Abstract
According to many cases, it has been demonstrated that sellers with bad intentions have manipulated letters of credit system in many ways, including fraud. Thus, many legal jurisdictions have recognized the fraud exception rule. In order to apply such exception, some conditions must be met. Among these conditions, the bank’s knowledge and a requirement of a clear evidence. Notably, the bank’s knowledge is crucial, meaning that the establishment of the sole exception will depend upon the status of the bank’s knowledge. Meaning that if the bank is aware of existing fraud, it is under a duty to refuse presentation. Otherwise, it should not. In turn, the establishment of clear evidence by the English courts is somewhat hard to achieve, consequently, such condition criticized often. Further, if the beneficiary himself commits the fraud, or has knowledge of the fraud, then the fraud exception rule will apply.1 This raises the question of whether the fraud exception should also bite where the fraud is committed by a third party but without the beneficiary’s knowledge. From these facts, this chapter will try to analysis the status of the bank’s knowledge and the hardship related to the clear evidence requirement in conjunction with the third-party fraud.
Highlights
Fraud is one of the most common threats to international business transactions, especially when a mechanism such as documentary credit is utilized.2 It is believed that letters of credit transactions are the “ideal vehicle for money laundering.”3 In one comment from the ICC commission “fraud is one of the oldest and best-known phenomena in the business world
Despite the fact that this occasion is not clear in the law but, in my judgment, from both the autonomy principle and a good faith principle, the bank is under a duty to honor the credit, regardless of knowing of the fraud prior to examination, only if the presented documents are in compliance
There is no doubt that the autonomy principle is the cornerstone of the letters of credit mechanism
Summary
Fraud is one of the most common threats to international business transactions (see Figures 1 and 2), especially when a mechanism such as documentary credit is utilized. It is believed that letters of credit (see Figure 3) transactions are the “ideal vehicle for money laundering.” In one comment from the ICC commission “fraud is one of the oldest and best-known phenomena in the business world. In the English (the American Accord), the court held that the fraud rule exception can only be established if the fraud appears in the presented documents [5] The facts of this benchmark case can be briefly summarized as follows: “an English company entered into a contract to sell glass fiber making equipment to a Peruvian company and payment was to be made by an irrevocable letter of credit. The bank refused such tender and held that the presentation was fraudulent because the goods were loaded on December and not on 15 December as agreed.”10 It is clear from these milestone cases that there is a dispute as to whether the fraud rule exception can be established either if the fraud accords in the presented documents or in the underlying transaction. This chapter will focus on a bank’s knowledge, clear evidence and third-party fraud
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