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

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The Fraud Exception

Bayfern presented documents to Santander. The documents were found on their face to comply with the credit. That therefore crystallized an obligation on the part of Paribas and Santander to pay the beneficiary the stipulated amount on 27 November. However, on 16 June Santander discounted the documents by way of an assignment and so became an assignee. No notice of the assignment was given to Paribas but the documents were passed by Santander to Paribas. On 24 June Paribas informed Santander that the documents pre­ sented and accepted by Santander included false and forged documents. It was assumed for purposes of the decision that the beneficiary had been guilty of fraud and that therefore prior to 27 November both Santander and Paribas had notice of established fraud. Santander argued that it had discharged its obligations as a confirming bank without notice of fraud and therefore was entitled to reimbursement from Paribas. But the Court ofAppeal held that Santander had not validly discharged its obligations under the credit; it had rather kept the obligation alive but had taken an assignment of the benefit of it. As a discounter, Santander was an assignee of a claim against itself (as confirming bank).

5.98Paribas was not liable to pay Santander because an assignee of a deferred payment letter of credit was, in the absence of special protection in the express terms of the credit itselfor trade usage, not protected from the fraud exception available against the assignor, the beneficiary. Waller L.J., with whose judgment Mummery and Morritt L.JJ. agreed, said that:

if parties agree for whatever reason that they will not provide a negotiable instrument, and do not provide by terms of the trade or even by the express terms of the instrument itself the protection for assignees that a negotiable instrument would provide, they must live with the consequences. . . it is [not] open to the court simply to make an exception to what would otherwise be the clear rule that a defence which would have been available as against the assignor should be available against the assignee.229

This decision of the Court of Appeal caused some concern in the banking community. It contrasts sharply with the position under the United States UCC, Article 5-109(a) (I)(iv) which gives express protection to assignees by providing that if fraud or forgery occurs the issuer must nevertheless pay if payment is demanded by ‘an assignee of the issuer’s or nomi­ nated person’s deferred payment obligation that was taken for value and without notice of forgery or material fraud after the obligation was incurred by the issuer or nominated person’.

B. Protection under UCP 600

5.99The UCP 600 has addressed the problem which resulted from the decision in the Banco Santander case. In a deferred payment credit subject to UCP 600 the issuing bank under­ takes to reimburse the confirming bank the full amount of the credit whether or not the confirming bank prepaid or purchased before maturity. Article 7.c provides that:

[a]n issuing bank undertakes to reimburse a nominated bank that has honoured or negotiated a complying presentation and forwarded the documents to the issuing bank. Reimbursement for the amount of a complying presentation under acredit available by acceptance or deferred payment is due at maturity, whether or not the nominated bank prepaid or purchased before maturity. An issuing bank’s undertaking to reimburse anominated bank is independent of the issuing bank’s undertaking to the beneficiary.

229 Ibid., at 912.

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discovered a ground (including the fraud exception) on which the confirming bank (or the issuing bank) would have been entitled to refuse payment to the beneficiary at maturity. In other words, the problem was that the right to reimbursement of a nominated bank that had prepaid or purchased a deferred payment credit before maturity could be defeated on the basis of the beneficiary’s fraud that comes to light before maturity even though the bank prepaid without notice of the fraud. Concern about the Banco Santander decision was not diminished when courts in other jurisdictions also allowed the beneficiary’s fraud, discov­ ered after presentation, to defeat the confirming bank’s claim against the issuing bank on the ground that the confirming bank did not have specific authorization to prepay.231 In the

230Ibid., at 915.

231e.g. the decision of the Singapore Court ofAppeal in CreditAgricole Indosuez v. Banque Nationale de Paris

[2001] 2 SLR 1.

