The Exercise Period for Put Options and the Limits of Independence and Abstraction in Letter of Credit Negotiation: Standards of Decision in Three Commercial and International Transaction Judgments

Question

This brief uses three judgments to analyse the standard for calculating the exclusion period for a put option, a right of formation under a shareholders' investment agreement; the time at which negotiation of a letter of credit takes place and the limits of the principle of independence and abstraction; and the requirements for refusing payment in a fraudulent transaction involving back-to-back letters of credit.

The first issue is the question addressed in 2019Da271661: "Where no exercise period is agreed, from when and within how many years must a put option provided for in an investment agreement be exercised?" The second issue is the question addressed in 2009Da93817: "Are an advice of a letter of credit made without the original, and a negotiation effected by crediting USD 819,293.15 to a separate deposit account, valid?"

The third issue is the question addressed in 2017Da216776: "In a scrap metal import brokered through back-to-back letters of credit, may the issuing bank refuse, on the ground of fraud, to pay a bank that has not effected a valid negotiation?" All three judgments ask how the boundaries of the text and the substantive factors for decision are to be identified on the record.

Material to check

First (2019Da271661), this decision addresses whether an right to demand purchase of shares arising under an investment-related contract constitutes a formative right and whether the period for its exercise is an exclusion period, the criteria for fixing the period where there is no agreement, and the extinction period and its starting point for a commercial investment contract. In the Records, one confirms, from the investment-related agreements and the agreements among shareholders, whether there is an right to demand purchase of shares stipulation and a stipulation on the exercise period, and the nature of the underlying contract and the motive and purpose of its grant. One then examines the performance Records and notice documents showing the implementation of the investment and the history of share acquisition, the time of non-performance of the obligations of the investee company and others, and the time of the declaration of the intention to exercise, and determines whether the period applies, in accordance with the purport of the Summary of Decision stating that the exercise period "is an exclusion period."

Second (2009Da93817), this decision addresses the validity of an advice of a letter of credit without the original and of negotiation, the meaning of negotiation, whether payment of a real consideration by deposit into a special deposit account may be recognized, and the limits of protection under the principle of independence and abstraction where shipping documents are forged. In the Records, one confirms, from the original letter of credit and the Records of the advice of issuance, whether the original was presented and whether the documents are consistent on their face, in the letter of credit, the required documents, and the shipping documents. One then examines the deposit Records of the special deposit account and the agreement documents concerning set-off and security, and determines whether a real consideration was paid, in accordance with the purport that the advice and negotiation were "lawful and valid."

Third (2017Da216776), this decision addresses the meaning and method of negotiation, whether a negotiation agreement entered into upon the opening of a back-to-back letter of credit constitutes the assumption of an unconditional payment obligation, the time for payment of the negotiation proceeds under an irrevocable documentary letter of credit payable at sight, and whether payment may be refused on the ground of fraud in the case of an invalid negotiation. In the Records, one confirms, from the master letter of credit, the back-to-back letter of credit, and the agreement concerning negotiation, whether there is a definite promise of payment. One then examines the presented documents and the bank Records showing the date of arrival of the documents and the date of payment, and determines whether "a real consideration was paid immediately" and whether a payment obligation was assumed.

Possible readings

In 2019Da271661, the issues were the legal nature and exercise period of a put option provided for in an investment-related agreement, and whether a put option granted under an investment-related agreement that is a commercial activity is extinguished upon the expiry of a five-year exclusion period.

In 2009Da93817, the issues were whether an advice of issuance made without delivering the original letter of credit, or a negotiation effected without presentation of the original, is valid; the meaning of "negotiation" under Article 2 of the Uniform Customs and Practice for Documentary Credits (UCP 600); and whether crediting the negotiation proceeds to a separate deposit account constitutes actual payment of value.

In 2017Da216776, the issues were the meaning and method of "negotiation" under Article 2 of the Uniform Customs and Practice for Documentary Credits (UCP 600); whether entering into an agreement on the negotiation of the master letter of credit when issuing a back-to-back letter of credit amounts to assuming an unconditional obligation to pay value; and the time by which the negotiating bank must pay the negotiation proceeds.

