INTERNATIONAL TRADE AND BUSINESS LAW

FINAL EXAMINATION

(Code 4)

Question 1 (International Trade Law module) (4 points)

The Chinese government signed a funding agreement with Company X (China's largest
state-owned enterprise specializing in manufacturing steel), according to which the former
would provide the later with 100 million USD. This amount would be disbursed in three
installments. The first 20 million USD was disbursed immediately after the conclusion of
the agreement. The second and third disbursement, 40 million USD each, would be
disbursed upon receiving Company X’s annual export results. The steel produced by
Company X are exported to Vietnam, where their competitive price causes serious
damage to the country’s steel industry.

Vietnam's steel industry consists of the following four manufacturers:

- Company A, which accounts for 30% of domestic products

- Company B, which accounts for 35% of domestic products

- Company C, which accounts for 25% of domestic products

- Company D, which accounts for 10% of domestic products

Among these manufactures, Company A urges Vietnam’s competent authority to initiate

an anti-subsidy lawsuit against Company X’s products. Company C and Company D do
not support this lawsuit, while Company B gives no opinion.

Question:

1. Is the sum granted by the Chinese government to Company X considered a subsidy

under the SCM agreement? If so, what kind of subsidy is it? (2 points)
2. Assuming that the sum is considered a subsidy. Would Vietnam’s competent authority
accept the application of Company A and initiate a lawsuit against Company X’s
products? (2 points)
Question 2 (International Business Law module) (6 points)

Comment on the principle of autonomy of the letter of credit in UCP 600. Analyze one
case in which the principle of autonomy of the letter of credit (L/C) in UCP 600 was
applied.

--- The end---

 ANSWERS:

Question 1

1. The sum granted by the Chinese government to Company X is considered a subsidy

under the SCM agreement.
Article 1.1 SCM Agreement provides that a subsidy under this Agreement essentially
requires: 1) a financial contribution by a government or any public body within the
territory of a Member, and 2) that a benefit is thereby conferred. As for this case, this sum
could be considered a subsidy whereby there is a financial contribution coming from a
government and this government practice involves a direct transfer of funds “this amount
would be disbursed…” and it confers a "benefit" which contributes to the export process
and the country steel’s industry. It is prohibited or “red light” subsidy. Prohibited
subsidies are specified in Article 3(1)(a) of the SCM: Subsidies contingent, in law or in
fact, whether solely or as one of several other conditions, upon export performance,
including those illustrated in Annex I. In this case, the second and third disbursement
from the government would be disbursed upon receiving Company X’s annual export
results. Which means Company X would have to make an annual notification providing
information about their export performance and the government will approve to disburse
the remaining sum. Furthermore, it is also clear that “their competitive price causes
serious damage to the country’s steel industry”, which means their subsidies are
prohibited because they aim to affect trade and are most likely to cause adverse effects to
other members.
2. Vietnam’s competent authority would not accept the application of Company A and
initiate a lawsuit against Company X’s products.
Article 11.4 SCM Agreement provides that petitions need support by domestic producers
whose collective output constitutes more than 50 per cent of the total production by that
portion of the domestic industry expressing either support for or opposition to the petition.
This provision also states that “no investigation shall be initiated when domestic
producers expressly supporting the application account for less than 25 per cent of the
total production of the like product produced by the domestic industry”. According to the
case, Company A’s collective output accounts for 30% of domestic products (more than
25% of the total production of the like product produced by the domestic industry) but
since both Company C and Company D do not support this lawsuit, the application will
be rejected because it didn’t meet up with the condition stated in the Article (the total
output of Company A is 30%, which is less than 35% of the total output of Company C
and Company D who do not support this lawsuit).

Question 2

The principle of autonomy stands fundamental among the laws pertaining to the L/C. This
principle is also known as the ‘independence principle’. This determines the separation
and independence of the letters of credit from the underlying contract for the credit in
respect of which the letter of credit is issued. This means that those claims made or
defense taken under the contract cannot specifically affect the payment undertaking of the
banks. The doctrine of autonomy is considered lying at the heart of the documentary
credits.1 Principle of autonomy has been clearly mentioned in Article 4 of UCP 600:

“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.”

 The beneficiary’s breach of the underlying sale contract does not entitle the bank to
withhold payment of a credit (conditioned only on tender of documents)

According to Article 4 of the UCP 600, principle of autonomy indicates L/C is separate
from the underlying sale contract. The duty of a bank to make payment is subjected to
compliance of exporter's documents. In pursuant to this, the bank shall not involve with
any dispute relating to the goods under the sale contract. Furthermore, any conflict
between importer and exporter arising out of the sale contract will not be a condition to
the bank for dishonour of payment.

In order to completely address the essence of autonomy principle, Article 5 of UCP 600
specifies: “banks deal with documents and not with goods, services or performance to
which the documents may relate.”2

1
https://www.lawteacher.net/free-law-essays/commercial-law/essential-principles-of-letter-of-credit-
commercial-law-essay.php
2
UCP600. Article 5
  The guiding rule is “pay first, argue later” (except for fraud by beneficiary)

Accordingly, when deciding whether to make payment under the credit in favour of a
beneficiary, the bank may only look at the terms of the credit itself. The bank may not
raise any defences that are available to the applicant in respect of the underlying
agreement of sale. The seller will thus always receive payment from the bank if he
submits documents that comply with the credit, regardless of any developments in the
underlying sales agreement. The bank should not be forced into the position in which it
has to resolve disputes between the seller and buyer, because this would lead to extensive
delays in payment and would make the letter of credit unattractive as a commercial
service. If the doctrine of independence is not scrupulously observed, the continuance of
the letter of credit system as the primary means of payment in international trade would
be in danger.

