Экзамен зачет учебный год 2023 / The-independence-principle-of-letters-of-credit-and-demand-guarantees-150-373

The Fraud Exception

the applicant seeking an injunction to interfere with payment under a letter of credit or performance bond to make a stronger case than he will normally be required to make.177 In Singapore, although the Edward Owen test of clear fraud has been followed in some cases,17819 that standard has now been rejected in the case of performance bonds in favour of the Canadian standard of a ‘strong prima facie’ case. In CharteredElectronics Industries Pte Ltd v. Development Bank o fSingapore™ the Singapore High Court took the view that ‘there is no reason why the less onerous test of a ‘strong prima facie case’ should not suffice’.180 One reason for adopting this standard of proof is to make it easier for the account party to be able to obtain relief in cases of abuse by the beneficiary. In the CharteredElectronics case the court noted that a performance bond can be an oppressive instrument if abused and that such abuse is given encouragement if the standard of proof is so high that it is extremely difficult for a claimant ever to reach the required threshold for the court to grant relief. A lower stan­ dard of proof will give the claimant a fighting chance of satisfying the requirement and enabling the court to grant relief.

3.Summary Judgment

5.76Where the beneficiary of a letter of credit or performance bond applies for summary judg­ ment against the paying bank and the bank seeks to defend the application on the ground of the fraud exception, the standard of proof required for the defence should be that contained in CPR Pt 24. However, it is not entirely clear whether the test in CPR Pt 24 is to be applied normally or whether it is to be adjusted to take account of the special circumstances arising from the independence principle of letters of credit and demand guarantees.181 It may be helpful to consider the general test in CPR Pt 24 before examining the extent to which it is adjusted in the context o f claims under letters of credit and demand guarantees.

A. General standard under CPR Pt 24

5.77Under CPR 24.2(a) (ii) the court may give summary judgment against a defendant on the whole of a claim or on a particular issue if the defendant has ‘no real prospect’ of successfully defending the claim or issue and there is no other compelling reason why the case should be disposed of at trial. This test of ‘real prospect’ in CPR Pt 24 is not a very high standard. What the defendant needs to show is ‘some “prospect”, i.e. some chance of success’.182 He is not required to show that his case will probably succeed at trial. As Lord Hobhouse of Woodborough said in Three Rivers D C v. Bank o fEngland (No Д),183 'The criterion which the judge has to apply under CPR Pt 24 is not one of probability; it is absence of reality.’

177The normal test is simply whether there is a substantial issue. See CDN Research & Development Ltd v. Bank o fNova Scotia, 21 June 1982, Ontario Superior Court ofJustice, esp. at [28]. In this case the court refused to grant an injunction to stop payment under a letter of credit because (at [29]) the evidence showed nothing more than a possibility of fraud’.

178Korea Industry Co Ltd v. Andoll Ltd [1990] 2 Lloyd’s Rep. 183 at 188 (letter of credit) and Bocatra Constructions v. A-G (No 2) [19951 SLR 733 (performance bond).

179Chartered Electronics Industries Pte Ltd v. DevelopmentBank o fSingapore [1999] 4 SLR 655 at [40].

180Approved by the Singapore Court of Appeal in Dauphin Offshore Engineering & Trading L'te Ltd v. The Private Office of HRH Sheikh Sultan Bin Khalifa Bin ZayedAl Nahyan [2000] 1 SLR 657 at [57].

181Enka InsaatVe SanayiAS v. Banca Popolaire DelTAltoAdige SPA [2009] EWHC 2410 (Comm) at [20].

182The White Book Service (Sweet & Maxwell, 2009) [24.2.3].

183[2001] 2 A11ER 513.

124

credit or performance bond. In Safa Ltd v. Banque du Смге,ш the facts were most unusual in that the letters of credit were integrated with the underlying transaction with which the issuing bank was itself intimately involved. The bank was resisting an application for sum­ mary judgment on the ground, inter alia, that the demand for payment was fraudulent and

184Solo Industries UKLtd v. Сапам Bank [20011EWCA Civ 1041, [2001 ] 2 All ER (Comm) 217 at [36].

185e.g. Safa Ltd v. Banque Du Caire [2000] 2 Lloyd’s Rep. 600 (application for summary judgment defeated

where bank was able to show a real prospect of establishing at trial that it was induced to enter into the letter of credit by misrepresentation); UKLtd v. Canara Bank [2001] 2 AUER (Comm) 217 (beneficiary’s application for summary judgment failed where bank could show a real prospect of establishing that it was induced to issue a performance bond by misrepresentation).

