Judgment no. 07/2020/KDTM-PT dated august 28, 2020, regarding dispute over indemnity claim arising from contract for issuance of term letter of credit (deferred L/C)

THE PEOPLE’S COURT OF NAM DINH PROVINCE

JUDGMENT NO. 07/2020/KDTM-PT DATED AUGUST 28, 2020, REGARDING DISPUTE OVER INDEMNITY CLAIM ARISING FROM CONTRACT FOR ISSUANCE OF TERM LETTER OF CREDIT (DEFERRED L/C)

On August 28, 2020, at its headquarter, the People's Court of Nam Dinh province is opening an appellate hearing to the public to try the commercial case No. 02/2020/TLPT-KDTM entertained on January 16, 2018, regarding “Dispute over the indemnity claim arising from the contract for issuance of the term letter of credit (Deferred L/C)”.

Owing to the fact that the preliminary commercial ruling No. 18/2019/KDTM-ST dated November 27, 2019 of the People’s Court of Nam Dinh city is appealed. 

According to the Decision to bring the case to trial No. 83/2020/QDXXPT-KDTM dated July 12, 2019 between litigants:

- Plaintiff: Joint Stock Company T; Address: Block C6-1, L1+L3, industrial park H, city N, province N:

Legal representative: Mr. Nguyen Van C, title: Company’s Director.

 Authorized representative: Mrs. Tran Thi T1, born in 1984. Address of registered permanent household: No. 53 H, ward N, city N, province N. Residence address: No. 68, street D, residential district H, ward L, city N, province N. (According to the power of attorney made on July 22, 2019).

- Defendant: Joint Stock Commercial Bank K (T2); Address: No. 191, street B, ward L, district H, Ho Chi Minh city.

Legal representative: Mr. Ho Hung H, title: President of the Governing Board.

Authorized representative: Mrs. Pham Thi N, title: Debt Management Director of Risk Management Operations - Joint-Stock Commercial Bank K. (According to the power of attorney No. 1218/2017/QD-HDQT dated September 27, 2017 of the President of the Governing Board of the Commercial Bank K). Successor agents:

Mrs. Hoang Minh T3; Mr. Nguyen Huu Tien A1; Mr. Du Van G – Debt management officer – Joint Stock Commercial Bank K. (According to the power of attorney for the successor agent No. 846/2019/UQ-TCB dated August 17, 2019).

3. Appellant: Joint Stock Company T (Plaintiff) and Joint Stock Commercial Bank K (Defendant).

At the hearing, Mrs. Tran Thi T1, Mrs. Hoang Minh T3 and Mrs. Pham Thi N are present.

CASE DETAILS

According to the petition, in the self-declaration and during the process of participating in the proceedings and at the court hearing, the plaintiff, JSC T, represented that: Due to the need for raw cotton for production, on February 8, 2012, Joint Stock Company T (hereinafter referred to as JSC T) signed a contract of sale and purchase No. F-138 (revised on February 17, 2012) with T4 COTTON CO.,LTD (hereinafter referred to as Company T4) to buy 108 tonnes of raw cotton, which stipulates payment via letter of credit. Therefore, on March 7, 2012, JSC T sent a Request for Issuance of Letter of Credit, requesting Joint Stock Commercial Bank K - Nam Dinh branch (hereinafter abbreviated as T2) to issue a letter of credit to the partner of JSC T in the F-138 contract, Company T4. The request for issuance of letter of credit contains the following information: Payment amount: USD 235,440; Payment term: deferred payment made within 90 days from the date of bill of lading (i.e. the date on which the goods are loaded on board the vessel); Time of presentation: Within 15 days after the date of loading and remaining within the time the credit is valid; the instruction issued by JSC T to T2: In case of invalid documents, T2 entirely has the right to refuse payment. In case where JSC T sends the Bank a written request for acceptance of the invalid set of documents, the Bank may make the payment and T must be committed to bearing L/C payment and settlement; JSC T proposed using 15% and 85% of its own capital as a security deposit or payment, respectively; The time limit for paying 85% of JSC T’s own capital  to Techcombank is 03 (three) working days from the date on which T2 notifies that submitted documents are valid; The responsibility for JSC T’s payment to T2 exists in all cases where T2 makes payment according to the letter of credit opened at the request of JSC T. If JSC T violates agreement on payment term with T2, it will be fined for that violation and bear the overdue interest rate of 150% until the payment is completed. Documentary delivery order is executed by T2. L/C opening fee is VND 7,057,620.

