Letters of credit:

Under which circumstances may the bank withhold payment?

by

Gaëlle Eloy

Supervised by J. Erauw

Master in advanced European Law Ugent

2011-2012

LLM PAPER

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Courts’ abbreviations……...…………………………………………………………...............3 Journals/reports’ abbreviations………………...……………………………………………....5

Introduction…………………………………………………………………………………....8

Chapter 1 : The independence principle . ……………………………………………………11

Section 1 : Definition………….……………………………… ……………...11 Section 2 : Breach of the underlying contract………………………………...14 Section 3 : Invalidity or unenforceability of the underlying contract ………. 15

I. Cases where there is only a dispute…………………...……...15 II. Cases where the contract has already been declared invalid

unenforceable………… ………………………...…………....16 Section 4 : Bank’s set-off…………………………………………...………...17

Chapter 2 : Conformity of documents ………………………………...……………………...19

Chapter 3 : The exception of fraud………………………………………...…………………23

Section 1 : Overview and juristic basis ……………….…….………………..23 Section 2 : Definition…………………………………………………………24

I. What kind of fraud?...............……..…………………………………..24 II. Is the fraud significant?…………………………………………………..…27 III. Who committed the act of fraud? fraud…………………………………...28

Section 3: The bank’s knowledge of the fraud. ……………………………..30 Section 4: Standard of proof…………………………………………………..31 Section 5 : Fraud and discounted payment…………………………………....33

I. Before UCP 600……………………………………………………………...33 A. Negotiation credit…………………………………………………..33 B. Acceptance credit…………………………………………………..33 C. Deferred payment credit…………………………………………………34

II. After UCP 600………………………………………………………...36

Chapter 4 : Towards the recognition of other exceptions…………….…………………..…...38

Section 1 : Nullity …………………………………………….........................38 I. What is a nullity?........……………………………………….…....39 II. Legal recognition..……………………………………………………...40 III. Policy considerations…………………………………………………..42

A. Arguments against a nullity exception....…………………………..42 B. Arguments in favour of a nullity exception……………………………44

Section 2 : Recklessness………………………………………………..……..46

Table of Contents

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Section 3 : Illegality…………………………………………………………...47 I. English law........…………………………………………………………48 II. Singaporean law………………………………………………………...49 III. US law………………..…………………………………………………..50 IV. French and Belgian law……………………………………...………...51 V. Other jurisdictions………………………………………………..52 VI. Policy considerations………………………………………….……….52

Section 4 : Unconscionability and bad faith ….………………………………54 VII. English law……………………………………………………………....54 VIII. Other jurisdictions……………………………………………………...55 IX. Condition of applications……………………………………………...56

Conclusion……………………………………………………………………………...…….58

Bibliography…………………………………………………………………………………..60

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A. British courts 1. General abbreviations Court of Appeal CA High Court, Chancery division Ch High Court, Family division F High Court, Queen’s Bench division QB High Court, Commercial Court within the Queen’s Bench Division Com Ct House of Lords HL Privy Council PC 2. Neutral citations Court of Appeal (Civil Division) EWCA Civ Court of Appeal (Criminal Division) EWCA Crim High Court, Administrative Court EWHC (Admin) High Court, Chancery Division EWHC (Ch) High Court, Commercial Court EWHC (Comm) High Court, Family Division EWHC (Fam) High Court, Queen’s Bench Division EWHC (QB) House of Lords UKHL Privy Council UKPC Supreme Court UKSC

B. US courts

1. State courts Colorado Court of Appeals Colo App District of Columbia Court of Appeals DC App Florida District Court of Appeal Fla Dist App Illinois Appellate Court Ill App Indiana Court of Appeals Ind App Iowa Supreme Court Iowa Iowa Court of Appeals Iowa App Kentucky Court of Appeals Ky App Maine Supreme Judicial Court Me Minnesota Supreme Court Minn Minnesota Court of Appeals Minn App New York Supreme Court, Appellate Division NY App Div New York Supreme Court NY Sup North Carolina Court of Appeals NC App Ohio Court of Appeals Ohio App Tennessee Court of Appeals Tenn App Texas Court of Appeals Tex App

Courts’ Abbreviations

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2. Federal courts

A. United States Courts of Appeals First Circuit 1st Cir Second Circuit 2d Cir Third Circuit 3d Cir Fourth Circuit 4th Cir Fifth Circuit 5th Cir Sixth Circuit 6th Cir Seventh Circuit 7th Cir Eighth Circuit 8th Cir Ninth Circuit 9th Cir Tenth Circuit 10th Cir Eleventh Circuit 11th Cir

B. United States District Courts

Middle District of Alabama MD Ala Northern District of California ND Cal Southern District of Florida SD Fla Northern District of Georgia ND Ga Eastern District of Louisiana ED La District of Maine D Me District of Maryland D Md District of Massachusetts D Mass Eastern District of Missouri ED Mo Western District of Missouri WD Mo Northern District of New York NDNY Southern District of New York SDNY Eastern District of Pennsylvania ED Pa Middle District of Pennsylvania MD Pa Southern District of Texas SD

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A. Australia Australian Company Law Reports ACLR Australian Business Law Review Austl Bus L Rev New South Wales Law Reports NSWLR New South Wales Supreme Court NSWSC Victorian Reports VR

B. Belgium Algemeen juridisch tijdschrift AJT Droit bancaire et financier Dr banc fin Droit des affaires DAOR Journal des tribunaux JT Jurisprudence Liège, Mons, Bruxelles JLMB Nieuw Juridisch Weekblad NjW Pasicrisie Pas Rechtskundig Weekblad RW Revue de droit commercial belge RDC Revue de la banque Rev Banque Tijdschrift voor Gentse Rechtspraak TGR Tijdschrift voor Privaterecht TPR Revue de droit des affaires internationales RDAI

C. Great-Britain Law Reports LR, AC, KB, QB, Ch, Fam, P All England Law Reports All ER Business and Legal Reports BLR Butterworths Company Law Cases BCLC Cambridge Law Journal CLJ Commercial law cases CLC Common Market Law Reports CMLR Company Lawyer Comp law Construction Industry Law Letter CILL Cowper’s Reports Cowp English Reports ER International Trade and Business law review Int’l Trade & Bus L

Rev Journal of Business Law JBL Journal of international banking law JIBL Journal of international banking law and regulation JIBLR Lloyd’s Law Reports Lloyd’s Rep Lloyd’s Maritime & Commercial Law Quarterly LMCLQ PLI Real Estate Law and Practice Course Handbook Series PLI/Real Times Law Reports TLR

Journals/reports’ abbreviations

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Weekly Law Reports WLR West's Bankruptcy Reporter BR

D. Canada Alberta law reports Alta LR All Canada Weekly Summaries ACWS Business and legal report BLR Carswell's Practice Cases CPC Dominion Law Report DLR Newfoundland Court of Appeal NFCA Ontario Judgments from Quicklaw OJ NO Over the corner OTC Receuil des arrêt de la Cour Suprême RCS

E. China Hong Kong Law Reports HKLR

F. France Banque Banque Bulletin des arrêts de la Cour de cassation (Chambres civiles) Bull civ Recueil Dalloz Dalloz Recueil Dalloz informations rapides Dall IR Revue banquet et droit Banque et droit Revue de la banque Rev Banque Revue de droit maritime français Droit maritime Français Revue trimestrielle de droit civil RTDC Jurisclasseur périodique (Semaine juridique) JCP Ed E Edition entreprise Ed G Edition générale Recueil Sirey S Semaine juridique SJ

G. Germany Wertpapiermitteilungen WM

H. Malaysia Malaysian Law journal MLJ Malaysian law journal unreported MLJU

I. Mexican

Mexican Law review MLR

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J. Singapore Singapore Academy of Law Journal SacLJ Singapore High Court SGHC Singapore Law Reports SLR

K. Switzerland Arrêts du Tribunal fédéral ATF

L. United States Atlantic Reporter A2d Appellate Division Report AD3d American Law Reports ALR Building and construction law cases BLDG & CONSTR L Brooklyn Law Review Brooklyn L Rev California Appellate Reports Cal App Federal Reporter F2d, F3d Federal Supplement F Supp, F Supp 2d McKinney's Forms–Uniform Commercial Code MCF UCC New York Supplement Reporter NYS, NYS2d North Eastern Reporter NE2d North Western Reporter NW2d Northern Illinois University Law Review NILULR Ohio State report Ohio St 3d, Ohio St LJ Pacific Reporter P, P2d Uniform Commercial Code Reporting Services UCCRS University of Pennsylvania Journal of International Business Law U Pa J Int’l Bus L Southern Reporter SO2d Sout Western Reporter SW2d, SW3d Virginia Journal of International Law Va J Int’l L Vanderbilt Journal of Transnational Law Vand J Transnat'l L William and Mary Law review Wm & Mary L Rev

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A letter of credit (also called documentary credit or banker’s commercial credit) is a commitment made by a bank, at the request of its customer (the applicant or account party) to make payment of, or up to, a specified amount to a specified person (the beneficiary) upon presentation of specified documents.1 Letters of credit are often used to secure one party’s obligations in an international contract of sale, loan commitment or lease.2 This international trade agreement between the account party and the beneficiary is called the underlying contract. Letters of credit have been developed in international commercial transactions as a response to the unwillingness of the seller to send the goods before being paid and the one of the buyer to pay the goods until the deliverance of merchandise. In that case, one solution is to require the importer to ask his bank to issue a letter of credit for the amount of the contract price in favour of the exporter. Thus the beneficiary will be paid by the bank after presentation of the documents listed in the letter of credit. These documents normally demonstrate proof of full performance of the seller’s obligations before the actual delivery of the goods to the seller. This mechanism reduces the exporter’s risk of non-payment and the importer’s risk of non-delivery. As mentioned in Power Curber International Ltd v National Bank of Kuwait SAK,3 a letter of credit is now ‘a universally acceptable means of payment in international transactions’. A letter of credit may also constitute a quadripartite operation. In this case, a second bank, usually situated in the beneficiary’s country, intervenes either by notifying the beneficiary of the opening of the credit (advising bank), or by receiving the documents and paying the seller (nominated bank). Moreover, a second bank can also give a personal undertaking to pay the beneficiary, in addition to the promise of the issuing bank. This bank will then be called the confirming bank. The different stages deriving from a letter of credit may be summarised as follows:4

a) The buyer and seller conclude a contract wherein it is provided that payment will be made by a letter of credit.

b) The buyer (the account party) approaches his bank (the issuing bank) and asks it to issue a letter of credit, in accordance with the terms agreed in the contract of sale, for the benefit of the seller and, if provided in the underlying contract, to mandate a second bank to notify, receive, pay or confirm the letter of credit.

c) The issuing bank opens the letter of credit and mandates, if need be, the second bank (advising, nominated or confirming bank).

d) The second bank notifies the opening of the letter of credit to the beneficiary and possibly adds its confirmation.

e) The seller makes transport arrangements and hands over the goods to the carrier. f) The transport company drafts and gives the transport documents to the seller (eg: the

bill of ladings).

1 N Enonchong, The independence principle of letters of credit and demand guarantees (OUP 2010) 7. 2 N Ann Connery, ‘Letters of credit in real estate transactions’ (2007) 539 PLI/Real 651. 3 [1981] 1 WLR 1233 (CA) 1240. 4 N De Gottrau, Le crédit documentaire et la fraude (Bruylant 1999) 15-16.