186[2000] CLC 252.

187For a discussion of the Edward Owen standard of proof, see para 5.69.

188[2000] 2 Lloyd’s Rep. 600.

125

The Fraud Exception

that there was a misrepresentation by the beneficiary directed at inducing the bank to enter in the letter of credit contract. Waller L.J., with whose judgment Hale and Schiemann L JJ. agreed, referred to the new CPR language o f‘real prospect of success’ and stated that where the bank raises a defence the appropriate test is whether it has a ‘real prospect of success’.189 He appeared to regard the standard of this test as lower than that o f ‘clear’ evidence. After referring to his judgment in the Balfour Beatty case he accepted that ‘an arguable case that a fraudulent demand has been made with a real prospect of success would entitle the bank to resist an application for summary judgment’.190 He said that ‘the difference between “the powerful evidence” that the Court had in mind when considering the 0 .1 4 position and the “real prospect of success”, the language of the new rules, is not very different’. He concluded that ‘[i]f a bank can establish a claim with a real prospect of success, either that the demand wasfraudulent even if it had no clear evidence of fraud at the time of demand, or that there

was a misrepresentation by the beneficiary directed atpersuading the bank to enter into the letter o fcredit, it may also be unjust to enter summary judgment against the bank either because the bank has a reasonable prospect of succeeding in a defence of set-off or because there is a compelling reason for a trial of the letter of credit issue’.19112The same test was therefore applied to a defence of fraud in the demand as to a defence of misrepresentation to induce the issue of the credit.

5.82In Solo Industries UK Ltd v. Canara Bank192 Mance L.J. disagreed with the approach in the

Safa case. A bank that had issued a performance bond sought to defeat an application for summary judgment on the ground that it had been induced to issue the bond by a fraudulent conspiracy and/or misrepresentation to which the beneficiary was a party. The case was not concerned with a defence of fraud in the demand. However, Mance L.J., with whose judg­ ment Sir Martin Nourse and Potter L.J. agreed, commented on Waller L.J.’s views in the

Safa case. He agreed with Waller L.J. that where the bank’s defence was that it was induced by misrepresentation into issuing the instrument, the ‘real prospect’ test was the appropriate test. However, where the bank’s defence was that the demand for payment was fraudulent Mance L.J. said that since the ‘real prospect’ test was a low test to satisfy he did not share the view that such a low test was appropriate. He said that if in the Safa case Waller L.J. was accepting that any lower test than the Edward Owen test o f ‘established fraud’ will justify permission to defend a summary judgment application on the ground that the demand was fraudulent then he could see problems with that view. He explained that:

[a]‘real prospect’ of establishing fraud is a comparatively low hurdle. The White Book Service (August 2001) note 24.2.3 identifies it with ‘some prospect of success’; it continues ‘That prospect must be real, i.e. the court will disregard prospects that are false, fanciful or imagi­ nary’ and adds that it does not involve showing a probability of success at trial. I would not consider that this low test can be justified on the basis that SAFA concerned the relationship between bank and beneficiary, rather than between customer and bank or between the parties to the underlying commercial relationship. If instruments such as letters of credit and perfor­ mance bonds are to be treated as cash, they must be paid as cash by banks to beneficiaries. The courts in the Harbottle and Edward Owen cases emphasised this, and in my view, set a higher standard than ‘a real prospect ofsuccess’ in relation to all these situations. Short of established

189Ibid., at 608.

190Ibid., at 607.

191Ibid., at 608. Emphasis added.

192[2001 ] 2 All ER (Comm) 217.

1 2 6

III. Standard o f P roof

fraud’, a bank will not normally be allowed to raise any defence or set-off based on alleged impropriety affecting the demand.19314

Mance L J.’s view found some support in Banque Saudi Fransi v. Lear Siegler Inc.194 The case 5.83 was concerned with the test to be applied where the claim for summary judgment was by a

bank that had issued a performance bond to enforce a counter-indemnity given by the instructing party. Arden L.J. stated obiter that on a summary judgment application against a bank ‘that has failed to make payment under a performance bond, it is likely that a higher test would on the authorities apply to a claim by the bank to rely on the fraud exception than that laid down by [CPR] Part 24’. She considered the Solo case and held that the test for summary judgment which found favour with the court was ‘a heightened test’.19516