In addition, in the request for opening of the L/C, there are other clauses permitted by law on opening of L/C.

On March 8, 2012, T2 - Nam Dinh branch issued a letter of credit No. TF1206801025/NDH to the beneficiary, Company T4. The applicable rule is the latest version of UCP600. The amount of L/C payment is USD 235,440. Payment period: pay by installment within 90 days from the BL date. In addition, in the L/C opening request, there is no language clause but T2 - Nam Dinh branch still includes the additional terms and conditions under which drafts and all documents must be issued in English in section 47A.

Processes for making the Request for Issuance of Letter of Credit: Based on the request for issuance of the letter of credit, on March 8, 2012, JSC T paid a 15% security deposit equaling VND 780,056,952; L/C opening fee equaling VND 7,057,620; SWIFT/Telex charge (including VAT) ) equaling VND 701,188, at the request of T2. On May 10, 2012, JSC T received the carrier’s fax notification of arrival of the shipment of cotton purchased by JSC T under the contract F-138 at Hai Phong port. On May 16, 2012, JSC T received an original bill of lading sent directly by Company T4 to JSC T. The bill of lading was dated April 4, 2012. Because T2 believed that submitted documents were incorrect, Company T4 carried out modification twice. On June 25, 2012, JSC T and Company T4 entered into a written agreement whereby Company T4 was committed to incur all storage charges and pay JSC T USD 15,000 when JSC T received the set of documents comprising a delivery order from Bank T2. On June 27, 2012, JSC T received a written notification titled “Notice of documents requiring modification” dated June 26, 2012 from T2 - Nam Dinh branch, pointing out that the set of documents contained an error called “1. LATE PRESENTATION”.  There was no other error.  T2 required JSC T to comment on the error contained in the set of documents by June 29, 2012 at the latest. After this deadline, in the absence of any reply from JSC T, T2 would send a telegram to refuse to pay under the set of documents. On June 29, 2012, JSC T sent a notice (attached to the last section of the notice dated June 26, 2012 of T2) saying its acceptance of a partial payment of USD 171,757.98, which was understood as payment made under the set of documents. The notice was represented by marking onto the appropriate box No. 3, and signed and sealed by Mr. Nguyen Van C, JSC T’s Director. In addition, JSC T sent T2 the Official Letter No. 33/CV-CT dated June 29, 2012 saying acceptance of the error in the set of documents and requesting T2 to pay the amount of 171,757.98 USD to the exporter’s foreign bank and confirmation of responsibility for paying the remaining amount of USD 60,000 to Company T4. At 16:25 July 2, 2012, JSC T received the Official Letter No. 80-2012 of T2 - Nam Dinh branch stating that a telegram of acceptance of payment to the foreign bank was issued only if JSC T had the adequate USD balance in its account opened at T2 - Nam Dinh branch and blocked at 17:00 that day by T2. In case where JSC T failed to meet the requirements, T2 would return the original set of documents to the foreign bank. On July 3, 2012, JSC T filed a claim for indemnity because T2 breached the instruction to request issuance of a letter of credit dated March 7, 2012 when it failed to comply with JSC T’s instruction to request T2 to pay USD 171,757.98 to Company T4. T2 committed a breach of the clause on the payment period specified in Section 42C of the request for issuance of the letter of credit and the bill of lading dated April 4, 2012 in which, though the payment due date was July 3, 2012, T2 requested JSC T to make premature payment on July 2, 2012. This act was a breach of the clause on the prior notice period of 03 working days, causing damage to JSC T. Hence, JSC T is filing a lawsuit to request T2 to compensate for damage specified as follows:

+ VND 63,108 (sixty three thousand, one hundred and eight Vietnamese dong) in VAT on SWIFT/telex cable charge for release of L/C number TF1206801025/NDH.  