Introduction

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g) When the seller will be in possession of all necessary documents mentioned in the underlying contract, he will present them to the (issuing, nominated or confirming) bank within the set time.

h) The confirming bank or the issuing bank checks the documents conformity. i) If the bank agrees that the documents comply with the credit, the beneficiary will be

paid and if relevant, the mandated bank or confirming bank sends the documents to the issuing bank.

j) The issuing bank checks again the documents for compliance and, then, sends them to the buyer.

k) The buyer’s account is debited by the issuing bank and if needed the mandated or confirming bank is reimbursed.

l) The buyer presents the documents to the carrier to take possession of the goods. In the majority of cases, letters of credit are regulated by a private set of rules entitled the Uniform Customs and Practice for documentary credits (UCP) drawn up by the International Chamber of Commerce of Paris (ICC). The ICC is the largest business organization in the world, which aims to codify international practices, sometimes selecting best practices, after long debates and negotiations of these practices. Regarding letters of credit, the UCP were published for the first time in 1933. The latest version entitled the UCP 600 dates from July 2007 and is widely followed by the international banking community. In order to take into account the emergence of electronic credits, the eUCP have been adopted since 2002.5 It is also useful to remember that these rules are private rules. Thus they must be supplemented by relevant national law.6 Without express choice made by the parties, this will probably be the law of the habitual residence of the bank when the dispute concerns the fact that the bank has accepted or refused to withhold payment.7 This paper intends to analyse in detail the key element of a letter of credit; the bank’s obligation to pay the beneficiary. More precisely, we purport to provide an overview of the circumstances in which the bank may withhold payment not only according to the UCP, but also according to different national laws, particularly English law but also under US and French law. However, before arriving at the heart of this paper, it is necessary to detail certain precisions concerning the different kind of letters of credit which are frequently met in practice. These distinctions will facilitate a better understanding of the matter described hereafter. There used to be a distinction between a revocable credit and an irrevocable credit. The former could be amended or cancelled by the bank without the consent of the beneficiary whereas the latter was unconditional and could not be withdrawn by the bank. Given the lack of legal certainty attached to the revocable credit, their use was not widespread. This is highly likely to explain why, unlike previous versions, the UCP 600 only applies to irrevocable credits.8 However, nothing prevents parties from applying the UCP 600 to a revocable credit if it is expressly mentioned in the letter of credit.9

5 Cf : S Miadana Rakotonanahary, ‘La fraude et la dématérialisation du crédit documentaire’ (Mémoire de maîtrise, Université de Montréal 2005). 6 E Caprioli, ‘La loi applicable aux contrats de crédits documentaires, approche de droit comparé’ (1991) RDAI 905, 909; M Delierneux, ‘Crédits documentaires : droit applicable, tribunaux compétents et valeur normative des Règles et usances codifiées par la Chambre de commerce internationale’ documentaire’ in AP André Dumont and others, Le crédit documentaire (Anthémis 2010) 27 7 Caprioli (n 6); Delierneux (n 6) 49. 8 Article 2. 9 Article 1.

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Another distinction to be made concerns sight, acceptance, deferred payment and negotiation credits. To begin with, a credit available by sight payment is paid directly upon presentation of complying documents.10 An acceptance credit is one whereby a bank accepts a bill of exchange drawn by the beneficiary, and pays at maturity provided that a complying presentation is made. In addition, a credit available by deferred payment occurs when the bank agrees to pay the beneficiary by a future date, known as the maturity date. This means that, unlike the sight payment, with an acceptance or deferred payment credit, the payment is postponed and the beneficiary has to wait for a specific period of time before he can receive the money. In the case of fraud, as we will see, this distinction is important. Finally, negotiation credits include an undertaking of the issuing and confirming bank not only towards the beneficiary’s bank but also towards any other bank.11 As a result, the beneficiary may present the documents to any bank which will pay him if they are in conformity with the letter of credit. Afterwards, the negotiating bank will enforce the issuing or conforming bank’s undertaking to be reimbursed at the maturity date. Finally, it is also important to not confuse letters of credit, often named as documentary credits, with standby letters of credits. Standby letters of credit are more similar to independent guarantees. Both types of letters of credit are similar in their process of enforcement, but differ with respect to the scope of the bank’s undertaking. The bank only intervenes in the case of failure of the principal debtor regarding standby letters of credit. It is likely that most readers will already have understood that the success of letters of credit is to be attributed to the unconditional characteristic of the bank’s obligation to pay the beneficiary. Once complying documents are presented to the bank, this latter cannot invoke any exception, taking its roots in the relationship between the bank and its client (the account party) or in the relationship between this party and the beneficiary, to refuse payment. This is what we call the independence principle of letters of credit, or in Canada this is referred to as the autonomy principle. The bank’s undertaking is abstract and independent from any other relations of the triangle or square formed by a letter of credit. The first title of this paper examines the meaning of such a rule and points out situations that, most of the time, due to this principle, do not entitle the bank to withhold payment. Following on from this, we will spend some time describing the condition of precedent linked to the bank’s undertaking. The bank is only compelled to make payment provided that a complying presentation is made. It is therefore perfectly entitled to refuse to pay in case of non conformity without breaching the independence principle of letters of credit. The extent of the bank’s obligation with regard to the examination of documents will be analysed in the second chapter. Finally, the third and fourth chapters will focus on exceptions to the independence principle recognized by the international community. Fraud is the only exception applicable worldwide, and will be examined in detail in the third chapter, whereas arguments towards the recognition of new exceptions will be discussed in the fourth chapter.

10 Article 2 of the UCP 600. 11 Enonchong (n 1) 19.

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Chapter 1: The independence principle Section 1 : Definition The independence principle is the primary characteristic of letters of credit.12 It means that a letter of credit is independent of the three relationships generated by letter of credit transactions. These relationships include that of the bank with its client who purchases the letter of credit, the bank and the beneficiary to whom it makes a promise to pay, and the underlying contract.13 With regards to the case of a second banks intervention, two other relationships enjoy this independence: the relationship between the issuing bank and the second bank and the relationship of this latter with the beneficiary.14 This principle implies that no party to one contract can be responsible for the performance of another party’s obligation.15 Incidentally, this rule means that if the letter of credit has not mentioned a particular applicable law of a certain jurisdiction, it will not necessarily be governed by the law governing the underlying contract.16 The purpose of this rule is to give the seller the assurance to be paid so as to make letters of credit payment instruments almost equivalent to cash in hand.17 This cast-iron assurance18 characterizing letters of credit gives them their international commercial value and ensures their vital role in international commercial transaction. This important role has resulted in case law referring to letters of credit as part of ‘the life-blood of international commerce’.19 In addition, for the same reason, the principle of independence has been defined as a ‘great and fundamentally important’ principle20 or as ‘the engine room behind letters of credit’.21 This principle is enshrined in the UCP 600 by article 4: ‘a credit by its nature is a separate transaction from the sale or other contract on which it may be based. Banks are in no way concerned with or bound by such contract’. Albeit the legal value of the UCP is widely discussed, particularly regarding the question of whether or not the status of international customs or practice, part of the lex mercatoria, should be attributed to these rules,22 we are of

12 San Diego Gas & Electric Co v Bank Leumi (1996 4th Dist) 42 Cal App 4th 928. 13 United City Merchants v Royal Bank of Canada [1983] AC 168; Re Onecast Media, Inc (2006 9th Cir) 439 F3d 558. 14 G Landry, ‘L’autonomie du crédit documentaire : RUU 500, droit anglais et droit suisse’ in B Tilleman (ed) Droits des contrats : France, Suisse, Belgique (De Boeck & Larcier 2006) 41. 15 Dallas Bank and Trust Co v Commonwealth Development Corp (1984 Tex App) 686 SW2d 226; Central Sav and Loan Ass'n v Stemmons Northwest Bank, NA (1992 Tex App) 848 SW2d 232. 16 Enonchong (n 1) 69. The same reasoning was applied in China with respect to an arbitration clause included in the underlying contract. See: M Williams, ‘Documentary credits and fraud: English and Chinese law compared’ (2004) JBL 155, 161. 17 City Merchants (n 13) [183F]. 18 This expression is used by Enonchong (n 1) 68. 19 Harbottle v National Westminster Bank [1978] QB 146 (QB). 20 Bolivinter Oil SA v Chase Manhattan Bank NA [1984] 1 Lloyd’s Rep 251 (CA) 257. 21 J Arkins, ‘Swow White v Frost White: the new clod war in banking law’ (2000) 15 JIBL 31. 22 JL Rives-Lange and M Contamine-Raynaud, Droit bancaire (5th edn, Dalloz 1990) 956; S Tevini Du Pasquier, Le crédit documentaire en droit suisse: droits et obligations de la banque mandataire et assignée (Helbing & Lichtenhahn, 1990); E Caprioli, Le crédit documentaire: évolution et perspectives (Litec 1992) nos 180; M Delierneux, ‘Les Règles et Usances Uniformes de la CCI relatives aux crédits documentaires irrévocables, version 2007 – (RUU 600)’ (2008) 1 RDC 3, 5. See also: Trib Bruxelles, 16 November 1978, Rev Banque, 1980, p. 249; Versailles, 28 February 2002, JCPE, 2003, n° 15, p. 396.

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the opinion that at least article 4, being recognized worldwide, as we will now consider, is part of customary law.23 In England, the independence principle is not mentioned in legislation but has been recognized by the courts.24 In 1958, Jenkins L.J., in Hamzeh Malas & Sons v British Imex Industries Ltd,25 declared that the bank’s absolute obligation to pay was ‘irrespective of any dispute there may be between the parties as to whether the goods are up to contract or not’.26 Several years later after recognition of this concept, Lord Denning M.R. in Edward Owen Engineering Ltd v Barclays Bank International Ltd. clarified this principle in the context of performance bond holding that ‘a performance bond stands on a similar footing to a letter of credit’.27 This statement already creates the opportunity to emphasize the similarity between independent guarantees and letters of credit. As Waite L.J. held in Themehelp Ltd v West,28 ‘letters of credit, performance bounds and guarantees are all subject to the general principle that they must be treated as autonomous contracts, whose operation is not to be interfered with by the court on grounds extraneous to the credit or guarantee itself’.29 This similarity explains why frequent references to cases regarding independent guarantees will be made in this paper. In principle, assertions concerning the latter are also valid with respect to letters of credit. Finally in Czarnikow-Rionda Sugar Trading Inc v Standard Bank London Ltd,30 it has been recalled that the independence principle also excludes an injunction against the beneficiary to prevent him from demanding or receiving payment under the letter of credit. In Canada, the first judgments having enshrined the independence principle are the cases of Jacques Cartier Bank31 and Rolland32, both dated from 1895. In 1951, the rule was recalled by Lord Bridges in a case where the letter of credit involved was said to be ‘in accordance with the contract’. Despite this acknowledgment, Lord Bridges held that, ‘the letter of credit must in my opinion be considered separate and apart from the contract’.33 In the United States, the principle is enshrined in the revised version of article 5-103(d) of the Uniform Commercial Code (UCC) according to which ‘rights and obligations of an issuer to a beneficiary or a nominated person under a letter of credit are independent of the existence, performance, or non-performance of a contract or arrangement out of which the letter of credit arises or which underlies it, including contracts or arrangements between the issuer and the applicant and between the applicant and the beneficiary.’ The principle has been referred to in many judgments.34