More recently in Enka Insaat Ve Sanayi Л5 v. Banca Popolaire DellAlto Adige SPA™ Teare J . 5.84 had to decide on the appropriate standard of proof in the context of an application for sum­

mary judgment pursuant to CPR Pt 24 by the beneficiary of an advance payment guarantee and a performance guarantee issued by two banks. The banks argued that they had a defence that the demands were made fraudulently and that the defence had a real prospect of success. Teare J. held that ‘the test to be applied must be that of a “real prospect” because that is the test set out in CPR Part 24’. He said that he was not bound to apply the ‘heightened test’ stated in Solo and Banque Saudi Fransi because the courts in those cases were not considering a claim against a bank where the defence was that the demand was fraudulent. However, the learned judge accepted that, in view of a number of authorities,197 in applying the ‘real pros­ pect’ test ‘the Court must be mindful of the principle that banks, when sued on a letter of credit or performance bond or guarantee, need particularly cogent evidence to establish the fraud exception’.198 Applying the ‘real prospect’ test in this way the learned judge held that on the facts of the case before him the banks had not shown that there was a real prospect that they would establish the fraud exception at trial.

ft is respectfully submitted that the learned judge is correct that the applicable test is the ‘real 5.85 prospect’ because that is what is set out in CPR Pt 24. However, although in general that test requires a low standard of proof in the context of fraud in a demand under a letter of credit

or performance bond a higher standard is required because the court is mindful of the high standard required at trial. Since at trial the bank will be required to produce ‘particularly cogent evidence’ to establish fraud, at the earlier hearing of the application for summary judgment a high standard is required in order to establish that there is a ‘real prospect’ that it will succeed at trial, ft therefore appears that in practice the real prospect test in this context is a high one so that it may not be easy to see the difference between the test to be applied under CPR Pt 24 and the formulation of the ‘heightened test’ stated by Mance L.J. in Solo and by Arden L.J. in Banque Saudi Fransi.

193Ibid., at [31].

194[2007] 2 Lloyd’s Rep. 47.

195Ibid., at [16].

196[2009] EWHC 2410 (Comm).

197Turjiye Is Bankasi AS v. Bank o f China [1996] 2 Lloyds Rep. 611 at 616; Czarnikow-Rionda v. Standard

Bank [1999] 2 Lloyd’s Rep. 187 at 202; Solo Industries v. Canara Bank [2001] 1 WLR 1800 at [1813] and

Banque Saudi Fransi v. Lear Siegler Inc [2007] 2 Lloyd’s Rep. 47 at [55], per Pill L.J. 198 [2009] EWHC. 2410 (Comm).

127

The Fraud Exception

D.Where counter-guarantor has refused to pay

5.86The same real prospect test applies where the claim is on a counter-guarantee rather than the performance bond or letter of credit. In Banque Saudi Fransi v. Lear Siegler Inc™9 the application for summary judgment was against a party who had given a counter-indemnity to a bank that had issued a performance bond at that party’s request. Tire defendant alleged that the beneficiary of the performance bond had made a fraudulent demand for payment under it and that at the time of payment the bank knew or must have known of the fraud. The Court of Appeal held that the appropriate test was the CPR Pt 24 test o f‘real prospect’. Arden L.J. stated that where, in an application for summary judgment, the defence is that the beneficiary’s demand under the performance bond was fraudulent, it is sufficient for the defendant to establish that the fraud exception defence has a ‘real prospect’ of success. But she went on to state that ‘[s]uch a defence, however, creates a high hurdle’.19200 Pill L.J. also stated that the correct test is that of a ‘real prospect’ as stipulated in CPR Pt 24. However, he went on to say that in the context of the claim in that case ‘the task is a difficult one. It is a high hurdle, as the authorities in my judgment recognise’.201 Not surprisingly, the defence failed because the defendant had failed to show a real prospect of proving the fraud exception by clear evidence at trial. That high hurdle is unlikely to be easily surmounted in many cases.

