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

The Fraud Exception

5.126 However, the position is different where the scope of the beneficiary’s statement is narrower, as where, in the example just discussed, the performance bond requires the beneficiary only to state (a) and (c). In such a case, the beneficiary does not need to have reason to believe that he has suffered loss in the amount claimed. Therefore, if the beneficiary makes a demand including the statements that (a) the account party is in breach ofcontract and (c) accordingly the beneficiary is entitled to payment under the performance bond then if he honestly believed the statements that is enough. There is no fraud and the bank must pay. In such a case, it is irrelevant whether or not the beneficiary honestly believed that the amount claimed was caused by the breach of contract.260 In other words, the bank must pay even if the benefi­ ciary had no honest belief that the amount claimed was caused by the breach of contract. Therefore, if the account party intends to have the protection that comes from a requirement that the beneficiary should only demand payment of such sum as he estimates represents the loss and damage caused by the account party’s breach of contract, this should be expressly provided in the performance bond.

4. No Documentary Requirement

5.127 There is ofcourse no documentary protection from fraud in the case of a clean letter ofcredit, that is to say, one that requires no documents to be presented as a condition for payment (apart from a draft). The same is true of a performance bond under which the issuer under­ takes to pay on a bare demand. Such instruments are sometimes referred to as a ‘suicide’ letter of credit or performance bond because of the extent to which it exposes the account party to the risk of fraud or abusive demand for payment by the beneficiary. Indeed it is a matter of some debate whether a beneficiary who demands payment under such an instrument can be guilty o f fraud. However, since it is likely that fraud in the transaction is part of the fraud exception, a demand under such an instrument may be fraudulent in certain instances such as where the beneficiary had induced the account party to enter into the underlying contract by fraudulent misrepresentation. Fraud may also defeat the beneficiary’s claim in the rare cases where it can be shown that the issuer was induced by fraudulent misrepresentation on the part of the beneficiary to issue the instrument. However, these are not the common instances of fraud usually encountered in international transactions. An account party will therefore be well advised to avoid ‘suicide’ instruments.

260 Enka ImaatVe SanayiAS v. Banco. Popolare DellAlto Adige SPA [2009] EWHC 2410 (Comm).

6

THE NULLITY OR RECKLESSNESS

EXCEPTION

I. IN TRO D UCTIO N

As indicated in Chapter 5, the fraud exception does not apply where a document presented 6.01 by the beneficiary contains a material representation which is false but the beneficiary was

not aware of it at the time ofpresentation. That limitation in the scope o f the fraud exception has given rise to the question whether the position should be different where the false repre­ sentation is one which renders the document null and void. In other words, the question is whether the law should recognize a separate nullity exception based not on the beneficiary’s fraud but rather on the fact that the document tendered is a nullity and therefore a worth­ less piece of paper. If there is to be no general nullity exception, a related question is whether there should be a recklessness exception which will apply where the document presented is a null and void, for example because the signature has been forged, and the conduct of the beneficiary in connection with the creation or presentation of the document, though not amounting to fraud, is so reckless as not to be deserving of the protection of the law. This chapter is concerned with these questions. It will first discuss the nullity exception before considering the possibility of a recklessness exception.

II. A N U LLITY EXCEPTION?

A document is a nullity if due to a defect it is void ab initio and so is a worthless piece of 6.02 paper. This may happen either because the document is forged, in the sense that it is fraudulently created or completed, or because it has been created in error without any fraudulent intent.1

1 MontrodLtdv. GrundkotterFleischvertriebs GmbH[2002] 1 WLR 1975; [2002] 1A11ER257.

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Rep. 102 at 116, bill of lading representing a consignment of cement shipped in May 1979 at Constanza for Port Said, whereas in fact the cement had been shipped a year earlier, at a time when the ship had a different name, had not been destined for Port Said, and by the time of tender the cement had been much deteriorated. Legatt J. described the document as a forgery, a sham piece of paper .