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The Fraud Exception

Banco Santander case the Court ofAppeal stated that if a confirming bank wished to be free to give value for documents when it accepts the documents, it could do so by insisting on obtaining from the issuing bank express authority to negotiate and confirmation of reim­ bursement if it does.2322

5 .1 0 4 To deal with the problem UCP 600 now makes provision for express authorization by the issuing bank under Article 12.b which states that ‘[b]y nominating a bank to accept a draft or incur a deferred payment undertaking, an issuing bank authorizes that nominated bank to prepay or purchase a draft accepted or a deferred payment undertaking incurred by that nominated bank’. This express authorization means that for deferred payment credits subject to UCP 600 it is not necessary for the nominated bank to seek specific authorization before making prepayment under the credit. However, it should be noted that the new provisions of UCP 600 on reimbursement are not designed to protect any bank that pays the benefi­ ciary before the maturity date.

C. The limits of protection under UCP 600

5.105 Under municipal law in England and some other jurisdictions, the protection against a ben­ eficiary’s fraud available to a holder in due course of an accepted draft is not available to a confirming bank that has purchased its own deferred payment obligation under a deferred payment credit. The UCP 600 has sought to extend to a nominated bank that has pre-paid under a deferred payment credit a protection similar to that enjoyed by a bank that has dis­ counted under an acceptance credit. However, it should be noted that the protection against a beneficiary’s fraud afforded by UCP 600 only covers nominated banks. A bank that prepays under a credit in which it is not a nominated bank is not covered by UCP 600 Articles 7.c, 8.c, and 12.b. Therefore, if a beneficiary’s bank, that is not a nominated bank, decides to provide finance to the beneficiary of a deferred payment credit by prepayment or purchase, the transaction falls outside the scope of Articles 7.c, 8.c, and 12.b and the bank will be exposed to the risk of the beneficiary’s fraud.

5.106 Even where the discounting bank is a nominated bank, not every prepayment or purchase by the bank may be covered by the provisions of UCP 600. In Fords Bank SAJNV v. Indian Overseas Bank,w which concerned sight letters of credit, the issuing bank sought to resist an application for summary judgment by the nominated bank that had paid the beneficiary on the ground that the paying bank had not made the payment as nominated bank’. On the facts of that case Hamblen J. rejected the contention on the ground that:

[ujnder UCP [600] the obligation to reimburse the nominated bank arises if it honours or negotiates a complying presentation and forwards the documents to the issuing bank. In the present case [the nominated bank] did negotiate what on their case was a complying presentation and did forward the documents to [the issuing bank]. What matters is the fact of honouring or negotiating a complying presentation.234

5.107 This seems to suggest that the reimbursement obligation arises where the nominated bank first honours or negotiates a complying presentation and then forwards the documents after­ wards. But what is the position where the reverse occurs, that is to say, the nominated bank

232Ibid., at 786.

233[2009] E W H C 2303 (Comm).

234Ibid., at [64].

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V. Prevention o f Fraud by D ocumentary Conditions

forwards the documents without honouring or negotiating the complying presentation and only makes prepayment to the beneficiary after the issuing bank has accepted to pay at maturity? In such a case, is the issuing bank under an obligation to reimburse under UCP 600 if the beneficiary’s fraud comes to light before the maturity date? This is not entirely clear. It would appear that the issuing bank is not under an obligation to reimburse under Article 7.c in such a case because the nominated bank has not honoured or negotiated a complying presentation. If that view is correct the bank will not enjoy the protection avail­ able under Article 7.c even though it is a nominated bank.235

A claim under Article 12.b will also encounter some difficulty. Under that provision the 5.108 authorization to the nominated bank from the issuing bank which renders the latter liable to reimburse the former for a prepayment only applies where the nominated bank has prepaid

or purchased a draft accepted or a deferred payment undertaking incurred ‘by that nomi­ nated bank’. 'Therefore, where a nominated bank prepays or purchases under a deferred paymentcreditincircumstanceswhereithasnotitselfincurredadeferredpayment undertaking,236 it is arguable that in such a case the prepayment is without the authority of the issuing bank under Article 12.b and therefore outside the protection provided by that provision.