+ VND 631,080 (six hundred thirty one thousand and eighty Vietnamese dong) in the SWIFT/telex cable charge for release of L/C number TF1206801025/NDH.  

+ VND 7,057,620 (seven million, zero hundred, fifty seven thousand, six hundred and twenty Vietnamese dong) in the fee for opening of L/C number TF1206801025/NDH.  

+ VND 3,517,405,076 (three billion, five hundred seventeen million, four hundred and five thousand, zero hundred, and seventy-six Vietnamese dong) in the profit that should have been enjoyed by JSC T from the successful purchase of cotton raw materials under the F-138 purchase and sale contract for yarn production and sale of products to  its partners mentioned in the following agreements in principle: No. 03/2012/TD-MA dated December 31, 2011; No. 34/2012/TD- TL dated March 13, 2012; No. 02/2012/TD-HA dated December 31, 2011; No. 37/2012/TD-PB dated April 25, 2012 and appendices thereof.

+ The amounts that JSC T would be fined for breach of the contracts for sale of yarn from partner companies, including VND 1,247,449,896 with Company M; VND 492,606,576 with Company T4; VND 942,263,784 with Co-operative H; VND 1,093,651,944 with Textile and Garment Joint Stock Company P. Total amount JSC T must be fined for breach of these contracts would be 3,775,972,200 VND, but JSC T requires T2 to pay the indemnity of VND 1,036,812,000 (one billion, thirty six million, eight hundred and twelve thousand Vietnamese dong).

+ VND 201,600,000 (two hundred – one million and six hundred thousand Vietnamese dong) in the amount that JSC T would be fined for breach of the Economic Contract No. 07/2012/TD-DH dated December 31, 2011 and the Appendix No. 02/TD-DH dated February 10, 2012 with Duc Hieu Co., Ltd.

+ The amount of USD 15,000 equivalent to VND 347,355,000 (three hundred – forty seven million and three hundred – fifty five thousand Vietnamese dong) (exchange rate in use is VND 23,157/USD 1) that Company T4 is committed to pay JSC T upon receipt of the set of documents from T2.

JSC T’s total claim for compensation against Bank T2  is VND 5,110,923,884 (five billion, one hundred – ten million, nine hundred – twenty three thousand and eight hundred – eighty four Vietnamese dong).

In the self-declaration, during the litigation process and at the court hearing, the successor agent of the defendant - Commercial Bank T2 – represents that: Between JSC T and T2 - Nam Dinh branch exists a contract to offer a limit for release of L/C No. 989/HDHM-LC/TCB-NDH dated January 13, 2012. The specific limit is 45 billion VND. Based on this limit, JSC T submitted an application for issuance of a letter of credit to secure obligations to pay the amount of USD 234,440.00 under Contract F-138 to the beneficiary, Company T4, COTTON CO.LTD, 11611 Forest Central Drive, P.O.BOX 740008 - Dallas Texas 75243. According to the instruction issued to T2, JSC T confirmed that it would place a security deposit and make a payment making up 15% and 85% of the LC value, respectively, by using its own capital. Thus, in this case, JSC T requested issuance of a letter of credit by using its own capital, not T2's loan with the allowed limit. That means that JSC T must pay money to the account set up at T2 to fulfill its payment obligations to its partner and T2 has no obligation to grant a compulsory loan to JSC T in case the set of documents contains errors. Whenever there is any error in the set of documents, T2 completely has the right to reject payment upon this letter of credit.  Basic contents of the letter of credit issued by T2 on March 8, 2012 complied with the provisions of law. The inclusion of the clause on use of English language is to comply with the last paragraph of the request for issuance of the letter of credit dated March 7, 2012 and common practices among banks during the process of making international payments. On March 8, 2012, JSC T placed a 15% security deposit of VND 780,056,952 and paid an LC opening fee of VND 7,057,620, and telex/SWIFT charge for opening LC (including VAT) of VND 694,188. The specific process was as follows:

