China Trade Finance and Letter of Credit Disputes: Fraud and Stopping Payment

The rules that govern a Chinese letter of credit

Letter-of-credit disputes in China are governed primarily by the Supreme People's Court's Provisions on Several Issues Concerning the Trial of Letter of Credit Disputes, issued as Fa Shi [2005] No. 13 and amended by a decision of the SPC Judicial Committee on 23 December 2020 (effective 1 January 2021, which updated its citations to the Civil Code). Article 2 of the Provisions resolves the hierarchy in a way that matters in practice: where the parties have agreed on applicable international rules or other provisions, their agreement prevails; where they have not, the ICC Uniform Customs and Practice for Documentary Credits (UCP) or other relevant international practices apply. UCP 600 is not law — it is a set of rules drafted by the International Chamber of Commerce — but it becomes binding through that default. The same Provisions recognise the independence and abstraction principles that Chinese courts have long applied: the credit is independent of the underlying sale contract, and banks deal in documents, not goods.

How strictly the documents are examined

On document examination, Articles 5 and 6 of the Provisions adopt a surface-compliance standard (表面相符): the bank pays where the documents and the credit, and the documents among themselves, are consistent on their face, and an inconsistency between documents that does not create ambiguity should not be treated as a discrepancy. UCP 600 Article 14 has already softened the older strict-compliance approach — data in the documents need not be identical to the credit terms provided it does not conflict with them — so the accurate description of the Chinese standard is surface compliance combined with that softened strict compliance, not a mechanical word-for-word match. For a trader, the practical consequence is that a discrepancy defence is real but not automatic; whether a minor mismatch defeats payment turns on whether it creates genuine ambiguity.

The fraud exception: four situations under Article 8

The independence principle has one crucial limit: fraud. Article 8 of the Provisions identifies the situations in which letter-of-credit fraud can be found. In substance they are:

• the beneficiary forges documents or presents documents containing fraudulent content;
• the beneficiary, in bad faith, fails to deliver the goods or delivers goods of no value;
• the beneficiary colludes with the applicant or a third party to present false documents where there is no genuine underlying transaction; and
• other situations amounting to fraud.

These are the gateways past the independence principle. Once a court finds one of them satisfied, the question shifts from "must the bank pay?" to "should payment be stopped?" — and that second question has its own procedure.

Stopping payment: the remedy that replaces the injunction

One terminological point avoids confusion with common-law systems: Chinese law has no concept of an "injunction" or a "stop-payment order" (止付令) in this context. The remedy a party seeks is a court ruling to suspend payment of the sum under the letter of credit (裁定中止支付), obtained by analogy to the property-preservation procedure with suitable modifications. The route matters because it is the only way to freeze payment before a final judgment — a claimant who simply writes to the issuing bank and asks it not to pay has not invoked the fraud exception at all.

The application rules: guarantee, 48 hours, reconsideration

The procedure is compressed by design. Under Articles 9 to 13 of the Provisions, the applicant for the credit, the issuing bank or another interested party applies to a court with jurisdiction to suspend payment; Article 11 sets the acceptance conditions, including the provision of a reliable and sufficient guarantee; and Article 12 requires the court to rule within 48 hours. A party dissatisfied with the ruling may apply within ten days to the next-higher court for reconsideration, which does not suspend execution of the ruling. Only after a substantive hearing, under Articles 14 and 15, will the court issue a final judgment terminating payment where fraud is established and no exception-to-the-fraud-exception under Article 10 applies.

Choosing the law: the LC rules, not the Negotiable Instruments Law

A common drafting error is to treat a letter of credit as a negotiable instrument. It is not, and the Negotiable Instruments Law does not directly govern the credit relationship. The correct analysis runs in layers: the credit itself is governed by Articles 1 and 2 of the Provisions (the parties' choice, then UCP by default); the Law on the Application of Law to Foreign-Related Civil Relations, with its Article 2 and Article 3 of Judicial Interpretation (I), supplies the conflict-of-laws layer, and its commercial-sector carve-out preserves the special rules for instruments, maritime law and civil aviation; and the Negotiable Instruments Law enters only where a draft or other instrument has actually been issued under the credit, with its Chapter Five conflict rules pointing to the law of the place of issue, payment or relevant act. Getting this layering right determines which law a court applies before it ever reaches the merits.

For a company caught in a letter-of-credit dispute — whether as applicant, beneficiary or bank — the levers are specific and time-sensitive: the fraud gateway, the 48-hour ruling, the ten-day reconsideration and the guarantee that must accompany an application. The earlier you invoke them, and the more precisely the credit's governing terms are drafted, the more options remain open. Our team advises on these questions alongside the broader international trade disputes they sit within, and on the shipping and cargo claims that often accompany them.