V. PREVENTION OF FRAUD BY DOCUMENTARY

CONDITIONS

As part of the principle of independence the bank is required to concern itself only with the 5.109 documents and not with the underlying facts. This exposes the account party to the risk of

fraud on the part of the beneficiary. To minimize this risk the account party can in the under­ lying transaction insist on the presentation of certain documents as a condition of payment under the letter of credit or demand guarantee. In the case of an international sale of goods contract, for example, a required document could be a certificate of inspection signed by a trusted independent expert, such as a firm of surveyors, certifying that the contract goods have been shipped and that they were in good condition at the time ofshipment. The require­ ment of such a certificate will reduce the chances of the seller shipping rubbish and present­ ing to the bank documents which on their face comply with the requirements of the credit, since an independent expert is likely to issue such a certificate only if he has inspected the goods during loading. Documentary protection may also be secured by the requirement of other documents to be issued by the account party himself or by the beneficiary. The extent to which the risk of fraud is reduced by a documentary requirement may depend on whether the document is to be signed by the account party, an independent third party, or the beneficiary. In principle the level of risk is lowest where the required document is to be signed by the account party himself and highest where the document is to be signed by the beneficiary alone.

235Where the nomination is to incur a deferred payment undertaking and the nominated bank has not incurred that undertaking then it has not honoured the credit. The issuing bank’s undertaking under Art. 7.c is to reimburse only a nominated bank ‘that has honoured or negotiated’ a complying presentation.

236e.g. where the credit is not confirmed and the nominated bank prepays to tbe beneficiary only after the issuing bank has incurred the deferred payment undertaking under the credit.

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The Fraud Exception

1. Documents to be Signed by the Account Party

5.110 The requirement may be for the account party to sign the document alone or to sign it jointly with another party.

5.111 An example of this is where a letter of credit issued pursuant to an international sale of goods contract requires a certificate of inspection signed by the buyer.237 This will reduce the risk of fraud since, for his own protection, the buyer will only sign the certificate after the goods have been inspected and found to be in conformity with the contract of sale.238 Since the requirement of a document issued by the account party puts the account party in a position where he can, by refusing to issue the certificate, block payment under the instrument239 many beneficiaries will be very reluctant to accept such a requirement. And, depending on his bargaining power, the account party may not succeed in securing the agreement of the beneficiary to such a requirement in the underlying contract.

5.112 Another form of documentary protection for the account party is where one of the docu­ ments to be tendered to the bank for payment under the instrument requires the cooperation of the account party. This may be the case where the document is to be signed jointly by the beneficiary and the account party240 or by a third party and the account party’s employee or agent. An example is the case of Astro Exito Navigation SA v. Chase Manhattan Bank N A 241 where the underlying contract was for the sale of a ship and the letter of credit required, inter alia, a notice of readiness signed by the master of the harbour and the buyer’s agent. A requirement of this kind gives the buyer similar protection as a buyer’s certificate because the buyer can block payment by instructing his agent not to sign unless satisfied that the event to be certified in the document has actually happened. And if the beneficiary signs the document and presents it to the bank for payment, the bank is entitled and bound to refuse payment on the ground that the document signed by the beneficiary instead of the account party is discrepant.242 Requirements of this kind are rare in practice because few beneficiaries are prepared to agree to them.

2. Third Party Certificates

5.113 A documentary requirement which is common in practice is for a certificate, such as a certifi­ cate of quality or inspection, to be issued by a third party, usually an expert such as a surveyor

237Or a finance company that has instructed the issuing bank, on behalfof the buyer, to open the credit. See, e.g. M ontrodLtdv. Grundkatter Fleischvertriebs GmbH\2001] EWCA Civ 1954; [2002] 1 All ER (Comm) 257.

238Of course a seller who is determined to commit fraud might present a forged certificate. But the forgery is likely to be detected since the buyer will know that he has not issued the certificate.

239If the account party seeks to abuse this power, by refusing to sign the document without justification, the beneficiary can seek a remedy under the Senior Court Act 1981.

240e.g. Elder DempsterLines Ltd v. Ionic ShippingAgency Inc, M idland Bank and M arine M idland Grace Trust Company o fNew York [1968] 1 Lloyd s Rep. 529, where the letter ofcredit required both the seller and the buyer to draw the draft to be presented for payment. See also GPA Group Pic v. Bank o fIreland [1992] 2 IR 408, where a letter of credit required a demand certificate signed by officers of both the account party and the beneficiary.

241[1983] 2 AC 787.