At 5:00 p.m. April 24, 2012, T2 received the original set of documents from the foreign bank, the bill of lading dated April 4, 2012. On April 25, 2012, T2 sent a notice of invalid documents to JSC T. This set of documents has 2 errors: “1. C/O: NOT ISSUED IN ENGLISH” means “Documents are not issued in A1 language and “2. PL: NOT ISSUED IN ENGLISH PARTIALLY”. Specifically, it means that the set of documents has 2 errors: "1. Proof of origin of goods is not issued in English” and “2. The detailed manifest and packing list is not issued in English partially”. On the same day, April 25, 2012, T2 received a reply about the error in the documents. Accordingly, JSC T requested the return of all documents and would bear all costs related to the return of the documents. This is proven by JSC T’s marking onto the appropriate box No. 4 at the end of the written notice which was signed and sealed by JSC T’s Director, Mr. Nguyen Van C. At 5pm on May 28, 2012, T2 received a substitute set of documents from the foreign bank. On May 29, 2012, T2 sent a notice of invalid documents to JSC T, pointing out 01 error: “1. C/O: NOT ISSUED IN ENGLISH” means “Documents are not issued in A1 language. At 10:00 on June 25, 2012, T2 received a substitute set of documents from the foreign bank. On June 26, 2012, T2 notified JSC T in writing of the followings: The set of documents contains an error labeled “1. LATE PRESENTATION”.  This means that the set of documents is presented late. T2 required JSC T to comment on the error contained in the set of documents by June 29, 2012 at the latest. After this deadline, in the absence of any reply from JSC T, T2 would send a telegram to refuse to pay under the set of documents. JSC T sent a notice dated June 29, 2012 (unknown acknowledgement date). The notice saying its acceptance of a partial payment of USD 171,757.98 is understood as payment made under the set of documents. The notice is represented by marking onto the appropriate box No. 3, and signed and sealed by Mr. Nguyen Van C, JSC T’s Director. Although JSC T accepted to pay under the erroneous set of documents on June 29, 2012, JSC T did not deposit enough money to pay this LC into the account set up at T2 in order for T2 to pay the beneficiary according to the instruction of the request for release of the letter of credit dated March 7, 2012. According to international practice, particularly in the Official Publication UCP600 issued by the International Chamber of Commerce in Paris, France, T2 will only pay under the LC unconditionally in case the set of documents is perfect and free of errors. This right is also specified in paragraph 3 of the instruction of the request for release of the letter of credit: “In case of invalid documents, T2 shall reserve the right to refuse to make payment. In case where we have a written request for payment sent to the Bank (acceptance of invalid documents), the Bank shall have the right to make payment…”. Thus, T2 has the right to refuse to pay and is “not obliged to pay” under this letter of credit when JSC T accepts the erroneous set of documents. In fact, JSC T accepted the payment but did not deposit the money into the account according to regulations, even though T2 had written to JSC T on July 2, 2012. According to the regulations on payment of letters of credit as well as the request for issuance of the letter of credit dated March 7, 2012, T2 transfers the original documents to JSC T only after JSC T has fully remitted its own capital (85% of the remaining amount) into the account set up at T2 - Nam Dinh branch for LC payment purpose. This regulation has been informed by T2 to JSC T repeatedly. Until 9:56 am, July 2, 2012, T2 received a telegram from the foreign bank for the request for return of the set of documents via courier mail. Up to that time, as JSC T still did not have enough money to make payment on its account, according to international practice, T2 had to return the documents to the foreign bank on the grounds that the foreign bank's instruction required the set of documents to be returned came first, and T2’s observance of this instruction is completely correct. Regarding the refusal to pay under the set of documents and return the set of documents, T2 has complied with the regulations of the Bank. As they did so in the absence of fault on their part, JSC T’s claim for indemnity is unacceptable. We are requesting the People's Court of Nam Dinh city to dismiss the petition to sue of JSC T.