What the decisions held

Supreme Court Decision 2019Da271661 decided July 14, 2022 held as follows: "As stated above, the period for exercising the right to demand purchase of shares, a formative right arising from a contract, is an exclusion period." Through this decision, the right to demand purchase of shares, which brings a sales contract into existence upon the claim of one party, is a formative right. The exercise period of a claim that is a formative right was regarded as an exclusion period. The position is that where there is an agreement, the right is extinguished if it is not exercised within that period. Where there is no agreement, the nature of the contract, the motive and purpose of its grant, and the exercise period of the claim that arises are considered. It held that a claim under a commercial investment contract has a period of 5 years by way of analogy to Article 64 of the Commercial Act, and that, absent special circumstances, the period runs from the time of non-performance, and in this case it found the right extinguished because 5 years had elapsed from the time of the breach.

Supreme Court Decision 2009Da93817 decided January 27, 2012 held as follows: "Accordingly, even where, when an advising bank advises the issuance of a letter of credit to the beneficiary, it does not deliver the original letter of credit, or even where, when a negotiating bank negotiates the documents relating to the letter of credit from the beneficiary, it has not been presented with the original letter of credit, such advice of issuance or negotiation remains lawful and valid." Through this decision, the Supreme Court regards an advice of issuance as notification of the fact and content of the issuance, and recognizes the advice and negotiation as valid even where the original is not delivered or presented. It distinguishes negotiation as being possible either through the immediate payment of a real consideration, such as cash or a credit to an account, or through the assumption of an unconditional obligation to make a definite payment on a specified date. It approved the judgment of the court below, which, since USD 819,293.15 was placed into the special deposit account, regarded it as an actual payment, and regarded the agreement on set-off of the amounts for which payment had previously been refused as a separate security agreement and did not deny its effect. It drew the line that, while only facial conformity of the shipping documents need be examined, a bank cannot receive the protection of the principle of independence and abstraction where it participated in the forgery, knew of it in advance, or had sufficient reason to suspect it.

Supreme Court Decision 2017Da216776 decided November 14, 2017 held as follows: "For a negotiation under the latter method to be established, the negotiating bank must be able to substitute the payment of a real consideration by assuming an unconditional obligation to pay the beneficiary a definite consideration on a specified date." Through this decision, the Supreme Court determined that the negotiation provided for in Article 2 of the sixth revised Uniform Customs and Practice for Documentary Credits is one in which the nominated bank provides a real consideration before the reimbursement date or assumes a definite payment obligation. The negotiation agreement entered into upon the opening of a back-to-back letter of credit is not a promise to make a definite payment on a specified date, and therefore does not constitute the assumption of an unconditional obligation. It held that, under an irrevocable documentary letter of credit payable at sight, the negotiation proceeds must be paid before the elapse of 5 banking business days from the day following the day the documents reach the issuing bank. Where there is no valid negotiation, the issuing bank may assert against the bank presenting the documents all grounds that it can assert against the beneficiary, and may therefore refuse payment on the ground of a fraudulent transaction.

Practical checklist

First, where an right to demand purchase of shares is stipulated in an investment contract and there is no agreement on the period for exercise, from when and within how many years must it be exercised? One confirms whether there is an agreement on the exercise period in the investment-related agreements, and, by comparing the time of non-performance with the time of exercise, examines the starting point and whether the right has been extinguished, in accordance with the standard that "it must be regarded as extinguished when the 5-year exclusion period has elapsed."

Second, is negotiation based on the advice of a letter of credit without the original and on a deposit of USD 819,293.15 into a special deposit account valid? One examines the establishment of the negotiation by comparing the records of presentation of the original letter of credit, the deposit Records of the special deposit account, and the content of the set-off agreement.

Third, in a scrap metal import transaction intermediated by a back-to-back letter of credit, may an issuing bank refuse payment to a bank that has made no valid negotiation on the ground of fraud? One confirms whether the negotiation agreement for the master letter of credit constitutes a definite promise of payment and the time of payment after the date of arrival of the documents, and examines whether refusal of payment is possible, in accordance with the standard that "all grounds that can be asserted against the beneficiary may be asserted."

Glossary

Criteria for fixing the exercise period of an right to demand purchase of shares that is a formative right (2019Da271661): The right to demand purchase of shares, which brings a sales contract into existence upon the claim of one party, is a formative right. The exercise period of a claim that is a formative right was regarded as an exclusion period. The position is that where there is an agreement, the right is extinguished if it is not exercised within that period. Where there is no agreement, the nature of the contract, the motive and purpose of its grant, and the exercise period of the claim that arises are considered. It held that a claim under a commercial investment contract has a period of 5 years by way of analogy to Article 64 of the Commercial Act, and that, absent special circumstances, the period runs from the time of non-performance, and in this case it found the right extinguished because 5 years had elapsed from the time of the breach. The decision factors presented include the nature of the contract, the motive and purpose of its grant, and the exercise period of the claim arising from the exercise.