American judges base the independence of letter of credits on two policy 23 Supported by Delierneux (n 6) 31. 24Urquhart, Lindsay & Co Ltd v Eastern Bank Ltd [1922] 1 KB 318 (KB). 25 [1958] 2 QB 127 (CA). 26 ibid 129. 27 [1978] QB 159 (CA) 171. 28 [1996] QB 84 (CA). 29 ibid 89. Seel also: Cass Comm, 20 December 1982, Dalloz, 1983, p. 365. 30 [1999] 1 All ER (Comm) 890 (Comm Ct). 31 Jacques Cartier Bank c R (1895) 25 RCS 84. 32 Rolland c Caisse d'économie Notre-Dame de Québec (1895) 24 RCS 405. 33 Davis O'Brien Lumber Co Ltd c Bank of Montreal (1951) 3 DLR 536. 34 With respect to the independence vis a vis the underlying contract: Daiwa Products, Inc v Nationsbank, NA (2004 Fla Dist) 885 So2d 884; SAVA guMarchka in kemijska industria DD v Advanced Polymer Sciences, Inc (2004 Tex App Dallas) 128 SW3d 304; Shin-Etsu Chemical Co, Ltd v 3033 ICICI Bank Ltd (2004 NY App Div)

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considerations. First of all, as the bank has not chosen the beneficiary and has no control over the drawing up of the underlying contract, the bank cannot assume any liability related to the performance of this contract. Secondly, the commercial value of letters of credit would dramatically be reduced if before performing its obligation, the bank was obliged to look beyond the terms of the letter of credit.35 In France, the principle is contained in article 2321(3) of the French civil Code, introduced in 2006.36 Case law had however previously recognized this principle.37 In Belgium, where the same Napoleonic code applies, such a provision has not yet been introduced. However, it is well established in case law that letters of credit are characterized by this independence.38 In Switzerland, the independence of the bank’s undertaking derives from the legal basis given to letters of credit: ‘l’assignation’. This concept refers to a contract whereby a party (l’assignant) authorizes another (l’assigné) to hand over, for the first party’s account an amount of money to a third person (l’assignataire) who has a mandate to get it on his own behalf.39 Article 468 al 1 of the Swiss code provides explicitly that ‘l’assigné’, namely the bank, can only oppose to ‘l’assignataire’ (the beneficiary) exceptions resulting from the content of the ‘assignation itself’, which clearly refers to the independence principle. Finally, it is also important to note that whereas no international convention regulates letters of credit, the principle is recognized in the UN Convention on Independent Guarantees and Standby Letters of Credit with respect to those instruments.40 After this short overview, we are able to conclude that the principle of independence is acknowledged all over the world and that, as we have already suggested, this characteristic is no longer contested and should be ranked at the heart of the lex mercatoria. Indeed, there is no doubt that the general practice and the opino juris necessary to create a custom are present in international trade. However, the independence principle has inherent and logical limits. As a letter of credit is a contract, the bank, without breaching the independence principle, may withhold payment raising all defences which arise under the letter of credit itself.41 Therefore, the bank is entitled to invoke lack of capacity, mistake, misrepresentation, duress or undue influence to deem the letter of credit as void and to avoid payment. The bank may also allege that the instrument has been discharged by frustration or by a repudiatory breach of the beneficiary accepted by the bank.42 More commonly the reason given by the bank to withhold

9 AD3d 171; Fisher v Dakota Community Bank (2005 5th Cir) 405 F Supp 2d 1089; Grunwald v Wells Fargo Bank, NA (2005 Iowa Ct App) 725 NW2d 324; Re Stonebridge Technologies, Inc (2005 5th Cir) 430 F3d 260; Blonder & Co, Inc v Citibank, NA (2006 1st Dept) 28 AD3d 180; Re Cooper Mfg Corp (2006 Bankr SD Tex) 344 BR 496; Morgan Creek Residential v Kemp (2007 3d Dist) 153 Cal App 4th 675. With respect to the independence vis a vis the relationship between the issuer and its customer: Housing Securities, Inc v Mayne Nat Bank (1978 Me) 2 ALR 4th 650; Aluminum Corp v Bank of Virginia (1982 D Md) 544 F Supp 386, judgment aff'd (1983 4th Cir) 704 F2d 136; Com Corp v Banco do Brasil, SA (1999 2d Cir) 171 F3d 739; Re Security Services, Inc (1991 Bankr WD Mo) 132 BR 411. 35 Amwest Sur Ins Co v Concord Bank (2003 ED Mo) 248 F Supp 2d 867. 36 By an ordonnance no 2006-346 of 23 March 2006, JOFR, 24 march 2006. 37 Cass Comm, 14 October 1981, Dalloz, 1982, p. 301; Paris, 24 November 1981, Dalloz, 1982, p. 296. 38 Trib Bruxelles (sais), 19 March 2001, JLMB, 2001, p. 219; Gent, 24 June 2009, NjW, 2010, p. 672. 39 Article 466 of the Swiss Federal Code of Obligation. 40 Article 3. 41 Enonchong (n 1) 76. 42 ibid.

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payment, without breaching the independence principle, is a lack of conformity of the document with the requirements of the letter of credit. In this instance, the bank is even under an obligation to refuse payment.43 Otherwise it would breach its own obligation and will not be entitled to debit the buyer’s account after payment. It is now time to focus on the independence of the bank’s undertaking from the underlying contract because, in practice, many disputes arise when the account party tries to prevent the bank from paying the beneficiary by reason of grievance based on the underlying contract. Therefore, it is worth focusing on the consequence of a breach of the underlying contract by the beneficiary on the bank’s obligation and on the consequence of the invalidity of this contract. As a rule, the bank’s obligation should not be affected. But we shall see what this means in practice.

Section 2: Breach of the underlying contract It is not unusual to see a buyer, following the presentation of complying documents by the seller, try to prevent the bank from making payment on grounds that the seller has not performed the contract correctly. A commonly invoked motive is that the quality of the goods delivered is not satisfactory44, or more frequently that there is a failure to deliver suitable substitute goods. Nevertheless, many other motives can be found in case law. In Rosenfeld v Banco International,45 a shipping documents presented to the bank contained a false description of the merchandise shipped. However, the documents were conformed to the letter of credit. In this case, an American court decided that the bank had an absolute obligation to make the payment under a letter of credit and that it had never been held that a bank was under an obligation or had a right to verify whether the description of the goods contained in the documents was correct. Only a contractual provision authorizing or compelling the bank to do so could have such an effect. As we will see, this question at the time being could be tackle via the fraud exception. In United City Merchants v Royal Bank of Canada,46 the plaintiff sued the issuing bank which had refused to honour the letter of credit because loading brokers, not acting for the plaintiffs, fraudulently entered an earlier date of shipment on the bill of lading. In Edward Owen Engineering Ltd. v Barclays Bank International Ltd,47 the account party wanted to restrain the bank from paying a performance bond by invoking a non-express repudiation of the contract by the beneficiary. Additionally, in Intraco Ltd v Notis Shipping Corporation (The Bhoja Trader),48 the buyer of a ship who claimed that the seller had breached the contract of sale and caused him loss because the ship was arrested, sought an injunction to prevent the beneficiary from disposing of the proceeds of the letter of credit, because the fruits of this letter of credit could only be released in Greece where the beneficiary had no asset. In all of these cases, the argument of the account party or the one of the bank was dismissed on the basis of the independence principle. It has been held that, ‘it makes no difference that the alleged breach of contract by the seller is one which would have entitled the buyer to rescind

43 See chapter 2. 44 United Technologies Corp v Citibank, NA (1979 SD NY) 27 UCCRS 212. 45 (1967 1st Dept) 4 UCCRS 212. 46 (n 13). 47 [1978] QB 15 (CA). 48 [1981] 2 Lloyd’s Rep 256 (CA).

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the contract of sale, reject the goods and refuse the contract price’.49 The payment must be made and ‘the rights and wrongs argued about later’.50 It is important to understand that the buyer does not lose his rights against the beneficiary of the letter of credit in case of wrong performance. An action for damages, specific performance or avoidance of the contract is still possible. However, in the case of insolvency, fraudulent disappearance or, even if the seller acts in bad faith, it may be impossible or very difficult for the buyer to get his money back. It is therefore advisable that the bank is prohibited from paying the beneficiary. This is the easiest way to safeguard the buyer’s interests. Nevertheless, it is contrary to the mechanism of the letter of credit itself.

Section 3: Invalidity or unenforceability of the underlying contract Whilst in case law it is evident that disputes concerning the performance of the underlying contract cannot affect the bank’s obligation, it is less clear how far disputes related to the validity or the enforceability of the contract can be invoked without breaching the independence principle.51 A contract providing the drawing of a letter of credit might fail to comply with a prescribed formality. This may affect the validity of the contract. Or, the contract might be void for lack of capacity, mistake, misrepresentation, economic duress, etc. The letter of credit being independent from the underlying contract, the invalidity of the underlying transaction does not lead to the nullity of the letter of credit itself. Therefore, it is highly likely that the buyer in this case will want to prevent the bank from honouring his obligation. Cases governing this matter can be divided into two categories: situations where the validity or enforceability is only challenged and cases where a court has already pronounced this invalidity or unenforceability. It is noteworthy that the invalidity for illegality, which is known in some countries, is a specific situation which will be examined in the fourth chapter.

I. Cases where there is only a dispute There is no leading case in the UK stipulating that a bank cannot withhold or suspend payment because of the alleged invalidity of the underlying contract. However, judicial opinions suggest that this should be the case. In Bolivinter Oil SA v Chase Manhattan Bank NA, Sir John Donaldson M.R. declared that ‘the letter of credit was independent from any disputes arising from the performance or indeed existence of the underlying contract’,52 which implies that the bank’s situation cannot be affected by that kind of disputes. In this regard, this statement seems to be in conformity with article four of the UCP 600 which mentions that the undertaking of a bank is ‘not subject to claims or defences’ by the account party. This broad terminology calls for the rejection of the buyer’s claim in such a situation. In addition in the United States, it is settled case law that such a dispute cannot be invoked against the bank.53 49 United City Merchants (n13) 183. 50 The Bhoja Trade (n 48) 257. 51 Enonchong (n 1) 73. 52 [1984] 1 Lloyd’s Rep 251 (CA) 393 (emphasis added). 53 CNA Mortgage Investors, Ltd v Hamilton Nat Bank (1975 Tenn App) 540 SW2d 238; Cappaert Enterprises v Citizens and Southern Intern. Bank of New Orleans (1980 ED La) 486 F Supp 819.