In the preliminary commercial ruling No. 18/2019/KDTM-ST dated November 27, 2019, the People's Court of Nam Dinh city decided that:

Pursuant to Articles 302, clause 1, 2 of Article 307 in the 2005 Civil Code in Viet Nam; Article 357 and 468 in the 2015 Civil Code in Viet Nam.

Pursuant to point b and g of clause 1 of Article 40, clause 1 of Article 147, point b of clause 2 of Article 227, clause 3 of Article 228 in the 2015 Civil Procedures Code in Viet Nam.

Pursuant to the Judicial Precedent No 13/2017/AL adopted by the Panel of Judges of the Supreme People’s Court on December 14, 2017:

Pursuant to point a, clause 1, Article 13 of the Resolution No. 01/2019/NQ-HDTP in Viet Nam dated January 11, 2019 of the Panel of Judges of the Supreme People's Court; Clause 3, Article 28 of the Resolution No. 05/2012/NQ-HDTP in Viet Nam dated December 3, 2012 of the Panel of Judges of the Supreme People's Court:

Pursuant to clause 4 of Article 27 in the 2009 Ordinance on court costs and fees in Viet Nam.

1. Accepting a part of JSC T’s indemnity claim arising from contract for issuance of term Letter of Credit (Deferred L/C).

Compelling the Bank K(T2) to pay an indemnity of 3,557,646,718 (three billion, five hundred and fifty seven million, six hundred forty six thousand, seven hundred eighteen Vietnamese dong) to JSC T.

In addition, in the preliminary ruling, court costs, injunctions for execution of the court’s judgement and the right of appeal of litigants are pronounced in accordance with laws.

On December 6, 2019, JSC T filed an appeal against the preliminary ruling as follows: The ruling that forces JSC T to incur 70% of liability is illegal and did not respect the interests of JSC T because JSC T is not at fault in causing damage and incurring regular costs. Requesting the Court of Appeal to compel T2 to pay all damages to JSC T according to the request.

On November 28, 2019, the Bank K filed an appeal as follows:

 Regarding the litigation process: Mrs. Nguyen Thi Thanh N - Lawyer of T Law Office, city H’s Bar Association, who is the defender of the legitimate rights and interests of the Bank K. When being subpoenaed for the first time to participate in the first-instance trial, though she had filed a request for adjournment of the trial, her request was rejected. This is a serious violation causing impacts on the Bank's rights under the provisions of clause 1 of Article 227 in the 2015 Civil Procedures Code.

Regarding case contents: The People's Court of Nam Dinh city did not properly, objectively and comprehensively consider and evaluate the evidence in the case file before making a judgment stating that the fault is more on T2’s part and T2 must compensate for Company T at the rate of 70% corresponding to their error.

Requesting the People's Court of Nam Dinh province to review the entire preliminary ruling according to the appellate procedures. Dismissing the preliminary ruling and transferring the case file to the trial court for retry the case according to the first-instance proceedings.

At the appellate court:

- JSC T and Bank K have reached an agreement on case resolution. They agreed that: Company T agrees not to request Bank K to pay any compensation and perform any financial obligations to Company T for any direct or indirect damage arising out of/in connection with the contract for offer of a limit for opening of a letter of credit No. 989/HDHM-LC/TCB- NDH signed on January 13, 2012 between Bank K and Company T, and the Letter of Credit No. TF1206801025/NDH opened by Bank K on March 8, 2012 for use by the beneficiary, Company T4.