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I I A N u llity Exception?

it is a question of doubt whether the bank is entitled to reject it and refuse to pay on the ground only that the document is a nullity. There is no English decision on such a document. However, there are divergent judicial opinions on the question. In the United City Merchants case, the Court of Appeal took the view that the bank should be entitled to refuse payment in such a case. Ackner L.J. gave the example ofa bill of lading on which the signature has been forged and the beneficiary was ignorant of the forgery when he presented the documents but the bank became aware of it before payment. He said he could see no valid basis upon which the bank should be entitled to pay and debit the account party. He continued to say that a ‘banker cannot be compelled to honour a credit unless all the conditions precedent have been performed, and he ought not to be under an obligation to accept or pay against docu­ ments which he knows to be waste paper. To hold otherwise would deprive the banker of that

security for his advances, which is a cardinal feature of the process of financing carried out by means of the credit’.8

documents that are a nullity because they were forged is strictly obiter. Thus, to sum up, the state of the English authorities is that in United City Merchants, where the document was

8[1982] QB 208 at 246.

9[1983] AC at 187.

10Ibid., at 188.

11[2002] 1 All ER (Comm) 257 at [56Ц59].

12Ihe policy considerations are discussed below at paras 6.22 to 6.31. 13 Ibid., at [58].

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77л? N ullity or Recklessness Exception

forged but not a nullity, the Court of Appeal expressed the view, obiter, that there was a nullity exception in respect of documents that were forged and were a nullity but the House of Lords, which refused to accept that view, left open the question whether there was such an exception. In Montrod, where the document was a nullity but not forged, the Court of Appeal expressed the view, obiter, that a general nullity exception should not be recognized. There is no decision of an English court on the nullity exception in a case where the relevant document was a nullity because it was forged. Thus, the position in respect of such documents is not entirely settled.

2.Innocently Created Documents that are a Nullity

A.Honest error of third party

6.09 Even if a nullity exception is accepted in relation to a forged document, it does not necessar­ ily follow that the exception should extend to a document which is a nullity because of an honest error by a third party who created or completed it. In Montrod Ltd v. Grundkotter Fleischvertriebs Gm bH u Potter L.J. said that although in the United City Merchants case Lord Diplock left open the question of forged documents where the effect of the forgery was to render the document a nullity ‘there is nothing to suggest that he [Lord Diplock] would have recognised any nullity exception as extending to a document which was not forged (ie fraudulently produced) but was signed by the creator in honest error as to his authority; nor do I consider that such an exception should be recognised’.41516There is some­ thing to be said for that view. If the law does not recognize a nullity exception where the nullity results from forgery, which is conduct involving moral culpability, then there should be no nullity exception where the document is a nullity because of an honest error of a third party.

B. Honest error of beneficiary

6.10 A bank is not entitled to refuse payment on the ground of nullity even though the nullity is due to the honest error of the beneficiary who presented the document. In Montrod Ltd v. Grundkotter Fleischvertriebs G m blF b the Court of Appeal was concerned with a case where a document was a nullity because it was signed by the beneficiary who created it in honest error as to his authority. The underlying contract was for the sale of frozen pork by a German company, GK, to a Russian buyer, Ballaris. Payment was to be by a letter of credit, which was issued by Standard Chartered Bank in London at the request of another bank, acting on the instructions of the claimant, Montrod Ltd, a finance company engaged by the purchasers for the purpose of the transaction. The credit, which was subject to UCP 500, was payable ‘45 days sight’ on presentation by GK ofvarious documents including a certificate of inspec­ tion issued and signed by Montrod, the credit applicant. In the course of communications with Ballaris, when negotiating the contract and putting in place of the credit, GK (who never had direct contact with Montrod) dealt with Ballaris in good faith on the basis that Ballaris could speak as to Montrod’s intentions so far as signature of the inspection certificate was concerned. GK were led to believe that an employee of GK should sign the inspection

14[2002] 1 All ER (Comm) 257.

15Ibid., at [56].

16[2002] 1 All ER (Comm) 257.

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II, A N ullity Exception?

certificate on behalf of Montrod and GK received through the post a Montrod company stamp as proofof Montrod s authorization. G К acted accordingly. GK presented to the bank documents, including the inspection certificate apparently signed by Montrod, which on their face complied with the terms of the credit. The bank paid the credit in spite of an assertion by Montrod that the inspection certificate which GK presented had not been signed or authorized by Montrod and that the document was fraudulently created. The judge found that the inspection certificate had indeed been signed without the authority of Montrod but that GK was entirely innocent of fraud and was entitled to payment by the issuing bank which was entitled to reimbursement by the instructing bank which was in turn entitled to reimbursement from Montrod.