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However, the position seems to be different if the injunction is sought directly against the beneficiary. This injunction prevents the latter from demanding payment and does not interfere, at least directly, with the bank’s independent undertaking. That is why, in cases concerning demand guarantee and performance bond, characterized by their independence as a letter of credit,54 some judges were ready to grant an injunction. In Themehelp Ltd v West,55 where an interim injunction was granted against the beneficiary of a demand guarantee on the ground that the buyer was likely to have been induced by fraudulent misrepresentation. Evans L.J. declared that ‘it is necessary to distinguish between cases where the validity of the underlying contract is called in question and those where, for whatever reason, it is not. I would be prepared to agree that in principle, if there was an arguable case that the contract was voidable or otherwise invalid, then further performance of the contract might be restrained pending the court’s resolution of that dispute’.56 The same approach has been held in Potton Homes Ltd v Coleman Contractors Ltd.57 Nevertheless, it has been criticized by many commentators because the assurance of payment expected to reassure the beneficiary is also undermined in that situation. However, nothing prevent parties to insert in the letter of credit a clause to the effect that the bank’s undertaking is not to be affected by any invalidity or unenforceability of the underlying contract.58 In such instances, an injunction against the beneficiary is not conceivable either.59

II. Cases where the contract has already been declared invalid or unenforceable Under the UN Convention on Independent Guarantees and Standby Letters of Credit Convention, a bank is entitled to withhold payment if ‘the underlying obligation of the principal/applicant has been declared invalid by a court or arbitral tribunal, unless the undertaking indicates that such contingency falls within the risk to be covered by the undertaking’.60 Nevertheless, there is no obligation upon the bank. This is a facultative decision.61 With respect to documentary credits, no convention or legislation provides such an authorization. Nevertheless, two remarks must be made. First of all, the bank’s obligation is dependent on the presentation of complying documents. However, in practice, if the underlying contract has been declared invalid or unenforceable it is unlikely that the seller will proceed to the shipment of the goods to the buyer and, therefore, the seller will not be in possession of the necessary documents to require payment.62 Secondly, if such presentation is made whereas the bank is aware of that invalidity, the bank could easily conclude that the demand amounts to a fraud and payment will be able to be withhold.63 Nevertheless in exceptional circumstances, if such a demand was not fraudulent, it is likely on the basis of the above case law mentioned concerning disputes related to the validity of the contract, that an injunction limiting the beneficiary’s right of payment will be granted. However, this does not necessary mean that the bank may withhold payment when it has been informed of the nullity of the underlying contract, and where no fraud can be invoked.

54 As we have already explained in Section 1. 55 [1996] QB 84 (CA). 56 ibid 103, 104. 57 [1984] 28 BLR 19 (CA). 58 Standard Bank London Ltd v Canara Bank [2002] EWHC 1574. 59 Gulf Bank KSC v Mitsubishi (Heavy Industries) Ltd (No2) [1994] 2 Lloyd’s Rep 145 (CA). 60 Article 19 (2)(b). 61 De Gottrau (n 4)131. 62 Enonchong (n 1) 75. 63 Cf. Chapter 3.

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In Belgium and France, neither nullity of, nor the resolution or termination of the underlying contract may affect the bank’s obligation.64 Therefore it has been declared unnecessary to make a distinction between cases where there is a dispute concerning the validity of the contract and cases where the contract has been declared void or terminated. The bank must always pay. In the United States, an injunction has been granted to prevent the bank from making payment under a standby letter of credit because the contract had been properly cancelled by one party under its force majeure clause.65 However, with respect to letters of credit, we are unaware of a similar decision having been taken.

Section 4 : The Bank's set-off The possibility for a bank to exercise a set-off on the basis of its own cross-claim against the beneficiary is controversial.66 In English law this defence is permitted provided that the set-off is liquidated67 or, if not, that it arises in connection with the transaction giving rise to the beneficiary’s claim for payment under the instrument.68 In Hongkong and Shanghai Banking Corporation v Kloeckner,69 the beneficiary acknowledged the validity of the bank’s claim but contended that a set-off was not enforceable under a letter of credit. His Lordship denied this argument pointing out two of the main features of the case. First, the letter of credit and the bank’s cross claim financed the very same transactions and secondly, the cross-claim was liquidated. Those two conditions were each per se sufficient to admit the set-off. This means that when a claim is liquidated, there is no need to prove that the bank’s claim is directly connected to the transaction.70 With continued reference to English law, should the proceeds of the letter of credit be assigned to a third party, the bank keeps its right of set-off against the assignee provided that the debt against the beneficiary has duly accrued before notice of the assignment is received.71 Any assignee should therefore be careful if the beneficiary is a customer of the issuing bank.72

64 In France, with respect to a guarantee: Cass Comm, 20 December 1982, Dalloz, 1983, p. 365; Cass Comm, 13 December 1983, Dalloz, 1984, p. 420, note M. Vasseur. In Belgium, also with respect to a guarantee: Trib Verviers (Prés), 8 February 1996, RDC, 1997, p. 781. See also: M Hendrick Van Lier, ‘Les garanties dites à première demande ou abstraites’ (1980) JT 345; F t’Kint, Sûreté et principes généraux du droit de poursuite des créanciers (Larcier 2004) 411; L Simont, ‘Les garanties indépendantes’ (1983) Rev Banque 591, 594; J Van Ryn and J Heenen, Principes de droit commercial, vol 4 (Bruylant 1988) n° 659. 65 Itek Corp v First Nat Bank (1984, 1st Cir) 730 F2d 19. 66 De Gottrau (n 4) 107. 67 Agra and Masterman’s Bank v Leighton [1866] LR 2 Ex 56; Nova (Jersey) Knit Ltd v Kammgarn Spinnerei GmbH [1977] 1 WLR 713 (HL). 68 Hongkong and Shanghai Banking Corporation v Kloeckner & Co AG (Kloeckner) [1990] 2 QB 514 (Com Ct). 69 ibid. 70 Etablissement Esefka International Anstalt v Central Bank of Nigeria [1979] 1 Lloyd’s Rep 445 (CA); Lehman Brothers Commodity Services Inc v Credit Agricole Corporate and Investment Bank [2011] EWHC 1390 (Comm), [2012] 1 All ER (Comm) 254. 71 Marathon Electical Manufacturing Corp v Mashreqbank PSC [1997] 2 BCLC 460 (QB); Union Bank (UK) Plc v Pathak [2006] EWHC 2614 (Ch), [2006] All ER (D) 210. 72 Enonchong (n 1) 78.

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In Belgian law, the right of set-off has been admitted without difficulty73 because it operates forthwith whereas in Switzerland, where parties must invoke it, the Court of Justice of Geneva in 198974 positioned itself against the right of set-off. However, the Federal tribunal,75 with respect to an independent guarantee admitted such a right in favour of the bank few years later. Thus, the Swiss doctrine is still divided on the question because no express ruling from the Federal tribunal deals with this matter with respect to letters of credits. In France, a decision of the tribunal of Paris seems to reject the right of set-off.76 Nevertheless, set-off had not explicitly been invoked. The bank argued that it was justified to refuse payment because the beneficiary had not yet reimbursed a debt he had in favour of the bank. In this instance, the tribunal held that the independence principle prevents the bank from invoking the exceptio non adimpleti contractus. However, incidentally, it can be argued that this judgment also means that the bank’s obligation cannot be terminated by set-off. To conclude this section, it is also important to mention that a contractual clause may exclude the bank’s right of set-off against the beneficiary.77 Although certain former first instance judgments of the English courts held that such a clause was not enforceable, the Court of Appeal in Halesowen Presswork & Assemblies Ltd v Westminster Bank Ltd contradicted these decisions.78 It is evident that at present judges depart much more easily from earlier first instance cases relying on the Court of Appeal decision.79

73 Trib Bruxelles, 18 April 1985, RDC, 1985, p. 727; Bruxelles, 13 June 1991, Dalloz, 1992, p. 306. 74 Genève, 27 April 1989, SJ, 1990, p. 109. 75 Trib Fédéral, 7 November 1996, SJ, 1997, p. 245. 76 Trib Paris, 20 November 1988, Dalloz, 1990, Somm, p. 205. 77 Banque de l’Indochine v Rayner (Mincing Lane) Ltd [1983] QB 711 (CA) 719. 78 [1971] 1 QB 1 (HL). 79 As in Kloeckner (n 68).

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The formalism of letters of credit is the corollary of the independence principle. It means that the bank’s obligation to pay the beneficiary is solely dependent on the terms and conditions mentioned in the letter of credit.80 The bank is neither concerned by the goods, services or performance to which the documents relate81 nor by the ‘actual existence of facts which those documents assert’.82 Additionally the bank is not concerned with the purpose for which a particular document has been asked by the account party under the letter of credit.83 However, only a “strict” compliance to the letter of credit entitles the bank to pay the beneficiary according to its mandate. Thus, an obvious situation where the bank may withhold payment is when the beneficiary does not make a complying presentation. In this chapter, we will not pose the question of exceptions to the independence principle. We will merely deal with the consequence of the condition precedent attached to the bank’s obligation when it has not been respected. Many articles have been written on this topic. We will nevertheless limit our comments to the main rules, referring the reader to more precise analysis of the UCP 600 for the rest. In order to determine whether the presentation complies with the letter of credit, it is first important to know what the letter of credit requires. In that respect, it is worth noting that since the letter of credit is independent of the transaction, the underlying contract cannot be taken into account to interpret the letter of credit.84 It cannot be used either to supplement the terms of the credit85 or to add obligations on the beneficiary.86 Therefore the nominated, confirming or issuing bank has ‘a maximum of five banking days following the day of presentation to determine whether a presentation is complying’.87 According to article 13(b) of the UCP 500, the bank had ‘a reasonable time, not exceeding seven banking days’. Despite the removal of the words “reasonable time”, it is commonly argued that when the bank can complete the examination process within a few hours or less than five days, it must do so. Waiting until the fifth banking day, and causing undue delay, will constitute a breach of contract towards the beneficiary for which this latter may claim damages.88

80 Philadelphia Gear Corp v Central Bank (1983 5th Cir) 717 F2d 230; Raiffeisen-Zentralkasse Tirol reg Gen mbH v First Nat Bank in Aspen (1983 Colo App) 671 P2d 1008; Five Star Parking v Philadelphia Parking Authority (1989 ED Pa) 703 F Supp 20; Crossroads Bank of Georgia v State Bank of Springfield (1991 Minn Ct App) 474 NW2d 14. 81 Hamzeh Malas & Sons v British Imex Industries Ltd [1958] 2 QB 127 (CA); United City Merchants (n 13); Rosenfeld v Banco Internacional (1967 NY Sup) 4 UCCRS 212. 82 IE Contractors Ltd v Lloyd’s Bank Plc [1990] 2 Lloyd’s Rep 496 (CA) 499. 83 Midland Bank Ltd v Seymour [1955] 2 Lloyd’s Rep 147 (QB) 151; Seaconsar Far East Ltd v Bank Markazi Jombouri Islami Iran [1993] 1 Lloyd’s Rep 236, 239. 84 Summit Ins Co of New York v Central Nat Bank of Houston (1981 Tex App) 624 SW2d 222; Atlas Mini Storage, Inc v First Interstate Bank of Des Moines, NA (1988 Iowa App) 426 NW2d 686; Ward Petroleum Corp v Federal Deposit Ins Corp (1990 10th Cir) 903 F2d 1297; Re Lancaster Steel Co (2002 SD Fla) 284 BR 152. 85 Utica Mut Ins Co v Walker (1987 Ky App) 725 SW2d 24; Ward Petroleum Corp (n 84). 86 Summit Ins Co of New York (n 84). 87 Article 14, b) of the UCP 600. 88 E Adodo, ‘A presentee bank’s duty when examining a tender of documents under the Uniform Customs and Practice for Documentary Credits 600’ (2009) 24(11) JIBLR 566, 578; D Doise and V Mayer, ‘Section IV: Le crédit documentaire’ in Lamy Contrats internationaux (Lamy 2001) no 671; M Isaacs and M Barnett,