- Representative of the Procuracy expresses the following opinions:

Through professional activities, the following facts are seen: The acceptance of the case and the notification of the acceptance of the case are lawful under the provisions of Article 285. During the settlement of the case, the Judge has strictly complied with the provisions of Article 48. Regarding the time limit for pre-trial preparation, the Judge has complied with the provisions of Article 286 in the Civil Procedures Code. At the court hearing, the Trial Panel and the Clerk strictly complied with the law on appellate court sessions. Litigants strictly complied with the Civil Procedures Code.

Regarding case contents:  At the court hearing, the litigants voluntarily reached an agreement on the settlement of the case and filed the petition to recognize their agreement to the Trial Panel. It is requested that the Trial Panel, based on Article 300 of the Civil Procedure Code, amends the preliminary ruling and recognizes the agreement between the litigants. Litigants are liable for court costs in accordance with law.

COURT’S JUDGEMENTS

[1] At the court hearing, JSC T’s authorized representative and Bank K’s authorized representative has voluntarily reached an agreement on case resolution.

Considering that the agreement between them is completely voluntary, does not breach the prohibition regulations of the law as well as does not go against social ethics. Therefore, the appellate trial panel revises the preliminary ruling and recognizes the agreement between JSC T and Bank K.

[2] Other parts of the preliminary ruling not subjected to such appeal or protest shall be in force from the date of expiry of such appeal or protest.

[3] In terms of court costs: Litigants are liable for court costs in accordance with law. In light of the aforesaid arguments,

HEREBY DECIDES

Legal bases: Article 300; clause 2 of Article 308 in the Civil Procedures Code. Revising the preliminary ruling:

1. Recognizing the voluntary agreement between JSC T and Bank K (T2).

Company T agrees not to request Bank K to pay any compensation and perform any financial obligations to Company T for any direct or indirect damage arising out of/in connection with the contract for offer of a limit for release of a letter of credit No. 989/HDHM-LC/TCB- NDH signed on January 13, 2012 between Bank K and Company T, and the Letter of Credit No. TF1206801025/NDH opened by Bank K on March 8, 2012 for use by the beneficiary, Company T4.

2. Regarding court cost:

Pursuant to the 2009 Ordinance on court costs and fees; Clause 5, Article 29 in the Resolution No. 326/2016/UBTVQH14 in Viet Nam dated December 30, 2016 of the National Assembly’s Standing Committee, stipulating amounts, reduction in amounts of, collection, payment, management and use of court costs and fees.

- JSC T must pay VND 2,000,000 in the cost of the commercial trial and VND 2,000,000 in the cost of the commercial appellate trial.

The amount of VND 30,200,000 that Mrs. Tran Thi L paid according to the receipt No. AB/2010/0003588 dated June 5, 2013; the amount of VND 200,000 that Mrs. Tran Thi L paid according to the receipt No. BB/2012/04088 dated April 25, 2014 and the amount of VND 2,000,000 that Mrs. Tran Thi T1 paid according to the receipt No. AA/2016/0002645 dated December 12, 2019, are reconciled at the Civil Judgment Execution Sub-department of Nam Dinh city. Refunding JSC T the amount of VND 28,400,000 (Twenty eight million and four hundred thousand Vietnamese dong).

- Bank K must pay VND 2,000,000 in the cost of the commercial trial and VND 2,000,000 in the cost of the commercial appellate trial.

The amount of VND 200,000 that Doan Thanh L paid according to the receipt No. BB/2012/04087 dated April 25, 2014; the amount of VND 200,000,000 paid according to the receipt No. AA/2016/0002617 dated December 6, 2019, are reconciled at the Civil Judgment Execution Sub-department of Nam Dinh city. Bank K must pay an additional amount of VND 1,800,000 (One million, eight hundred thousand Vietnamese dong).

The Appellate Judgement shall enter into force as from the pronouncement date.