IV. LIMITS OF TH E EXCEPTIO N

5.87It has been seen that in terms of what constitutes fraud, under English law the scope of the fraud exception is not limited to fraud in the documents but extends to fraud in the wider transaction in the case of demand guarantees and probably also in the case of letters of credit. This section examines the limits of the exception in terms of the parties against whom it may be raised.202 As already indicated, where a bank makes payment to the beneficiary on the date payment is due under the instrument without knowledge of the beneficiary’s fraud the bank’s claim for reimbursement is not affected by the beneficiary’s fraud which comes to light after payment. However, in the case of a letter of credit, where the beneficiary’s fraud is uncovered after a bank has paid the beneficiary but before the date of maturity of the credit, the ques­ tion arises as to which of two innocent parties should bear the risk of such fraud. Should the risk fall on the paying bank that has been duped by the beneficiary (in which case the excep­ tion should apply to defeat the bank’s claim for reimbursement) ? Or should the risk be borne by the issuing bank and ultimately the account party (in which case the exception should not apply to the paying bank’s claim against the issuing bank)? The answer depends on the pre­ cise role of the paying bank when making prepayment to the beneficiary. Where the bank that has prepaid the beneficiary did so without the authorization of the issuing or, where there is one, confirming bank and is demanding payment from the confirming or issuing

199 [2007] 2 Lloyd’s Rep. 47.

200Ibid., at [3].

201Ibid., at [34].

202See Xiang Gao, ‘Presenters immune from the fraud rule in the law of letters of credit’ [2002] LMCLQ10.

128

I V Lim its o f the Exception

bank simply as a collecting bank for the beneficiary it is the beneficiary’s agent203 and there­ fore will not be in a better position than its principal, the beneficiary. The bank’s claim will therefore be defeated by the beneficiary’s fraud even though the collecting bank had no knowledge of it. However, where the bank that has prepaid is a nominated bank that has paid under the credit in accordance with its authorization the bank’s claim for reimbursement will not be affected by the beneficiary’s fraud discovered after prepayment. This is the case in particular where a nominated bank: (a) has negotiated a negotiation credit, or (b) has prepaid under an acceptance credit, or (c) for credits subject to UCP 600, has prepaid under a deferred payment credit.

1. Negotiating Bank

The nature of a negotiation credit has already been described in paragraph 2.37 above. Where 5.88 a bank that has authorization to negotiate actually negotiates the credit according to its terms without notice of any fraud by the beneficiary, its entitlement to reimbursement from the issuing bank or confirming bank is not affected by fraud on the part of the beneficiary that is discovered after the credit was negotiated but before the reimbursement date.204256Titus in

European Asian Bank AG v. Punjab & Sind Bank (No 2)ж where a bank had negotiated the credit in good faith and was seeking summary judgment against the issuing bank, Robert Goff L.J. explained that:

[i]t is beyond question that by 20 August the plaintiffs had negotiated the letter of credit, and there is no suggestion that they acted otherwise than in good faith in doing so. 'thereafter, in February 1980, they claimed payment from the defendants; and this was refused. In our judg­ ment it is not open to the defendants on these facts to say against the plaintiffs that they were justified in refusing payment on the ground that the documents were fraudulent or even forged. In our judgment the relevant time for considering this question is the time when pay­ ment falls due and is claimed and refused. If, at that time, the party claiming payment has negotiated the relevant documents in good faith, the issuing bank cannot excuse his refusal to pay on the ground that, at some earlier time, the negotiating bank was a mere agent for collec­ tion on behalfof the seller and alleged against him fraud or forgery (ifthat indeed be the case) on the part of the beneficiary of the letter of credit.

The position is the same where the action is an application by the account party for an 5.89 injunction to stop the issuing bank from paying the bank that has negotiated the credit

in good faith. The injunction will be refused because the liability of the issuing bank to reimburse the negotiating bank is not affected by the beneficiary’s fraud discovered after negotiation. In DCD Factors Pic v. Ramada Trading Ltd206 a finance company procured a bank to issue a letter ofcredit in favour of Royal Rice Mills Ltd. The credit was issued through a correspondent bank in Pakistan. It was a negotiation credit expressed to be available with or by any bank in Pakistan by negotiation. The beneficiary was advised of the credit by the correspondent bank by letter and the beneficiary made its presentation of documents to the correspondent bank on the same day. The documents included a bill of exchange drawn on the issuing bank to the order of the correspondent bank. The correspondent bank sent the

203e.g. Re Farrow's Bank Ltd [1923] 1 C h 4l.

204Czarnikow-Rionda v. Standard Bank London Ltd[ 1999] 2 Lloyds Rep. 187 at 205.

205[1983] 1 W LR642.658.

206[20071 EWHC 2820 (QB); [2008] Bus LR 654.