Chapter 2: The conformity of documents

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In order to be entitled to withhold payment, the bank must conclude within those five days that ‘on the basis of the documents alone, on their face, the documents appear’89 to not constitute a complying presentation. Article 2 states that a complying presentation refers to ‘a presentation that is in accordance with the terms and conditions of the credit, the applicable provisions of these rules and international standard banking practice.’90 In addition, the data in the documents ‘need not be identical to, but must not conflict with’ the data in the letter of credit.91 With respect to the bank’s duty to examine the documents, different points must therefore be developed. First, the bank’s task is ministerial rather then investigative.92 Visual inspection is enough. The documents must appear “on their face” to be in compliance with the letter of credit. In other words, the bank need not act as a detective agent93 even for facts that are within its knowledge.94 There is no obligation to verify the genuineness of the tendered documents.95 To summarise, the documents should not, ‘call for further inquiry or are such as to invite litigation’.96 Nevertheless, if the indications in the documents are not wholly conform with the requirement under the letter of credit or if anything may suggest that there is fraud or that they are not telling the truth, a bank may withhold payment or at least carry out further investigations. Indeed, a bank will be negligent if it ignores anything that can serve as a red flag despite the apparent good order of the documents.97 Although the UCP 600 removes the provision according to which a bank had to act with reasonable care, there is no reason to think that the bank is no more under such an obligation.98 This is in fact a common law requirement.99 Secondly, generally a bank cannot refuse to pay the beneficiary on the basis of documents presented which were not required by the credit. Article 14, g) states that ‘a document presented but not required by the credit will be disregarded and may be returned to the presenter’. However, what happens if the non stipulated document is inconsistent with the others documents, referring for example to second-hand goods whereas the invoice mentions new goods? Without going into too many details, it seems that the non stipulated documents may be taken into account in two situations. These include when they supplement the required documents. The bank may then consider that the credit implicitly required those documents.100 Alternatively, this is when the non stipulated documents indicate that the beneficiary is guilty of fraud with respect to the underlying transaction.101 ‘International trade finance – letters of credit, UCP 600 and examination of documents’ (2007) 22(12) JIBLR 660. 89 Article 14, a) of the UCP 600. 90 Article 2 of the UCP 600. 91 Article 14, d) of the UCP 600. 92 Bisker v Nations Bank NA (1996 DC Ct App) 686 A2d 561, 565; Insurance Co of N Am v Heritage Bank (1979 3rd Cir) 595 F2d 171, 173; Kumagai-Zenecon Construction Pte Ltd v Arab Bank plc [1997] 2 SLR 805 [17] (Singapore). 93 Adodo (n 88) 568. 94 Fortis Bank SA/NV v Indian Overseas Bank [2009] EWH 2303 (Comm), [2010] 1 Lloyd’s Rep 227 [53]. 95 Gian Singh & Co Ltd v Banque de I'Indochine [1974] 1 WLR 1234 (PC). 96 M Golodetz & Co In v Czarnikow Ronda Co Inc [1980] 1 WLR 495 (CA). 97 Adodo (n 88) 568. 98 Isaacs and Barnett (n 88) 664. 99 Basse and Selve v Bank of Australasia [1904] 20 TLR 431 (CA); Equitable Trust Co of New York v Dawson Partners Ltd [1927] 27 Lloyd’s Rep 49 (CA). 100 Kumagai-Zenecon Construction (n 92); Flagship Cruises Ltd v New England Merchants (1978 1st Cir) 569 F2d 699. 101 Guaranty Trust Co of New York v Hannay &Co [1918] 2 KB 623 (CA); European Asian Bank AG v Punjab and Sind Bank [1983] 1 Lloyd's Rep 611 (CA).

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The third point to mention is that in the common law countries, courts require the bank to pay the beneficiary only in case of strict compliance.102 It means that, ‘there is no room for documents which are almost the same or which well do just as well’.103 In Moralice (London) Ltd v ED & F Man,104 the documents showed that the shipment was short by 0.06% compared to what the credit asked for. The bank was held to be entitled to reject the documents because of non compliance. In another case, the goods in the credit mentioned the delivery of ‘coromandel groundnuts’ whereas the bill of lading related to, ‘machine-shelled groundnut kernels’.105 Despite a trade usage that the two terms referred to the same goods, the court held that the bank was only entitled to pay against documents referring to coromandel groundnuts. However, ‘the requirement of strict compliance is not equivalent to the test of exact literal compliance in all circumstances and as regards all documents’.106 For example typing errors in names may not be regarded to as discrepancies. ‘Industries’ instead of ‘industrial’ has been held not discrepant.107 In addition, even in cases where the discrepancy is not a misspelling, English courts seem to let more margin of discretion to the banks,108 as equally the United States109 and Canada 110 rules. These courts have followed the comments of some authors who pleaded for the recognition of linguistic equivalency.111 Nevertheless, the practice is not consistent.112 Therefore, the degree of discretion left to the bank may be a large cause for concern if the applicant on later inspection argues that the documents should have been rejected.113 The same problem applies in civil law countries which recognise to a much larger extent a general principle of good faith.114 This principle limits the scope of the obligation of strict compliance because a refusal to pay cannot lack good faith.115 It is also worth noting that the bank’s obligation to examine the documents is also affected by banking practices. If the presentation does not conform exactly with the terms of the credit but to a banking practice, the bank cannot refuse to pay. Those banking practices certainly encompass the opinions and decisions of the ICC Banking Commission on banking practices in the field of letters of credit,116 specifically the International Standard Banking Practice for

102 Dynamics Corporation of America v Citizens & Southern National Bank (1973 ND Ga) 356 F Supp 991; Courtaulds North America Inc v North Carolina National Bank (1975 4th Cir) 528 F2d 802; United Technologies Corp (n 44). 103 Equitable Trust Co (n 99) 52. 104 [1954] 2 Lloyd’s Rep 526. 105 Rayner & Co Ltd v Hambro’s Bank Ltd [1943] KB 37 (CA). 106 Kredietbank Antwerp v Midland Bank plc [1999] Lloyd's Rep 219 (CA) [12]. 107 Hing Hip Hing Fat Co Ltd v Daiwa Bank [1991] 2 HKLR 35. 108 Enonchong (n 1) 85. 109 T Zsuzsanna, ‘Documentary credits in international commercial transactions with special focus on the fraud rule’ (Thesis, Athens 2006) 91. 110 Banque de la Nouvelle-Écosse (BNE) v Angelica Whitewear (1987) 1 RCS 59. 111 M Ippoliti, ‘Letters of credit: have we fully recovered from three insolvency shocks?’ (1987) 9 U Pa J Int’l Bus L 595, 597. 112 For more details on the strict compliance : Isaacs and Barnett (n 88); M Barnett ‘International trade finance - letters of credit, UCP 600 and examination of documents’ (2007) 22(12) JIBLR 660; Shearman & Sterling LLP, ‘Fortis Bank SA/NV v Indian Overseas Bank: letters of credit - discrepant documents’ (2010) 25 (6) JIBLR 60; Enonchong (n 1) 80 ; WR Barr, ‘Cause of Action by Beneficiary against Bank for Wrongful Dishonor of Draft or Demand for Payment under Letter of Credit’ (2010) 6 COA 337; Shearman & Sterling LLP ‘Letters of credit - discrepant documents’ (2012) 27(2) JIBLR 42. 113 Isaacs and Barnett (n 88) 666. 114 Tevini Du Pasquier (n 22) 145; K Kawan, ‘La fraude dans le crédit documentaire : Confusion ou Cohésion ?’, (1991) 6 RDAI 797. 115 Eg: Mannesmann Handel AG v Kaunlavan [1993] 1 Lloyd’s Rep 8 (Com Ct) where Swiss law was applied. In Switzerland: Trib Fédéral, 11 January 1989, ATF 115, 1989, II, p. 67. 116 Credit Industriel v China Merchants Bank [2002] EWHC 973 (Comm), [2002] All ER (Comm) 427; Voest-Alpine Trading USA Corp v Bank of China (2000, SD Tex) US Dist Lexis 8223.

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the Examination of Documents under Documentary Credits (ISBP). There are also national, regional or local banking practices. However, their applicability is controversial.117 Finally, if the bank is of the opinion that no complying presentation has been made, the bank may reject the demand of payment118 or contact the account party for a waiver of the discrepancies.119 Nevertheless, this demand to the account party does not extend the period of five banking days. In addition, the bank is never obliged to pay in the case of a waiver given by the account party. This is only a faculty.120 If the bank decides to withhold payment, it must give a letter of notice to that effect to the beneficiary. The practical details of this notice are governed by article 16, c) of the UCP 600. If those conditions are not respected, the bank will be precluded from invoking the non-complying presentation.121 After having briefly described when a bank may withhold payment on the ground of a non-complying presentation and having explained that when this condition precedent is fulfilled, the bank’s obligation to pay the beneficiary is almost unconditional, it is time to focus on the exceptions to this rule. The main exception to the independence principle is that of fraud. Being the only recognized exception all over the world, we will explain fraud in much further detail.

117 Adodo (n 88) 575. 118 Article 16, a) of the UCP 600. 119 Article 16, b) of the UCP 600.

• 120 Article 16, c), iii, b of the UCP 600. That had already been recognized by French courts: Cass Comm, 20 June 2006, Droit et patrimoine, 2006, September, p. 87.

121 Article 16, f) of the UCP 600.

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Chapter 3: The fraud exception Section 1: Overview and legal basis of the exception

The first exception to the principle of independence to be recognized by the court was in instances where fraud had occurred. Fraud attacks public policy and is ‘an equally serious threat to the commercial utility of the letter of credit’.122 When this exception applies, the main consequence is the possibility for the bank to withhold payment even though the documents may appear on their face to comply with the requirements of the letter of credit. This possibility in many states is even an obligation. Hence if the bank pays the beneficiary and there is awareness of fraud being carried out, it will be deprived of reimbursement from the issuing bank or from the account party. In the same way, this exception entitles the account party to apply for an injunction to prevent the beneficiary from making a demand of payment or to prevent the bank from making payment.

The Uniform Customs and Practice are silent about this exception. The comments of the International Chamber of Commerce related to the UCP 500 declared in this regard that ‘the UCP should not attempt to regulate the attitude of banks if it is alleged or proved that a fraud has been committed with respect to the goods to which the credit refer or to the documents presented hereunder’.123 Therefore, the legal basis of this exception is to be found in national law and particularly in case law.

