LC Case Discussion: Stop-Payment Order, Mistaken Payment, and Refund Claim

The following case is adapted from a recent discussion shared on LinkedIn by Mr. Xin Zhong. As with many practical cases discussed in professional forums, certain facts may be condensed, but the issues raised are both common and worth closer examination.

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QUESTION

Recent LC case in China

Case Summary:

1. Issuing Bank: A Bank, Ho Chi Minh City Branch
2. Negotiating Bank: B Bank in Shanghai
3. Documents were compliant; Issuing Bank made payment of USD 30,000
4. The Issuing Bank later requested the Negotiating Bank not to credit the beneficiary. It claimed that after the Vietnamese buyer took delivery of the goods, fraud was discovered and a court injunction (stop-payment order) was obtained

Additional facts:

• The court order was issued on 9 December
• Due to internal error, the Issuing Bank made payment on 12 December
• The Issuing Bank then requested a refund, supported by a letter of indemnity (LOI)
• The two banks belong to the same banking group

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Questions:

Q1. On what grounds did the Issuing Bank request a refund?
Q2. Are these grounds valid?
Q3. If the Shanghai bank had negotiated the documents rather than acting merely as a presenting bank, would there be any difference regarding the refund?
Q4. Is the Vietnamese stop-payment order binding on the Shanghai bank? What measures can be taken?

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MR. OLD MAN’S ANSWER

This case involves the interaction between UCP 600 rules on honour/negotiation and matters outside UCP, namely fraud, court injunctions, and restitution. A key issue is whether the credit was a negotiation LC or a payment LC, as this determines the position of the Shanghai bank.

Q1. On what grounds did the Issuing Bank request a refund?

The refund request is not based on UCP 600, which does not deal with fraud or court injunctions.

Instead, it is grounded on:

• The Vietnamese court injunction (dated 9 December), which the Issuing Bank is obliged to comply with under local law
• The fact that payment made on 12 December was contrary to that order, due to internal error
• General legal principles relating to mistaken payment

The letter of indemnity (LOI) is a commercial arrangement to support the request and mitigate risk for the receiving bank.

Q2. Are these grounds valid?

The answer depends on perspective.

From the Issuing Bank’s perspective

Yes. The Issuing Bank must comply with the court order and may face liability toward the applicant if it fails to do so.

From the Shanghai bank’s perspective

Not necessarily.

• Under UCP 600, once a complying presentation is honoured, the transaction generally reaches payment finality in the documentary credit context
• Any refund claim therefore falls outside UCP 600 and must be assessed under applicable law

Accordingly, a Vietnamese court order does not automatically create a valid claim against the Shanghai bank.

 Q3. Does it matter whether the Shanghai bank negotiated the documents?

Yes—this is a decisive factor.

(i) If it was a nominated bank that negotiated

Under UCP 600 Article 2, negotiation means the purchase of documents by advancing or agreeing to advance funds.

• If the Shanghai bank advanced funds (i.e., purchased the documents):
  • It has taken commercial risk
  • It is entitled to reimbursement from the issuing bank upon a complying presentation
• Once the Issuing Bank honoured, the principle of finality of payment applies

→ The Shanghai bank has strong grounds to refuse refund, unless a competent court in China decides otherwise.

 (ii) If the credit was a payment LC (no nomination for negotiation)

• The Shanghai bank is not a nominated negotiating bank
• It acts as a presenting/remitting bank

If it paid the beneficiary:

• It did so on its own account and risk, outside the UCP framework for negotiation.

Its position then depends on the facts:

• If it has already advanced funds to the beneficiary:
  → it may resist refund, relying on payment against complying documents
• If it has not yet credited the beneficiary:
  → it may hold or return the funds, particularly with LOI support and intra-group considerations

Thus, it is not automatically obliged to refund, but its position is weaker than that of a negotiating bank.

 Q4. Is the Vietnamese stop-payment order binding on the Shanghai bank? What measures can be taken?

Binding effect

No, not directly.

• A Vietnamese court order does not automatically bind a bank in China
• It must be recognized and enforced by a Chinese court before it has legal effect there

Even where bilateral arrangements exist, formal procedures are required.

Measures

The Issuing Bank may:

• Apply to a Chinese court for:
  • recognition of the Vietnamese court order, or
  • a local freezing / injunction order
• Act through commercial channels, including:
  • intra-group coordination
  • issuance of a letter of indemnity
• Act promptly, as recovery becomes difficult once funds are released

The Shanghai bank may:

• Delay crediting funds if still under its control
• Require indemnity protection
• Assess its position under local law and internal policy

Conclusion

This case highlights that:

1. UCP 600 governs documentary compliance and honour, but not fraud or court injunctions
2. Once a complying presentation is honoured, payment finality limits interbank recovery under UCP
3. The Shanghai bank’s position depends critically on whether it:
   • purchased documents by advancing funds (negotiation), or
   • acted merely as a presenting bank
4. Cross-border enforcement depends on recognition in the jurisdiction where the funds are located

In practice, the outcome will depend less on UCP rules and more on the specific fact:

• the role and actions of the Shanghai bank,
• whether funds have been released, and
• the availability of legal remedies in China

As this case was originally shared for discussion, the above reflects only Mr. Old Man’s personal view. Other perspectives—especially from those who have encountered similar situations—would be most welcome.

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Mr. Old Man

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An expert shared the following comment on this article on LinkedIn:

Dear Huu Duc Nguyen. Great explanation as always. Thank you.
May I add a point of responsibility on the Issuing bank.
It is my view that when the Applicant goes to their local courts to obtain a court injunction to stop payment against a complying presentation.
The Issuing bank, who will be made aware of the pending action (as the named party within the legal papers) must go to court and defend the principles of a LC, rather than just throwing up their hands.
For failure to do so not only weakens the trust in a LC as a method of payment settlement but damages their reputation within the banking industry.

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My reply:

Thank you for your thoughtful comment—I agree with you on the principle.

In theory, the issuing bank, as a party to the proceedings, is in the best position to defend the independence of the LC and the integrity of complying presentations.

In practice, however, the situation is often more complex. The issuing bank is frequently also the financing bank of the applicant, and this creates a degree of conflict. If the applicant suffers a loss (for example, due to alleged fraud), that exposure may ultimately fall back on the issuing bank.

In such circumstances, the bank may find itself balancing two competing considerations:
– the need to uphold the LC mechanism, and
– its own credit risk and recovery position.

As a result, it is not uncommon to see issuing banks take a more cautious or even passive stance in local court proceedings, while the nominated or negotiating bank—whose position depends on payment finality—may be more active in seeking to protect its interests.

This is, of course, not ideal from a systemic perspective, but it reflects the practical realities in some cases.