of entrusted import contract No. 02/UT: “If any difficulty arises, both parties will discuss the problem and reach a mutual agreement by additional annexes”. 

Moreover, the expiry date of the import license No. 5605-TM/XNK dated May 12, 1995 of the Ministry of Trade is December 31, 1995 and Article 3 of the entrusted import contract No. 02/UT stipulate: “The time of shipment is between December 1995 and January 1996”, but the cargo had not reached the given port until April 1996. In order for the consignment to be imported at the port, the import license No. 5605/XNK dated May 12, 1995 should have been extended and the applicant for renewal was supposed to be Hai Phong Export and Import Company (the license holder). This matter was raised by Hai Phong Commercial Company at the Court of First Instance’s hearing but the Courts overlooked it and failed to bring Hai Phong Export and Import Company to legal proceedings as a person with relevant rights and obligations.

Based on above-mentioned analysis, the Supreme People’s Procuracy deems it that First Instance Judgment and Appellate Judgment constituted serious procedural errors; the evidence has not been substantially taken and there were major mistakes made during the application of laws, so the interests of parties were not fully protected.

Request the Council of Judges of the Supreme People's Court to conduct a cassation review to: Quash the First Instance Economic Judgment No. 02/KTST dated March 8, 2004 of the People’s Court of Hai Phong City and Appellate Economic Judgment No. 154/KTPT dated September 10, 2004 of the Court of Appeal of the Supreme People's Court and then refer the case file to the Court of First Instance for retrial.

CONSIDERING THAT

Hai Phong Commercial Company still owes to Maritime Bank based on the credit agreement associated with the payment of the consignment of 5,000 tonnes of steel of SUNKYUNG (Korea) under 360-day deferred payment L/C; the import of this consignment is showed in the entrusted import contract No. 02/UT dated December 15, 1995 between Hai Phong Commercial Company and Hai Phong Export and Import Company under the import license No. 5605 TM/XNK dated May 12, 1995 of Ministry of Trade issued to Hai Phong Export and Import Company. Therefore, for comprehensive and thorough resolution, it is required to clarify why Hai Phong Commercial Company had no entrusted import contract and import license but it had concluded the entrusted import contract with SUNKYUNG (Korea) 1 day before with the quantity of cargo as the same as mentioned in the import license.

Hai Phong Commercial Company imported the said steel consignment under the entrusted import contract No. 02/UT dated December 15, 1995 with Hai Phong Export and Import Company, represented by Mr. Nguyen Duc Vinh, manager of general business and service department No. 4 with the letter of authorization No. 1082/UQ-TCT dated December 15, 1995 of General Director Pham Van Chinh; on December 19, 1995, Mr. Nguyen Duc Vinh signed the dispatch No. 417/CV-KD4, letting Hai Phong Commercial Company directly receive, manage and sell the consignment on behalf of  Hai Phong Export and Import Company. This dispatch was made beyond the scope of authorization; therefore, the right to own the consignment was still held by Hai Phong Export and Import Company. In order to determine the role and liability of Hai Phong Export and Import Company for the business loss and debt to the Bank, it is required to bring Hai Phong Export and Import Company to the legal proceedings as a person with relevant rights and obligations.

- Did Maritime Bank comply with laws and regulations in issuance of the L/C? Yes, its issuance of L/C is accordant with Decree No. 58/CP dated August 30, 1993 of the Government, Decision No. 23/QD-NH14 dated February 21, 1994 of the Governor of the State bank of Vietnam and other laws and regulations on opening and honour of deferred payment L/C with foreign party, in which whether the documents were accepted within the L/C period should be clarified. And then consider faults and responsibility of each party for the loss in this transaction.

Accordingly, it is necessary to quash Appellate Judgment and First Instance Judgment in this case and then refer the case file to the Court of First Instance to justify the evidence and retry the case under general procedures.

According to facts and matters, pursuant to Clause 3 Article 291, Clause 3 Article 297, Clause 1 and Clause 2 Article 299 of the Civil Procedure Code;

HEREBY DECIDES

Quash the First Instance Economic Judgment No. 02/KTST dated March 8, 2004 of the People’s Court of Hai Phong City and Appellate Economic Judgment No. 154/KTPT dated September 10, 2004 of the Court of Appeal of the Supreme People's Court.

Refer the case file to the People’s Court of Hai Phong City for re-conducting the first-instance trial as per the law.

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- Grounds for quashing the First Instance Judgment and Appellate Judgment:

1. Certain facts in the case need further clarification;

2. Bring Hai Phong Export and Import Company to legal proceedings as the person with relevant rights and obligations.

- Reasons for quashing the First Instance Judgment and Appellate Judgment:

1. Procedural errors in verification of certain facts which are important and meaningful in determining faults and responsibility of each party in the case;

2. Procedural errors in determining procedural participants.