In many common law jurisdictions, the first recognition has been inspired by the US leading case delivered by a New-York court, Sztejn v J Henry Schroder Banking Corporation.124 Subsequently, Discount-Records Ltd v Barclays Bank Ltd125 in England, Contronic Distributors Pty Ltd v Bank of New South Wales126 in Australia and Banque de la Nouvelle-Écosse (B.N.E.) c. Angelica Whitewear127 in Canada expressly referred to the American case. Two different justifications underlying the fraud exception has been recognized. In English law Lord Diplock expressly held that the exception was ‘a clear application of the maxim ex turpi causa non oritur actio or, if plain English is to be preferred, “fraud unravels all”’.128 In civil law country, the maxim fraus omnia corrumpit is invoked.129 As Enonchong pointed out130, the English expression used by Lord Diplock is in fact closer to the second maxim than to the first one. However, as we will see, these maxims do not explain why any fraud is not taken into account. Donnelly stressed with relevance that only ‘some fraud’ unravels all.131 Accordingly, the fraud exception when invoked by a bank against the beneficiary should

122 G W Smith, Irrevocable Letters of Credit and Third Party Fraud: The American Accord (1983) 24 Va J Int’l L 55, 96. 123 Comments of the International Chamber of Commerce related to the UCP 500, p. 49. 124 (1941 NY Sup) 31 NYS 2d 631. 125 [1975] 1 Lloyd's Rep 444 (Ch). 126 [1984] 3 NSWLR 110. 127 (1987) 1 RCS 59. 128 City Merchants v Royal Bank of Canada (n 13) 183. 129 JP Mattout, Droit bancaire international (3rd edn, Paris Banque 2004) 254; C Martin , ‘Le crédit documentaire, la fraude et la révision 1983 des RUU’ (1985) RDAI 371. 130 Enonchong (n 1) 97. 131 K Donnelly, ‘Nothing for nothing: a nullity exception in letters of credit’ (2008) 4 JBL 316, 319.

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better be based on the implied limitation of the bank’s mandate.132 When the bank has a clear knowledge of fraud, it has no mandate to pay the beneficiary unless the applicant expressly permits payment. In a number of cases, English courts have recognized that this term was implied by operation of law.133 Nevertheless, this limited mandate has never been recognized as the proper justification of the fraud exception. In some countries, the fraud exception has been enshrined by legislation. This is the case for the United States where article 5-109 of the Uniform Commercial Code deals which “Fraud and Forgery” in letters of credit.134 The originality of this text comparing to all the other jurisdictions mentioned in this paper is to give a right to the bank to withhold payment in case of fraud but not to impose any obligation to do so, provided that the bank acts in good faith.135 In France, illegality of fraud in letters of credit is also enshrined by legislation: article 2321(2) of the civil code targets expressly a case of fraud by the beneficiary. However, in France and in the United States as well, the fraud exception takes it roots in case law.136 Although the fraud exception has been recognized worldwide,137 the conditions of application differ between countries. The kind of fraud that can be invoked, the degree of certainty that the bank must have to refuse payment, the author of the fraud or the consequence of a discounted deferred payment when the fraud is discover between the payment and the maturity date are questions that have not been resolved identically in each jurisdiction. Nevertheless everywhere the trend is to narrow as much as possible the scope of this exception. According to the wording of Kerr J. in Harbottle v National Westminster Bank,138 ‘except possibly in clear cases of fraud of which the banks have notice, the courts will leave the merchants to settle their disputes under the contracts by litigation or arbitration as available to them or stipulated in the contracts.[…] these are risks which the merchants takes’.139

Section 2: Meaning of fraud

I. What kind of fraud?

The definition of fraud is important because the account party could be easily tempted to elude his obligations by describing as fraud any disadvantageous operation.140 In all jurisdictions two kinds of fraud may be invoked so as to entitle a bank to withhold payment. Civil law countries use the terms “material fraud” (fraude matérielle) and “intellectual fraud” (fraude intellectuelle).

132 ibid 319. 133 Harbottle (n 19) 155; Tukan Timber Ltd v Barclays Bank Plc [1987] 1 Lloyd’s Rep 171 (QB); Czarnikow-Rionda Sugar Trading Inc v Standard Bank London Ltd [1999] 1 All ER (Comm) 890 (QB). 134 In the first draft, fraud was regulated by Article 5-114. 135 Article 5-109(a)(2) of the UCC. In this regard Kawan points out: ‘Is there anything more contradictory than to consider that a bank has been acting in good faith when, fully aware of the facts, it paid on fraudulent documents?’ (n 114) 813. 136 In France: Cass Comm, 4 March 1953, S, 1954, p. 121; Cass Comm, 23 October 1990, Bull civ IV, p. 168. In the United States: Sztejn (n 124). 137 For China for example: Williams (n 16). 138 [1978] QB 146 (QB). 139 ibid 155. 140 D Doise, ‘Les fraudes et dérives du crédit documentaire’ in AP André Dumont and others, Le crédit documentaire (Anthémis 2010) 53, 55.

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A “material fraud” in this context refers to situations either where a document has been created by the fraudulent person and therefore includes a forged or unauthorized signature; or where the fraudulent person has materially alters certain elements of a genuine document or finally, where the drafter did not have the power to deliver such documents.141 In those cases, the documents are said to lack of authenticity. A document stating a false date of shipment falls under this category of fraud.142 An “intellectual fraud” is constituted by documents which comply fully in their appearance with the requirements of the letter of credit but which contain elements contrary to the whole truth. Therefore a bill of lading would be concerned by this type of fraud if it mentions that goods shipped are in conformity with the contract whereas they have no value or have a value manifestly inferior to the one expected.143 There is in this case a lack of sincerity.144 In Sztejn,145 the seller had delivered instead of hog bristles, ‘cowhair, other worthless material and rubbish’.146 Although the seller had presented complying documents to the bank, this latter was entitled to refuse payment because the documents contained false representation of fact. In a French case, a bill mentioned the delivery of 5080 articles whereas only 580 of them had been shipped.147 Compared to material fraud, intellectual fraud is more difficult to establish because it requires the bank to look beyond the documents. Moreover, it can only be discover after the delivery of the goods, which reduces the possibility to detect a fraud before payment. The bank’s possibility to take into account the underlying contract and to overlook the documentary nature of letters of credit explains why a fraud situation is an exception to the independence principle. However, the extent to which the fraud exception may interfere with the independence principle seems to be larger in common law than in civil law. In civil law countries, only those two types of fraud may be invoked.148 Thus only a fraud in the documents may justify a refusal to pay. The documents must always present a false representation. In common law jurisdictions, generally, a fraud in the transaction may also be invoked although this expression has been withdrawn from the UCC in 1995 because of its ambiguity. A fraud in the transaction includes situations in which the account party was induced into the underlying contract by the fraud of the beneficiary, or when payment is asked for when the beneficiary has no right to payment.149 Thus, if the account party has entered into the underlying contract on the basis of a fraudulent misrepresentation, this party could be entitled to prevent the bank from making payment to the beneficiary. Despite the fact that this point has not yet been decided by English courts, indications toward recognition can be found in several judgments and are supported by certain scholars.150 According to these authors, there is no reason to exclude from the maxim ‘fraud unravels all’ fraud of the beneficiary in

141 De Gottrau (n 4) 141. 142 United City Merchants (n 13); Merchants Corp of America v Chase Manhattan Bank, NA (1968 NY Sup) 5 UCCRS 196; Siderius, Inc v Wallace Co (1979 Tex App) 27 UCCRS 191; Prutscher v Fidelity International Bank (1980 SD NY) 30 UCCRS 1632. 143 De Gottrau (n 4) 110. 144 Kawan (n 114) 800. 145 (n 124). 146 ibid 633. 147 Cass Comm, 7 April 1987, Rev Banque, 1987, p. 625. 148 In France: Cass Comm, 15 July 1992, Dalloz, 1994, p. 28; Grenoble, 20 September 1994, Banque & Droit, 1995, n° 40, p. 34; Cass Comm, 9 April 1997, JCPE, 1997, n° 30, II, p. 167. 149 Enonchong (n 1) 101. 150 ibid.

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the underlying contract.151 In addition, with respect to performance bonds, the English courts have already recognized that the exception extends to fraud in the transaction.152 In Group Josi Re v Walbrook Ins Co Ltd153 and in Czarnikow-Rionda Sugar Trading Inc v Standard Bank London Ltd,154 both cases concerned fraudulent misrepresentation that led to the conclusion of the underlying contract. Notwithstanding the development on the consequence of the invalidity of the underlying contract of the bank’s obligation that we have discussed earlier, the courts have nowhere rejected the fraud exception because the fraud was not a fraud in the documents. In the first judgment, the claim was dismissed because of a lack of evidence of fraud and in the second one on the ground of the balance of convenience.155 In addition, in a more recent case concerning performance bonds, TTI Team Telecom International Ltd v Hutchison 3G,156 it has been held that ‘a court will intervene to prevent payment on the ground of fraud: (i) where there is a fraud in the demand, (ii) where the documentary credit was procured by fraud, or (iii) possibly, where the underlying transaction was itself procured by fraud’.157 It is now plausible to conclude that English law currently restricts the fraud exception to fraud contained in relevant documentation. Nevertheless the courts are likely to adopt in the future a broader definition. In Canada, the position is much clearer. A fraud in the transaction is admitted as an exception to the independence principle of letters of credit.158 As we are able to recall from the case Banque de la Nouvelle-Écosse (BNE) c Angelica Whitewear159 the fraud exception,

(…) should not be confined to cases of fraud in the tendered documents but should include fraud in the underlying transaction of such character as to make the demand for payment under the letter of credit a fraudulent one. (…) (The fraud exception) should extend to any act of the beneficiary of a credit the effect of which would be to permit the beneficiary to obtain the benefit of the credit as a result of fraud.160

In the United State, the fraud exception encompasses fraud of ‘such egregious nature as to vitiate the entire transaction’.161 Article 5-114 of an earlier version of the UCC recognized that the scope of the fraud exception extended to ‘fraud in the transaction’. This expression first of all referred to what we have translated as, “intellectual fraud”. Thus in United Bank, Ltd v Cambridge Sporting Goods Corp,162 an injunction was granted to prevent the bank from making payment when the beneficiary had delivered old, unpadded, ripped and mildewed boxing gloves instead of new ones as required by the contract and mentioned in the documents. However, some scholars contended that a fraud in the transaction should also include cases where the buyer was induced to enter into the contract by fraudulent 151 Enonchong (n 1) 101. 152 Solo Industries Ltd v Canara Bank [2001] EWCA Civ 1059, [2001] 1 WLR 1800. 153 [1996] 1 WLR 1152 (CA). 154 [1999] 1 All ER (Comm) 890 (Com Ct). 155 The balance of convenience is a test that must be fulfilled in English law in order to obtain an injunction. 156 [2003] EWHC 762 (Comm), [2003] 1 All ER (Comm) 914. 157 ibid 31. 158 Rosen v PulIen (1981) 16 BLR 28; Henderson v Canadian Imperial Bank of Commerce (1981) 16 BLR 28. 159 (1987) 1 RCS 59. 160 ibid 75. 161 Bossier Bank & Trust Co v Union Planters Nat Bank (1977 Tenn App) 21 UCCRS 254; O'Grady v First Union Nat Bank (1978 NC App) 26 UCCRS 146; Stringer Constr Co v American Ins Co (1981 Ill App) 32 UCCRS 1167; Morgan v Depositors Trust Co (1982 Me) 33 UCCRS 1473. 162 (1976 NY Sup) 20 UCCRS 980.

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representation.163 This has been admitted in NMC Enterprises, Inc. v Columbia Broadcasting System, Inc. where the court clearly rejected the contention that the fraud exception was limited to fraud in the documents.164 This judgment has been widely followed.165 To clarify this, article 5-109 of the current version speaks about any ‘material fraud by the beneficiary on the issuer or the applicant’ in addition to forged and fraudulent documents. The scope of the fraud exception is therefore, without any doubt, broader than the one given in civil law. In France for example, when the buyer is induced to enter into a contract by fraudulent misrepresentation, the contract can be declared void by a judge, yet this nullity does not affect the bank’s obligation.