242cf. Lambias (Importers & Exporters) CoPteLtdv. Hong Kong drShanghai Banking Corp [1993] 2 SLR 751

(Singapore High Court).

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V. Prevention o f Fraud by D ocum entary C onditions

or engineer.2432Sometimes the requirement is for the third party certificate, such as a certifi­ cate of origin, to be issued by the Chamber of Commerce of the seller’s country or even a particular city. The requirement of such a certificate is likely to reduce the risk of fraud by the beneficiary, although the extent of the protection may well depend on what is required to be certified. The protection afforded the account party by the requirement of a third party certificate is buttressed by the third party’s liability to the account party if he issues a false

243In some cases the third party document required is an order ofa court. See e.g. GPA Group Pic v. Bank o f Ireland [1992] 2 IR 408, where a letter of credit required either: (i) a demand certificate signed by both the beneficiary and the account party, or (ii) signed by the beneficiary and attaching a final and binding order ofa court of competent jurisdiction for the amount claimed.

244[1973] AC 279.

245Ibid., at 285.

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The Fraud Exception

Ibid it [62]. ThePother reason why the contention was ill-founded was because the report stated or implied that the weight of cargo loaded was obtained from the draft carrying vessels draft meastuements. In those circumstances the draft measurements themselves were of no concern to the buyei.

248 cf Rank M elli Iran v. Barclays Bank DCO [1951] 2 Lloyds Rep. 367 at 375, where it was held that inspection certificate was defective because it did not purport to relate to any specific goods.

w See, e.g. the certificate of inspection required in Niru Battery Manufacturing Co v. Milestone Trading Ltd

[2004] 1 Lloyd’s Rep. 344.

250 (1904) 90 LT 618.

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V. Prevention o f Fraud by D ocum entary Conditions

it as the bill of lading quantity was described. The analyst gave a certificate confirming that the sample submitted was more than five per cent protoxide. The bank paid against that certificate. The seller was later convicted for obtaining the money by fraudulent misrepresen­ tation. However, it was held that on its face the certificate conformed to the requirement of the credit and that the bank was entitled to accept it. If it was a requirement that the analyst should himself draw the sample from goods identified as the contract goods, it would have

been difficult for the seller’s fraud to succeed without the complicity o f the analyst.

(Hi) Signatory o fthe certificate

contract for the sale of goods where payment was to be by way of letter of credit. The credit called for, inter alia, a quality and weight inspection certificate to be issued and signed by the authorized signatories of the account party. The certificate was to be ‘countersigned by Mr Yau Ting Sang, holder of Hong Kong Identity Card No. A 422436’ in the presence of the bank. A copy of Mr Sang’s certificate of identity was sent to the bank in Singapore. After the sellers informed the buyers that the goods were ready for shipment the sellers received a telex notifying them that Mr Sang would be arriving from Hong Kong between 15 and 20 March. Eventually a man claiming to be Mr Sang contacted the sellers’ representative, inspected the goods and attended the bank’s offices where he signed the certificate in the

251Under Art. 3 ofUCP 600.

252[1974] 1W LR1234.

253[1993] 2 SLR 751.

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The Fraud Exception

presence of an officer of the bank. After he had left the bank, the officer established from the certificate of identity that the man claiming to be Mr Sang was in fact an impostor. When the sellers subsequently presented documents, including the quality and weight inspection certificate the bank refused to pay on the ground, inter alia, of the fraud or forgery in the certificate signed by the impostor. It was held that the bank was entitled to refuse to pay as the certificate, signed by an impostor, was a nullity. Without the special requirement of the bank witnessing the signature and verifying the identity of the signatory against the cer­ tificate of identity the fraud or forgery in the document might have gone unnoticed by the bank.