The only exception to the principle of autonomy is fraud committed by the beneficiary
when tendering the documents. As De Rooy has stated: ‘No system can be effective if it is
blind to something which is manifestly unreasonable.’ If the bank discovers fraud in the
documents that were tendered by the beneficiary, it is entitled to refuse payment even
though the documents appear to be in conformity with the terms of the letter of credit.
This entails that the beneficiary, if he had been truthful in his representations, would have
tendered documents that did not strictly comply with the terms of the letter of credit. The
fraud, however, must be clear and evident to the bank, without the need for additional
proof or having to investigate the actual circumstances surrounding the underlying
contract. A mere suspicion of fraud is not sufficient to set aside the independence
principle. Thus, even if a bank suspects fraud, it is obliged to pay under the letter of credit
if the beneficiary has tendered documents that are in conformity with the letter of credit.

The UCP 600 enhances the role of the banks in LC transaction, which is restricted to
documents. The banks, be it issuing bank, confirming bank or negotiating bank are
dealing with documents only and not with goods, services or performance. Prior to this
provision, the previous UCP did not specify this position when it is generally stated that
'people' in LC are dealing with documents only. The word 'bank' is not specifically
mentioned; rather it is impliedly categorized a bank under 'people'. The use of the word
'people' is criticized as not suitable since in LC transaction, not all people are restricted to
deal with documents since exporter and importer are the parties who are also concerned
with the goods transacted. (ICCCommentary,2007). The only party who is dealing with
document is the banks. Thus, article5 is more idyllic in designating the bank's
autonomous obligation in regards to LC documents. It obviously separates the bank with
the sales contracts entered into by the importer and exporter. Likewise, this provision
totally encapsulates the function of the bank relating to the documents only.

The principle of autonomy stands fundamental among the laws pertaining to the Letters of
Credit. This principle is also known as the ‘independence principle’. This determines the
separation and independence of the letters of credit from the underlying contract for the
credit in respect of which the letter of credit is issued. This means that those claims made
or defense taken under the contract cannot specifically affect the payment undertaking of
the banks. The doctrine of autonomy is considered lying at the heart of the documentary
credits.3

The Autonomy Principle has an exception known as the ‘Fraud Exception’. The exception
entitles buyers either to restrain sellers from drawing the credit or to restrain banks from
making payments to sellers. After a while, other common law countries approved the
reasoning of the court in that case and the application of the Fraud Exception became a
widespread phenomenon.4

In transactions involving a letter of credit, the bank is not party to the underlying contract.
As such, letters of credit have an abstract character. This implies that the bank is not
concerned with the specifics and the actual performance of the underlying contract. The
conditions of the bank’s duty to pay are to be found exclusively in the terms of the letter

3
https://www.lawteacher.net/free-law-essays/commercial-law/essential-principles-of-letter-of-credit-
commercial-law-essay.php
4
HE FRAUD EXCEPTION IN DOCUMENTARY CREDITS: A Global Analysis by Nevin Meral

 
of credit and do not in any way depend on the performance of the seller’s obligations
under the contract of sale.

and by referring to principle of autonomy, the beneficiary exporter receives the guarantee
that he will be paid after tender the complying presentation of documents to the issuing
bank. Neither bank nor the account party will be able to withhold payment with relevant
arguments to the quality of delivered goods or other issues related to performance of
underlying contract. Therefore, even in case of conflict on performance of underlying
contract account party and issuing bank have no other choice rather than paying
beneficiary upon presentation of complying documents and seek remedy by suing him for
the breach of underlying contract.

Requirements on Submission:

- Formality Requirements: The maximum number of pages is 4 (excluding the reference

list and appendices if any). Font size: 13-14. Line spacing: 1.3. Margins: left 3cm, right 2
cm, top 2 cm, bottom 2cm.

- Due date : 13:30. June 26, 2021 (students wil have 72 hours and 30 minutes to do and
submit assignments)

- Regulations on disciplining students who violate rules: according to University's

Regulation No.2626.

- Naming file for submitting assignments on Microsoft Teams:

Course – Class (Lecture) – Student’s Full Name - Student ID

E.g.: LDS1-CNBB08M-2-20-N11-NguyenVanDung-441234

Wherein

- LDS1: Course
- CNBB08M-2-20-N11: Class (Lecture)

- NguyenVanDung: Student’s Ful Name

- 441234: Student ID.

- Submission: under the guidance of IT Center.

- In case students cannot submit the assignments due to errors of Microsoft Team system,
it is necessary to contact with the IT Center or send email to address of the Discipline:
gqtctmqt2013@yahoo.com.vn. Students are advised to submit assignment earlier than the
due date. Late submission wil result in grade “0”.

- On June 27, 2021, the Discipline wil acknowledge receipt of assignments submitted in
the same class on the Microsoft Team system where the questions were assigned (the
seminar class).