The judge rejected the alternative argument that the issuing bank was entitled to refuse 6.11 payment on the ground that even if GK was not fraudulent, the bank and GK had, prior

to payment, been made aware that the inspection certificate had not been signed or autho­ rized by Montrod and as such was a nullity and/or a non-conforming document. That decision was affirmed by the Court of Appeal. Potter L.J., who delivered the judgment of the court, said that since there was no nullity exception where a third party signed a docu­ ment in honest error as to his authority he did not think that the fact that it was the benefi­ ciary himself who created the document said to be a nullity should of itself disentitle him to payment where such creation was devoid of any fraudulent intent and was effected in the belief that GK had the authority of Montrod to sign and issue the certificate. He said that:

[i]f, in the circumstances of a multipartite transaction, a seller/beneficiary is indeed led to believe that he has authority to create and present a certificate of inspection for the purpose of triggering payment by a letter of credit, I do not see why he should be regarded as any less entitled to payment in accordance with UCP 500 than in acase where he receives from a third party a document regular on its face which has, unknown to him, been created without authority.17

An application for permission to appeal against the decision was dismissed by the Appeal 6.12

Committee of the House of Lords. So, in relation to an innocently created document that is a nullity, the position of English law appears settled. The question whether English law may have taken a wrong turning in the Montrod case is considered below18 after a brief discussion of the different approach adopted by the Singapore courts.

3. Singapore Approach

It is well known that the Singapore courts have departed from the direction of the English 6.13 courts in Montrod and have recognized a nullity exception. However, the nullity exception recognized in Singapore is a limited one and, although it conflicts with obiter dictum in

Montrod, does not conflict with any English decision. To fully appreciate the scope of the Singapore exception, it is helpful to consider cases where a document is a nullity because it is forged before looking at cases where a document is a nullity because of an honest mistake by the maker.

17Ibid., at [57].

18Paras 6.22 to6.31.

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The N ullity or Recklessness Exception

A.Forged document that is a nullity

(i)Nullity exception available

6.14 It is in the case of Bean Technology (Mfg) Pte Ltd v. Standard Chartered Bank19 that the Singapore Court of Appeal recognized a nullity exception which applies where a material document presented under a credit is forged and null and void and the bank is aware of the nullity before it has accepted the document. In that case a letter ofcredit was issued to finance the sale of electronic components. The credit, which was subject to UCP 500, required a full set of clean air waybill. The buyers notified the sellers that the air waybill would be issued by their freight forwarders, ‘Link Express (S) Pte Ltd’. When the sellers presented the documents under the credit, the confirming bank rejected them on the ground that the air waybill was a forgery because ‘Link Express (S) Pte Ltd’ did not exist. The sellers sought to re-present the documents but the bank refused to accept any further presentation. The sellers/beneficiary brought an action against the bank claiming payment under the credit. For purposes of the application it was assumed that the air waybill was a forgery which rendered it a nullity and that the beneficiary was innocent of the forgery and had presented it in good faith. The question was whether in those circumstances the bank which had knowledge that the document was a forgery and a nullity was entitled to reject the document and refuse to pay even though it appeared on its face to comply with the requirements of the credit. This is the precise issue left open by Lord Diplock in United City Merchants. The Singapore Court of Appeal held that the bank was not obliged to pay under the credit if it had established within the period of examination of documents under UCP that a material document required under the credit was forged and a nullity and had given notice of refusal within that period. The court took the view that implicit in the requirement that the benefi­ ciary should present a conforming document is the assumption that the document is true and genuine.20 Since a document that was forged and a nullity was not a genuine document such a document was not a conforming presentation and the bank was entitled to reject it as non-compliant.

(ii)Exception is a limited one

6.15It is worth noting that the Beam Technology case did not recognize a general nullity exception which will be applicable whenever a document is a nullity. The nullity exception that was recognized in that case is, as the Singapore Court of Appeal itself described it, ‘a limited one’.21 It applies only where the document that is a nullity is forged and is a ‘material’ document and the exception has no application where the bank has already accepted the document or has failed to give a notice of rejection within the stipulated time limit.

6.16The exception, as expressed in Beam Technology, is confined to cases where a document is a nullity because it was forged. It is not expressed to be wide enough to cover cases where a document is a nullity though it is not forged, such as the inspection certificate in Montrod. In this respect the nullity exception recognized in Beam Technology is not in conflict with the actual decision in Montrod.