II. Significant fraud To be covered by the fraud exception, the fraud must be significant. As stipulated in the UCC, the fraud must be material, not in the sense used in French law but meaning that ‘the fraudulent aspect of the documents [must] be material to the purchaser of that document or that the fraudulent act [must] be significant to the participants in the underlying transaction’.166 The example given is a seller who knowingly delivers 998 instead of 1,000 barrels of salad oil. This shortage of two barrels will probably be an insubstantial breach of contract which excludes, in spite of the seller’s bad faith, the application of the fraud exception. In contrast, if this quantity (998) is mentioned in the documents, the bank could reject the documents for non compliance as we have seen. In England, the same word is used but has not been defined positively. In United City Merchants, Lord Diplock only held that materiality is not to be determined by reference to the effect on the bank’s security or the buyer’s right to reject the goods.167 Some authors suggest defining the materiality by reference to the bank’s duty to pay. If, without the fraud, the bank will have been entitled and bound to refuse payment, the fraud should be considered as material.168 Thus, if a bill of lading contains a false date of shipment whereas the right date would have also entitled the beneficiary of payment, the fraud exception should not apply.169 This definition seems narrower than the one used in the UCC. Therefore a positive definition given by a court will be welcome. In French and Belgian law, it is not possible to find per se a requirement of significant or material fraud. However, it may be argued that, if without the fraud, the bank would have been entitled to pay as well, the beneficiary could invoke an abuse of right from the bank to challenge the fraud exception.170

163 De Gottrau (n 4) 141. 164 (1974 NY Sup) 14 UCCRS 1427. 165 Eg: Mid-America Tire v PTZ Trading Ltd Import and Export Agents (2000 Ohio App) 43 UCC Rep Serv 2d 964. 166 Official comment of article 5-109 UCC in D Baird, T Eisenberg, T Jackson (comp), Commercial and Debtor-Creditor Law. Selected Statutes (Foundation Press 2002) 545. 167 (n 13). 168 A Malek and D Quesst, J Jack, Documentary Credits (4th edn, Tottel Publishing, 2009) [9.17]. 169 Enonchong (n 1) 105. 170 This abuse of right in contractual relationships is based on article 1134 al 3 of the French Civil code which requires parties to act in good faith.

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III. Whose fraud? In England, the fraud exception is confined to fraud by the beneficiary. However, fraud is proved when the ‘false representation has been made (i) knowingly, (ii) without belief in its truth, or (iii) recklessly, careless whether it be true or false’.171 In other words, the beneficiary must at least have been aware of the false representation or of the fraud in the underlying transaction but does not need to have been active in the fraud. In United City Merchants,172 the judges rejected the contention that a forged date of shipment attributed to a third party was enough for the bank to withhold payment because the beneficiary was not aware of this mistake. In contrast, in Montrod Ltd v Grundkotter Fleischvertriebs GmbH,173 where the beneficiary presented the documents with knowledge that he was not entitled to payment because of a lack of sincerity of the documents, the fraud has been recognized. Hence, the key element is the seller’s believe in the conformity of the documents. However, Lord Diplock in United City Merchants suggested that a fraud by a third party which makes the document a nullity could entitle the bank to withhold payment.174 In addition, as already said, the mere fact not to have an honest believe that the documents were true is enough to be guilty of fraud. In Tukan Timber Ltd v Barclays Bank Plc,175 the court held that the beneficiary could not have honestly believed that the documents emanated from the required persons. The third situation, where the beneficiary has been reckless in not noticing the forgery in the documents, will be later examined.176 A similar approach has been adopted in many common law countries. In Singapore, it has been held that there was no fraud when the presenter was not aware that the bill of lading had been antedated and that a health certificate was a forgery.177 In the United States, according to the wording of the UCC, a fraud in the transaction must be committed by the beneficiary but the beneficiary’s knowledge also prevents him from being paid.178 In addition, any forged or fraudulent documents, whoever is their author, seems to be enough to activate the fraud exception. Indeed, no specific requirement is present in the text or in case law.179 Nevertheless, the fraud cannot be invoked against an innocent third party.180 In France and Belgium, the majority view argues in favour of an objective approach.181 That would mean that if a fraud is established, the bank does not have to look beyond and be

171 Derry v Peek [1889] 14 AC 337 (HL). 172 (n 13). 173 [2001] EWHC 1032 (Comm), [2002] 1 WLR 1975. 174 (n 13) 181.We will examine the nullity exception in chapter 4, section 3. 175 [1987] 1 Lloyd’s Rep 171 (QB). 176 See Chapter 4. 177 Mees Pierson NV v Bay Pacific (S) Pte Ltd [2000] 4 SLR 393. 178 Wyle v Bank Melli of Tehran (1983 ND Cal) 39 UCCRS 610. 179 Old Colony Trust Co v Lawyers' Title & Trust Co (1924 2nd Cir) 297 P 152. See also: S Leacock, ‘Fraud in the international transaction: enjoining payment of letters of credit in international transactions’ 17 Vand J Transnat'l L 885. 180 More specifically, article 5-109 (a)(1) of the UCC protects (i) a nominated person who has given value in good faith and without notice of forgery or material fraud, (ii) a confirmer who has honored its confirmation in good faith, (iii) a holder in due course of a draft drawn under the letter of credit which was taken after acceptance by the issuer or nominated person, or (iv) an assignee of the issuer’s or nominated person”s deferred 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. For more information, Zsuzsanna (n 109) 122. 181 Contra in Belgium : A Dieryck, Les ouvertures de crédit (Bruylant 1945) 279 ; M Van Der Haegen, Le principe de l’inopposabilité des exceptions dans le crédit documentaire irrévocable (1986) 7 RDAI 721.

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concerned about the author of the fraud.182 The risk of fraud is on the beneficiary.183 In Belgium, whilst in 1981, the Court of Appeal of Antwerp had refused to take into account a fraudulent document because it was not established that the fraud had been committed by the beneficiary,184 by 2002 W. Ganshof Van Der Meersch185 sitting in the Commercial Court of Liège clearly declared that a fraudulent act can never be opposed to contracting or third parties.186 This latter statement is in conformity with the objective approach. In France, case law has not yet been developed to state its position. With respect to forged or fraudulent documents, the English point of view, not shared by the American or the French one, sparked off strong reactions.187 With this in mind, it is worth noting that the decision of the House of Lord in United City Merchants is contrary to the judgment of the Court of Appeal. LJ Griffits in particular held that:

The identity of the forger is immaterial. It is the fact that the documents are worthless that matters to the bank. In such a case the right of the bank to refuse payment does not rest upon the application of the maxim ex turpi causa non oritur actio, but upon the fact that the bank's obligation is to pay upon the presentation of genuine documents in accordance with the requirements of the letter of credit. If the documents presented are fraudulently false, they are not genuine conforming documents and the bank has no obligation to pay.188

According to proponents of the objective approach, the necessity of maintaining the compulsory nature of the conditions laid down in the credit justifies their argument.189 ‘The breaking of these conditions must be thwarted, independent of the intention of the beneficiary of the credit’.190 It is also argued that ‘from a legal conceptual point of view it appears unrealistic to suggest that the bank’s promise extends to the making of payment against documents which are vitiated by forgery or by fraud’.191

Moreover, requiring the bank to look for the beneficiary’s state of mind contradicts the ministerial task of the bank which is only concerned by documents.192 This issue reflects the conflict of values between the protection of innocent parties on the one hand and the documentary character of letters of credit on the other hand. From our point of view, as the mechanism of letters of credit is already favourable to the beneficiary, the objective approach seems preferable.

182 Caprioli (n 22); Martin (n 129); Mattout (n 129). 183 Doise (n 140) 63. 184 Antwerpen, 23 September 1981, RW, 1981-1982, p. 2168. 185 ‘Propos sur le texte de la loi et les principes généraux du droit’ (1970) JT 594. 186 Trib Liège, 2 July 2002, RDC, 2004, p. 189. 187 A Arora, ‘Fraud and forgery in commercial documentary credits’ (1983) 9 Com L Bull 271, 277; E Ellinger ‘Documentary Credits and Fraudulent Documents’ in C Chinkin, R Davidson, W Ricquier, Current Problems of International Trade Financing (Butterworths 1983) 206; Smith (n 122) 60; J Stoufflet, ‘Note sous Paris 30 April 1985 et Paris 28 May 1985’ (1986) Dalloz 199. 188 United City Merchants (Investments) Ltd and Others v Royal Bank of Canada and Others [1982] QB 208 (CA) 238. 189 P Anna-Georgia, ‘La fraude dans le crédit documentaire’ (DEA Droit des Affaires, Université Robert Schuman 2004) 43; Kawan (n 114) 817. 190 Kawan (n 114) 817. 191 Ellinger (n 187) 206. 192 Kawan (n 114) 818.

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Section 3: The bank’s knowledge of the fraud Once the fraudulent manoeuvre can be defined as a real ‘fraud’, the fraud exception requires proving the bank’s sufficient knowledge of that fraud. In Edward Owen Engineering Ltd v Barclays Bank International Ltd,193 it has been held that the fraud exception applies only where ‘there is a clear fraud of which the bank has notice’.194 In other cases, the requirement was for the bank to be ‘clearly aware of the fraud’.195 This condition is common in all countries196 and is often based on the assumption that the bank’s mandate is limited by an implied term according to which it should not pay where it has knowledge of a fraud.197 If the bank has knowledge of the fraud, it is entitled and even bound, except in the USA,198 to refuse payment.199 However, if the bank has paid the beneficiary whereas the account party claims that it ought not to have done so because of a fraud by the beneficiary, the bank will be protected. Indeed, the account party would not be in position to prove the bank’s knowledge of that fraud at the time of payment. In addition, the bank is under no obligation to conduct an investigation in to discovering a hypothetical fraud by the beneficiary,200 except in case of clear suspicions. Thus, the issuing, confirming or nominated bank will have a right or reimbursement. This right to refuse payment may be the source of litigation. If the bank considers it has sufficient knowledge of the fraud, it may be sued by the beneficiary by a summary judgment for breach of contract. On the other hand, if the bank refuses to withhold payment, the account party can apply for an injunction to stop the bank from making payment. In the former, the bank must prove it has sufficient knowledge of fraud on the part of the beneficiary.201 In this regard, it would seem that if the bank proves a clear fraud at the hearing, the absence of sufficient knowledge of fraud at the time of payment will not benefit to the beneficiary.202 This is logical because in complex legal issues, it can be very difficult for the account party to produce immediately evidence of fraud to the bank.203 When the bank is willing to pay, it is up to the account party to establish both the fraud by the beneficiary and the bank’s sufficient knowledge.204 The burden of proof is not on the bank.

193 [1978] QB 15 (QB). 194 ibid 171. 195 GKN contractors Ltd v Lloyd’s Bank Plc [1985] 30 BR (CA) 48; Turkiye Is Bankasi AS v Bank of China [1996] 2 Lloyd’s Rep 611 (Com Ct) 617. 196 Eg in France: Paris, 24 April 1992, Dalloz, 1993, p. 102. In Belgium: Antwerpen (8th Ch), 21 April 2010, Dr banc fin, 2010, p. 257. In the USA, Roman Ceramics Corp v Peoples Nat Bank (1981 MD Pa) 32 UCCRS 522. 197 Enonchong (n 1) 114. 198 However, the bank must act in good faith. 199 Edward Owen Engineering (n 193) 169. 200 Cf. discussion chapter 2. 201 Enonchong (n 1) 115. 202 In England: Solo Industries Ltd v Canara Bank [2001] 1 WLR 1800. In the USA: Roman Ceramics (n 196). 203 G Longwa Kayembe, ‘The fraud exception in bank guarantee’ (LLM dissertation, University of Cape Town 2008) 42. 204 Edward Owen Engineering (n 193).