B. Liability of the issuer

5.121 A third party certificate should afford the buyer some protection on the basis that, in order to protect its own reputation, a third party expert would not wish to be involved in any fraud by the seller. However, the protection does not depend entirely on the expert’s desire to protect his reputation. It is backed up by a legal duty imposed on the third party certifier. An inspector who allows himself to be persuaded by a fraudulent seller to issue an inspection certificate when he has not inspected the goods may be liable in tort to the buyer, who is relying on the certificate for protection, even though the person who instructed the expert is the seller. In Niru Battery Manufacturing Co v. Milestone Trading Ltd,25Athe letter of credit required an inspection certificate by SGS to certify that the quality, quantity and packing of the goods loaded strictly complied with the terms of the underlying contract and the credit. The seller persuaded SGS to issue a certificate in those terms even though SGS had not inspected the goods. The seller then presented the certificate to the bank which paid and obtained reimbursement from the buyer. No goods were ever shipped to the buyer. It was held by the Court of Appeal that SGS was liable in tort to the buyer. Although there was no direct contract between the buyer and SGS at any stage, SGS had assumed a responsibility and owed a duty of care to the buyer with regard to the inspection of the goods and the issue of the certificate. SGS was in breach of that duty and SGS’ breach of duty was a cause of the buyer’s loss.

5.122 The natural desire of any expert issuer to avoid such liability strengthens the protection against fraud that may be enjoyed by an account party who insists on such a certificate by a named person.

3. Beneficiary’s Certificate

5.123 A letter of credit or demand guarantee may require, in addition to documents issued by third parties, a document to be issued by the beneficiary himself. Although, in the case of a docu­ ment to be produced by the beneficiary himself, it is easy for the beneficiary to include a false statement in it, nonetheless beneficiary’s certificates do offer a measure of protection against fraud, depending on what is required to be stated in the document. In this respect the types of certificate normally required of beneficiaries under letters ofcredit are different from those commonly required under demand guarantees.254

254 [2004] 1 Lloyds Rep. 344.

present a statement confirming that a notice of the demand for payment under the bond has been given to the account party.256 This offers some protection to the account party since notice of the demand gives him the opportunity to apply to the court for an injunction to restrain the threatened demand by the beneficiary if the account party has evidence that the demand is fraudulent. However, the usual requirement is for a beneficiary’s certificate stating that the account party is in breach of the underlying contract and, in some cases, specifying in what respects the account party is in breach of the contract.257 The protection offered by such a requirement is that if the beneficiary issues such a statement with knowledge that the account party is not in breach of contract or without honest belief that the account party is in breach of contract that could amount to fraud258 and the account party can obtain an injunction against the fraudulent beneficiary. The wider the scope of the statement required of the beneficiary the better the protection afforded the account party. Suppose a perfor­ mance bond requires the beneficiary to state that: (a) the account party has failed to fulfil his obligations under the underlying contract, (b) the amount of damage due and payable to the beneficiary as a result of the account party’s breach, and (c) accordingly the account party is entitled to receive payment of the amount stated in (b) under the bond. In such a case, even if the account party has committed a breach of contract, if the beneficiary makes a demand for an amount which he does not honestly believe to be the amount of his damage resulting from the account party’s breach the demand is fraudulent and therefore the bank can refuse to pay if it has knowledge of it. This is because the bond expressly requires a statement that the sum demanded is the amount of damage due and payable as a result of the breach.259

255 cf. KBCBankv. IndustrialSteels (UK) L td[200l] 1 AUER (Comm) 409, where, however, the bank failed to notice the inconsistency in the documents. See also Fortis Bank SA /N V v. Indian Overseas Bank [2009] EWHC 2303 (Comm), where a credit required a beneficiary’s certificate confirming that the beneficiary had advised the nominated bank to send a complete set of original shipping documents to the issuing bank at the beneficiary’s cost, a certificate which stated that the beneficiary had requested the documents to be sent at the issuing bank’s cost was non compliant.

256See, e.g. the advance payment bond in TTI v. Hutchison 3G [2003] 1 All ER 914, 922, under which the beneficiary was required to tender a copy of the written notice to the account party.

257For a recent example, see the bond in Rainy Sky SA v. Kookmin Bank [2009] EWHC 2624 (Comm).

258See discussion at paras 5.39 to 5.43 above. By making such a false statement, the beneficiary may also be committing an offence under the Fraud Act 2006, s 2 (fraud by false representation).

259 Balfour Beatty Civil Engineering v. Technical and General Guarantee Co Ltd (1999) 68 Con L.R 180 at 191.

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