Requirements for the establishment of negotiation of a letter of credit and the limits of the principle of independence and abstraction (2009Da93817): The Supreme Court regards an advice of issuance as notification of the fact and content of the issuance, and recognizes the advice and negotiation as valid even where the original is not delivered or presented. It distinguishes negotiation as being possible either through the immediate payment of a real consideration, such as cash or a credit to an account, or through the assumption of an unconditional obligation to make a definite payment on a specified date. It approved the judgment of the court below, which, since USD 819,293.15 was placed into the special deposit account, regarded it as an actual payment, and regarded the agreement on set-off of the amounts for which payment had previously been refused as a separate security agreement and did not deny its effect. It drew the line that, while only facial conformity of the shipping documents need be examined, a bank cannot receive the protection of the principle of independence and abstraction where it participated in the forgery, knew of it in advance, or had sufficient reason to suspect it. The decision factors presented include whether a real consideration was paid immediately and whether an unconditional obligation was assumed.

Time of establishment of negotiation of a letter of credit and the standard for refusal of payment in a fraudulent transaction (2017Da216776): The Supreme Court determined that the negotiation provided for in Article 2 of the sixth revised Uniform Customs and Practice for Documentary Credits is one in which the nominated bank provides a real consideration before the reimbursement date or assumes a definite payment obligation. The negotiation agreement entered into upon the opening of a back-to-back letter of credit is not a promise to make a definite payment on a specified date, and therefore does not constitute the assumption of an unconditional obligation. It held that, under an irrevocable documentary letter of credit payable at sight, the negotiation proceeds must be paid before the elapse of 5 banking business days from the day following the day the documents reach the issuing bank. Where there is no valid negotiation, the issuing bank may assert against the bank presenting the documents all grounds that it can assert against the beneficiary, and may therefore refuse payment on the ground of a fraudulent transaction. The decision factors presented include whether there is a definite promise of payment and whether an unconditional obligation was assumed.

Sources and limitations

This white paper was prepared solely on the basis of the texts of Commercial Act Articles 46, 64, and 335 and Civil Act Articles 2, 105, 162, and 536 disclosed on the Korea Law Information Center, and the judgment texts of Supreme Court Decision 2019Da271661 decided July 14, 2022, Supreme Court Decision 2009Da93817 decided January 27, 2012, and Supreme Court Decision 2017Da216776 decided November 14, 2017.

This is an academic research material organizing general legal principles and standards for record review, and is not legal advice on an individual case or an opinion submitted to a court.

Points left open

2019Da271661: Where there is no agreed period and the starting point is placed at the time of the breach, what remains of the plan for recovering the investment?

2009Da93817: How far may consideration tied up in a special deposit account and an intended set-off be regarded as an actual payment, and where may suspicion of fraud be raised?

2017Da216776: Where a bank that has not met the requirements for negotiation succeeds to the rights of a fraudulent beneficiary and claims payment, how far may it be met with defenses?

When to reconsider

2019Da271661: Where the acquisition agreement contains a separate stipulation on the exercise period, one examines whether a period other than 5 years applies.

2009Da93817: Where materials evidencing awareness of forgery are added to the Records of facial conformity of the shipping documents, whether protection under the principle of independence and abstraction applies is examined anew.

2017Da216776: This is examined anew where the assumption of a definite payment obligation before the reimbursement date and compliance with the 5 banking business days again become an issue.

Statutes referred to

• 상법 제46조, 제64조, 제335조
• 민법 제2조, 제105조, 제162조, 제536조

Decisions referred to

• 대법원 2022. 7. 14. 선고 2019다271661 판결 · Decision ledger
• 대법원 2012. 1. 27. 선고 2009다93817 판결 · Decision ledger
• 대법원 2017. 11. 14. 선고 2017다216776 판결 · Decision ledger

Verification status

The cited provisions (Commercial Act Articles 46, 64, and 335; Civil Act Articles 2, 105, 162, and 536) and the decisions examined (Supreme Court Decision 2019Da271661 decided July 14, 2022, Supreme Court Decision 2009Da93817 decided January 27, 2012, Supreme Court Decision 2017Da216776 decided November 14, 2017) were cross-checked, as of 2026-10-15, against the current statutes on the Korea Law Information Center and the original texts of the Supreme Court decisions. This white paper cites only the three decisions listed under Decisions Examined.