1 2 9

The Fraud Exception

documents to the issuing bank and the issuing bank sent a SW IFT notification in which it advised that the bill had been accepted. The correspondent bank relied on the SW IFT mes­ sage and credited the discounted amount of the bill to the beneficiary’s account before the maturity date. Hie finance company subsequently sought an injunction to prevent the issuing bank from paying the correspondent bank on the due date on the ground of the beneficiary’s fraud which had come to light after the credit was negotiated. The court accepted that there was evidence which supported the view that there was fraud in the sense that there were no genuine underlying transactions. However, the injunction was refused because it was held that the correspondent bank had negotiated the credit in good faith.

5.90 In that case, Lloyd Jones J. concluded that the negotiating bank ‘is clearly entitled to enforce the payment obligation in its own right. It is not suing on or through the rights of the beneficiary. There is no suggestion here that [the negotiating bank] had any notice of any fraud when it negotiated the letter of credit. The fact that fraud came to light prior to the date of due payment does not affect the payment obligation of the bank. There is no scope for the operation of the fraud exception’.207

5.91Since the issuing bank is not entitled to refuse to reimburse a bank that has negotiated a credit on the ground of the beneficiary’s fraud discovered after negotiation, in some cases issuing banks seek to get round this hurdle by contending that the paying bank was not authorized to negotiate the credit.20829However, even in cases where the paying bank was not originally authorized to negotiate the credit, the issuing bank may be estopped by its conduct from denying that the paying bank was authorized by it to negotiate the credit. In European Asian Bank v Punjab and Sind Bank (No 2 )ш purchasers in India contracted to buy a ship­ ment of cloves from sellers in Singapore. Payment was to be by irrevocable letter of credit payable 180 days from the date of the bill of lading. The purchasers’ bank, Punjab Bank in New Delhi, opened the letter of credit and through their correspondents in Singapore, Allgemene Bank, the credit was advised to the sellers through their bank, European Asian Bank. Clause 6 of the letter of credit stated that it was to be advised through European Asian Bank and should be ‘divisionable and unrestricted for negotiation’. However, Clause 9 stipu­ lated that ‘negotiations under this credit are restricted’ to Allgemene Bank in Singapore. The sellers presented all the documents to European Asian Bank including a draft (for the amount of the contract price) drawn on the purchasers and made payable to European Asian Bank. The bank indorsed the draft and sent it with the documents directly to Punjab Bank in India with a letter stating that they, European Asian Bank, had negotiated the letter of credit, which they would present on maturity for payment and asked Punjab Bank to ‘advise acceptance’. Punjab Bank forwarded the documents to the purchasers who accepted them and Punjab Bank wrote back to European Asian Bank stating that the documents had been accepted. Relying on this reply, European Asian Bank credited the account of the sellers with the discounted amount of the credit after negotiating it with the sellers. Subsequently but before maturity it transpired that the sellers had acted fraudulently and no goods had been shipped at all. The purchasers then instructed their bank, Punjab Bank, not to make payment under the letter of credit when it fell due. In an application by European Asian

207Ibid., at [35].

208e.g. European Asian Bank v. Punjab and Sind Bank [1983] 1 WLR 642; DCD Factors Pic v. Ramada TradingШ \2Ш \ EWHC 2820 (OB); [2008] Bus LR654.

209[1983] 1 W L R 642.

130

IV. Lim its o f the Exception

Bank for summary judgment against Punjab Bank it was held that on its true construction, the letter of credit did not permit European Asian Bank to act as negotiating bank210 and therefore Punjab Bank was not liable to European Asian Bank under the terms of the credit. However, by its conduct and representation Punjab Bank was estopped from denying that European Asian Bank was authorized by it to negotiate the credit. Punjab Bank had unequiv­ ocally represented to European Asian Bank that Punjab Bank recognized that European Asian Bank was entitled to act as negotiating bank under the letter of credit and that the documents were in order. Accordingly Punjab Bank was liable to pay European Asian Bank the sum due under the letter of credit on maturity.211