6.17The second way in which the exception recognized in Beam Technology is limited is that it does not apply to every document required under a credit. Application of the exception is

19[2003] 1 SLR 597. Noted, LY Chin and YK Wong, ‘Autonomy - A Nullity Exception at Last?’ [2004] LM CLQ14.

20Ibid., at [33].

21Ibid., at [34].

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It applies to all cases where the document has been falsified. This appears to include cases where the forgery does not render the document a nullity. Secondly, it does not appear to be confined to ‘material’documents but extends to ‘any’document required under the guarantee

22Ibid., at [33].

23Although curiously the decision ofthe English Court ofAppeal inMontrod. is distinguished asa case where the document required was not an essential document.

24[2000] 4 SLR 393.

25[2003] 1 SLR 597 at [36].

26Art. 16(f).

27Mees Pierson NVv. Bay Pacific (S) Pte Ltd [2000] 4 SLR 393.

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or credit. Thirdly, it is not limited to cases where the document is forged but extends to cases, such as Montrod, where the document is a nullity because it was signed by someone who acted under an honest mistake that he had authority to sign the document when in fact he had no authority.

B.Document that is a nullity due to honest error

6.21As indicated above, the nullity exception recognized in the Beam Technology case is confined to cases where the document is a nullity because it is forged. Should it extend to a document that is a nullity because it was created and issued by someone acting under an honest mistake about his authority? If a Singapore court is faced with such a document is it likely to extend the nullity exception recognized in Beam Technology to cover it or is likely to follow the deci­ sion in Montrod? This is not entirely clear. On the one hand, the basis on which the nullity exception was recognized in Beam Technology is that a document that is a nullity is not a complying presentation. On this view the cause of the nullity should be irrelevant and the exception should apply equally to any material document that is a nullity. On the other hand, in Beam Technology, the Montrod decision, which rejected a nullity exception in the case of a document created by someone without authority acting under an honest beliefas to his authority, was not rejected but only distinguished.28

4.Policy Considerations

6.22The question whether, as a matter of legal policy, a nullity exception should be recognized is one on which there is some controversy. In England, the current judicial trend, represented in Montrod, is against recognition of the exception. By contrast, the courts in Singapore have gone in the opposite direction by recognizing a limited nullity exception. Commentators are also divided, with some in favour of a nullity exception29 and others against it.30 Although the competing arguments may be finely balanced, it is submitted that the policy consider­ ations against recognizing a nullity exception outweigh those in favour.

A.Reasons against a nullity exception

(i)Uncertainty

6.23An important policy reason against a general nullity exception is that it would involve making undesirable inroads into the principle of independence which is fundamental to the smooth functioning of letters of credit31 as the scope of the exception is likely to be vague. First, there are problems in defining when a document that is forged is a nullity, since not every forged document is a nullity.32 Secondly, in Singapore where the exception has been recognized in relation to forged documents, a further difficulty arises because the exception applies only where the document is a ‘material’ document. Tire difficulty is that, as indicated above, no

attempted to distinguish between a forged document that isa nullity and a forged document that is not a nullity. See also, M. Bridge, ‘Documents and contractual congruence in international trade’ in S. Worthington (ed),

CommercialLaw and CommercialPractice (Hart Publishing, London, 2003) 234.

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II. A N u llity Exception?

test has been provided on how to determine whether a document is material. The court in

Beam Technology expressly stated that it is ‘not possible’ to define when a document is a nul­ lity and that the question can only be answered on the facts of each case. But the court expressed the view that the question is no more difficult than the question ofwhat is ‘reason­ able, an exercise which the courts are all too familiar with’.33 However, the problem with this approach is that, considering the object of letters of credit and performance bonds namely, to provide prompt payment to the beneficiary, the assessment is one which should be made by the bank within a few days rather than by the courts at the end of legal proceedings. If the assessment whether a document is a nullity is not one that banks can make without litigation then a general nullity exception would provide further complication and encourage litiga­ tion in an area where simplicity and clarity are required.

(ii) Bank in a dilemma as to whether to investigate

deceived by the third party forger. II so, it is an argument which supports a recklessness exception (discussed below) rather than a nullity exception.

33[2003] 1 SLR 597 at [36].

34Montrodcase [2002] 1 All ER (Comm) 257 at [58].

35[1982] QB 208 at 234.

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