2. Discounter of Acceptance Credit

An acceptance credit has been described in paragraph 2.34 above. A draft is normally used 5.92 with such a credit. Where the draft is discounted to a bank other than the issuing or confirm­

ing bank, the discounting bank that has received the accepted draft from the beneficiary will normally be a holder in due course. Such a bank is protected from the fraud exception because under section 38(2) of the Bills of Exchange Act 1882, a holder in due course holds the bill ‘free from any defect of title of prior parties, as well as from mere personal defences available to prior parties among themselves’. Therefore, holders in due course can sue on the drafts even if the beneficiary’s fraud is discovered prior to the maturity date.212 In Discount RecordsLtd v. BarclaysBank Ltd213 the underlying contract was for the sale of goods by a seller in France to a buyer in England. Payment was to be by documentary credit. The buyer’s bank, Barclays Bank Ltd, issued the credit through another bank, Barclays Bank International Ltd, which sent telex instructions to a French bank, Barclays Bank SA, directing the opening of an irrevocable credit with Discount Bank of Paris in favour of the seller. The credit was available for negotiation and the maturity date was 20 July. After the seller presented docu­ ments Barclays Bank International instructed Barclays Bank SA to accept the bills. When the goods arrived but before the maturity date the buyer alleged that there had been fraud by the seller in that some of the cartons shipped were empty and others were filled with rubbish. The buyer then applied for an injunction to restrain his bank from paying on the ground of fraud. Megarry J. refused to grant the injunction because the fraud was not established but also because the bill of exchange had already been accepted by Discount Bank. Acceptance of the bill by Discount Bank meant that the bill may well have passed into the hands of a holder in due course. The seller might already have negotiated it and received payment. In such a case, if the holder in due course presented the bill for payment to Discount Bank the bank would be bound to pay it on 20 July. Thus, if the injunction against the bank was granted, it would have failed to achieve the real purpose of the buyer, which was to prevent the seller from being paid. Megarry J. distinguished the Sztejn case214 ‘in relation both to established fraud and to the absence there of any possible holder in due course’.215 Thus a

210Under clause 9, documents could only be presented to Allgemene Bank who was the only bank who could negotiate the credit.

211Credit Agricole Indosuez v. Banque Nationale de Paris [2001] 2 SLR 1, where the Court of Appeal of Singapore held that the facts did not justify a finding of any estoppel against the issuing bank.

212Banco Santander SA v. Bayern Ltd [2000] 1 All ER (Comm) 776, CA at 782.

213[1975] 1 WLR315.

21431NYS2d631 (1941), discussed at para 5.14.

215[1975] lW LR 315(C h)at320.

131

The Fraud Exception

nominated bank that has paid the beneficiary and become a holder in due course will be able to recover payment from the confirming bank even though fraud is discovered after payment by the nominated bank but before the date of maturity. The position seems to be similar in other common law jurisdictions such as Canada.216

5.93This protection against the fraud exception extends to a confirming bank that has accepted a bill and becomes a holder at maturity. Under section 61 of the Bills of Exchange Act 1882, when the acceptor of a bill, the confirming bank, becomes the holder of it at or after maturity, in his own right, the bill is discharged. Since the discharge is automatic, ‘the confirming bank is in as good a position as a holder in due course, even if it purchases drafts accepted by it’.217 Where the draft is accepted by the confirming bank at a time when the bank did not have knowledge of the beneficiary’s fraud but is later discounted by the confirming bank after it has acquired knowledge of the beneficiary’s fraud the confirming bank cannot claim under the bill as a holder in due course, since it has acquired the bill with notice of a defect in the title of the beneficiary.218

5.94Normally an acceptor is only liable under a bill of exchange where he has endorsed it. However, the practice in the context of letters of credit appears to be that the issuing bank will not normally endorse and return the bill to the nominated bank but will simply send a written message to the nominated bank confirming that the draft has been accepted. The nominated bank is entitled to rely on such a message in deciding whether or not to prepay the beneficiary. Consequently, if an issuing bank receives documents including a draft from the nominated bank and notifies the nominated bank in writing that the bill is accepted and that payment will be made to the nominated bank on the due date and the nominated bank relies on this representation and discounts the bill before the due date, the issuing bank will be estopped from denying liability under the bill on the ground that it had not endorsed it.219 The issuing bank cannot therefore use lack of endorsement as an excuse to avoid liability where fraud on the part of the beneficiary comes to light before the maturity date.

5.95A holder in due course of an accepted draft is also protected from the fraud exception under the United States Uniform Commercial Code (UCC).220 However, some US courts, giving effect to provisions of the UCC,221 have gone further by holding that the protection extends to a fraudulent beneficiary holding an accepted draft.222 The view in those cases is that under section 4-303 of UCC, once a bank has accepted a draft it becomes unconditionally obliged to the holder to pay it at maturity and any knowledge or notice or legal process served upon the bankafter the acceptancecomes too late to affect the bank’sobligation to pay. Consequently knowledge of the beneficiary’s fraud which the bank acquires after acceptance is too late to

216Bank ofN ova Scotia v. Angelica-Whitewear Ltd [1987] DLR4t1' 1б 1 at 177.

217Banco Santander v. Banque Paribas [2000] CLC 906 at 911; [2000] 1 All F.R (Comm) 776 at 782. However, where the nominated bank that has paid the beneficiary is the payee of the bill of exchange it cannot rely on the bill to avoid the fraud exception, since the payee of a bill is not a holder in due course: REJones Ltd

v.Waring and Gillow Ltd [1926] AC 670, HL. See also Yan v. Post Office Bank I.,td [1994] 1 NZLR 154; The Inflatable Toy Company Pty Ltd v. State Bank o fNew South Wales Ltd [1994] NSW LEXIS 14071.

2,8 Section 29(l)(a) and (2) of the Bills ofExchange Act 1882.

219DCD Factors Pic v. Ramada Trading Ltd [2008] Bus LR654 at [271.

220See UCC, Article 5-109(a)(1)(iii).

221Section 4-303.

222First CommercialBank v. Gotham Originals Inc 486 NYS2d 715 (1985); A llServices Exportacao Comercio SA v. Banco Bamerindus Do Brazil SA (1990) 921 F 2d 32. See also Supreme Mdse v. Chemical Bank 520 NYS 2d 734 (1987); Algeme Bank Nederland v. Soysen Tarim Unmleri Dis Ticaret 748 F. Supp. 177 (1990).

132

IV. Limits o f the Exception

allow the fraud exception to prevent payment to the fraudulent beneficiary himself. The US

decisions that extend protection from the fraud exception to the fraudulent beneficiary have been subjected to trenchant criticisms223 partly on the ground that they fail to recognize that honour of a draft is not simply by acceptance but rather by acceptance and payment at maturity.224 Under the revised UCC Article 5-102(8)(ii), honour of an acceptance letter of credit is defined to mean, unless the letter of credit provides otherwise, 'acceptance of a draft and, at maturity, its payment’. So, it is now considered that an injunction could be obtained against a fraudulent beneficiary where the fraud is discovered after acceptance but before maturity.225

3. Discounter of a Deferred Payment Credit

ing bank provides value and acts without notice, the issuing bank is able to raise against the discounting bank (assignee) all the defences which it would have had against the assignor227*(fraudulent beneficiary), including the fraud exception. In Banco Santander v. Banque Paribas11* the Court of Appeal took the view that the general rule that an assignee cannot be in a better position than the assignor applies in the context of letters of credit avail­ able by deferred payment. Banque Paribas (Paribas) issued a deferred payment letter of credit to Bayfern Ltd confirmed by Banco Santander (Santander). The deferred payment was promised 180 days from bill oflading. On 15 June, before the date of maturity, 27 November,

223Notably by B. Kozolchyk, ‘The Immunization of Fraudulently Procured Letter of Credit Acceptances:

All Services Exportacao, Importacao Comercio, S.A. v. Banco Bamerindus Do Brazil, S.A. and First Commercial v. Gotham Originals’ (1992) 58 Brooklyn L Rev 369.

224Other grounds of criticism are that the decisions are based on a misunderstanding ofArt. 4 of the UCC

and that there is no policy reason for protecting the fraudulent beneficiary in this way.

225P.S. Turner, ‘Revised UCC Article 5: The New US Uniform Law on Letters of Credit’ (1996) 11 BLFR 205, 230. See also Official Comment of Revised Article 5-109, Comment 4, para 2: stating that one way to avoid an injunction against honour after acceptance ofa draft by the issuer is to define honour in the particular letter of credit ‘to occur upon acceptance and without regard to later payment of the acceptance’.

226In Credit Agricole Indosuez v. Banque Nationale de Paris [2001] 2 SLR 1, a deferred payment credit contemplated the use of drafts.

227It is perhaps different in a case where there would have been no defence available against the assignor but simply a personal counter-claim, in which case the court will not allow the debtor to raise the counter-claim against the assignee: Stodtlart v. Union Trust Ltd [1912] 1 KB 181, as interpreted in Banque Santander SA v. Banque Paribas [2000] 1 All ER (Comm) 776.

223[2000] CLC 906; [2000] 1 All ER (Comm) 776.

133