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Section 4: Standard of proof Although in all countries a bank must have knowledge of a fraud to be entitled or bound to withhold payment, the degree of certainty that the bank must have with respect to the fraud may differ between jurisdictions. Given that the bank is not under an obligation to investigate mere allegations of fraud invoked by the account party, this standard of proof is important. Moreover, the degree of proof required to obtain an injunction against the bank from making payment may also differ from the one to be entitled to do so without judicial intervention. We shall now focus on this matter. In English law, for the fraud exception to succeed at trial, there must be ‘particularly cogent evidence’ of fraud .205 When a bank plans to pay the beneficiary despite the allegations of fraud, the bank should thus keep in mind that if the account party later on proves, on the basis of the material produced before the court and of which the bank had knowledge that ‘the only realistic inference to draw is that of fraud’ the bank will not be reimbursed.206 This is in conformity with the obligation of the bank to withhold payment only when there is a clear knowledge fraud.207 On the other hand, if the bank is convinced that such a proof will not be adduced, it can without worries pay the beneficiary. The same threshold applies when the account party seeks a permanent injunction to prevent the bank from making payment.208 When the bank withholds payment, the beneficiary may seek a summary judgment imposing to the bank to honour its obligation. When the defence of the bank is based on the fact that the instrument is a forgery, the bank, in order to succeed, must only prove that the defendant has no ‘real prospect of success’ which means that the bank only needs ‘some chance of success’.209 This prospect must nevertheless be real.210 When it is not invoked that the document itself is invalid, the standard will be higher to ensure the effectiveness of the independence principle. However, there is a divergence of judicial opinion on this point in English case law. Some judgments211 still require a mere, ‘real prospect’ of chance because it is the test set out by the CPR Pt 24212 for any summary judgments whereas others adapt this test to ensure that letters of credit are treated as cash in hands and require an established fraud.213 With respect to interim injunction to restrain the bank from making payment, the standard of proof used to be the high threshold of “established fraud”.214 However, in American Cyanamid Co v Ethicon Ltd215 and in United Trading Corporation,216 the standard of proof has been lowered. According to Ackner L.J., the test of established fraud may render the

205 Enka Insaat Ve Sanayi A v Banca Popolare Dell’Alto Adige SPA [2009] EWHC 2410 (Comm), [2009] CILL 2777, 25. 206 United Trading Corporation SA v Allied Arab Bank [1985] 2 Lloyd’s Rep 554 (CA) 561. 207 Cf. section 2. 208 Bolivinter Oil SA (n 20). 209 Solo Industries Ltd (n 202) [36]. 210 Safa Ltd v Banque du Caire [2000] 2 Lloyd’s Rep 600 (CA) [31]. 211 Safa (n 210); Enka Insaat (n 205). 212 Civil Procedure Rules 1998, part 24. 213 Solo Industries (n 202); Banque Saudi Fransi v Lear Siegler Inc [2007] EWCA Civ 1130, [2007] 2 Loyd’s Rep 47. 214 Harbottle (n 19); Edward Owen Engineering (n 199); United City Merchants (n 13). 215 [1975] AC 396 (HL). 216 (n 206).

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maxim “fraud unravels all” meaningless.217 The current test to satisfy is therefore whether the account party has a ‘seriously arguable’ case. As Enonchong explains perfectly well the test is to establish that ‘on the material available, the only realistic inference is that the beneficiary could not honestly have believed in the validity of its demand for payment’.218 The difference with an established fraud relates to corroborated evidence. Such evidence is, especially if non-explained by the beneficiary, sufficient to prove fraud.219 Many judgments have followed this new threshold, setting aside the Edward Owen test.220 In other common law jurisdiction, the test is similar. In the United-States, the previous version of the UCC lacked a definite answer for the standard of fraud. Therefore the courts adopted different views.221 According to the new version, so as to obtain an injunction against the bank from making payment, it must be proved that the claim of fraud is ‘more likely than not to succeed’.222 In Canada, the applicant must prove a ‘strong prima facie’ case which is lower than the test of established fraud.223 The same requirement suffices in Singapore as well.224 Finally, in Australia, the courts have adopted the standard of a ‘seriously arguable’ case.225 In France226 and in Belgium227, as soon as the bank is convinced of the beneficiary’s manifest fraud, it is bound to not make payment. Equally, in order to obtain an interim injunction “en référé” to prevent the bank from making payment, a manifest fraud must be proven.228 Nevertheless, an array of corroborating circumstances may prove the fraud. The standard of proof is therefore higher than in England where the threshold has been lowered.229 Finally, in Switzerland, the standard of proof seems to be much lower. A high probability of fraud seems to be sufficient to grant an injunction refraining the bank from making payment.230 We have now finished dealing with all the conditions that must be fulfilled to activate the fraud exception. As the topic of this paper is to understand when a bank may withhold payment, it is not necessary to develop all the requirements laid down by legislation or case law in order to obtain an interim or permanent injunction. We have mentioned those conditions only to the extent that it was relevant from the bank’s perspective. However, it is clear that those requirements differ from countries to countries. For example, it is harder to obtain an injunction in the United States than in France or Belgium because many US states

217 ibid 561. 218 Enonchong (n 1) 122. 219 United Trading Corporation (n 206). 220 Group Josi Re v Walbrook Ins Co Ltd [1996] 1 Lloyd’s Rep 345 (CA); Themehelp Ltd v West [1996] QB 84 (CA). 221 For more information, Zsuzsanna (n 109) 114-122. 222 Article 5-109(b)(4) of the UCC. 223 CDN Research & Development Ltd v Banque de la Nouvelle-Écosse [1980] 18 CPC 62; Banque de la Nouvelle-Écosse (BNE) c Angelica Whitewear (1987) 1 RCS 59. 224 Chartered Electronics Industries Ptd Ltd v Developments Bank of Singapore [1999] 4 SLR 655. 225 Alex Focas Pty Ltd v Skodaexport Co Ltd [1998] 3 VR 380; Fletcher Construction Australia Pty Ltd v Varnsdorf Pty Ltd [1998] 3 VR 812. 226 Colmar, 14 June 1985, JCP, 1986, n° 113. 227 JF Romain, ‘La fraude et l’abus manifeste dans les garanties bancaires autonomes : persistance ou transformation des concepts de droit commun dans la jurisprudence internationale, en particulier française et belge’ (2002) Dr banc fin 28, 30. 228 Cass Comm, 24 June 1997, n° 95-10.259 <www.legifrance.gouv.fr> accessed 10 May 2012. 229 Mattout (n 129) 256. 230 Genève, 16 July 1985, Dalloz, 1986, p. 219.

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require the proof by the account party of the “non reparable damage” that he or she would suffer if no injunction is granted.231 As most of the time damage will be a purely economic loss, proof of this requirement will be hard to deduce. In England, the evidence of fraud is not conclusive either in order to obtain an injunction. The English approach requires a second step where the adequacy of damages and the balance of convenience are assessed by the court.232 For more information about these conditions we refer the reader to other articles.233

Section 6: Fraud and discounted payment There has been much controversy over the question as to the person who had to bear the risk of fraud in case of a discounted payment. In many situations, a bank, without knowledge of fraud pays the beneficiary before the date of maturity. However, if the fraud is discovered before the date of maturity the issuing bank or the account party will try not to reimburse the bank that has made payment. The legal analysis differs according to the role of the paying bank when making the prepayment. In addition, the UCP 600 has intervened in this matter to challenge the solutions developed by case law in many jurisdiction. Thus, we will firstly analyse the matter before the entry into force of the UCP 600, distinguishing the different roles the bank that made payment may have. We will subsequently try to understand to what extent the new UCP articles affect our first conclusions.

I. Before UCP 600

A. Negotiation credit It is useful to remind the reader that the nature of a negotiation credit has already been described in the introduction. Regarding this kind of credit, the beneficiary may present the documents to any bank which will pay him if they are in conformity with the letter of credit. The negotiating bank will next be reimbursed by the issuing or conforming bank at the date of maturity date. The prepayment is at the heart of the negotiation credit. That is why any fraud discovered between the time of payment and the maturity date does not affect the negotiating bank’s right to be reimbursed provided that she has authorization to negotiate the credit.234 This also means that an injunction asked by the account party to prevent the issuing bank from reimbursing the bank that has negotiated the credit will fail.235 B. Acceptance credit As explained in the introduction, in case of an acceptance credit the beneficiary receives a draft, which embodies the bank’s undertaking to pay at the date of maturity. If often arises that this draft is discounted to a bank other than the issuing or confirming bank. In that case, the bank in English law is protected by the Bills of Exchange Act 1882. In England, the bank that

231 Xantech Corp v Ramco Industries, Inc (1994 Ind Ct App) 643 NE2d 918. 232 State Trading Corp of lndia v ED & F Man (Sugar) [1981] Com LR 235 (CA). 233 In the Unites States: Article 5-109 (b) of the UCC. See also: Leacock (n 179). In England: Enonchong (n 1) chap 10, 227; A Mugasha, ‘Enjoining the Beneficiary’s Claim on a Letter of Credit or Bank Guarantee’ (2004) 5 JBL 515. In France: Kawan (n 114) 822. 234 European Asian Bank AG v Punjab and Sind Bank (No 2) [1983] 1 Lloyd's Rep 611; Cass Comm, 23 October 1990, Bull civ IV, p. 168. 235 DCD Factors Plc v Ramada Trading Ltd [2007] EWHC 2820 (QB).

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has received the accepted draft from the beneficiary is called “a holder in due course”.236 Such a holder holds the bill ‘free from any defect of title of prior parties, as well as from a mere personal defence available to prior parties among themselves’.237 Therefore the fraud of the beneficiary cannot be invoked anymore against the paying bank and the discovery of the beneficiary’s fraud before the maturity date has no impact on its right of reimbursement.238 The account party bears the risk of fraud. In Canada, the same position seems to have been adopted.239 This protection will nevertheless not apply if this confirming bank was aware of the fraud when it has discounted the draft. In that case, the bank is no longer a holder in due course because is has acquired the bill with notice of a defect in the beneficiary’s right to be paid.240 In the United States, the Uniform Commercial Code also protects a holder in due course in case of fraud.241 Although the protection in that country used to go further than in England and to protect fraudulent beneficiary holding an accepted draft,242 the revised article 5-102 (a)(8)(ii) of the UCC resolves the issue. Previously the provision according to which once the bank had accepted a draft, it became unconditionally obliged to pay at maturity243 was used to justify that the discovery of the fraud which happened after the acceptance of the draft but before payment did not affect the issuing bank’s obligation. Strong criticisms were made244 against those cases and the revised version of the UCC now mentions clearly that honour of an acceptance letter of credit means ‘acceptance of a draft and, at maturity, its payment’.245 The consequence is that the fraud discovered before the discounting bank pays the beneficiary may still be invoked. In France, if the bank having discounted the draft is a third party to the letter of credit, it is entitled to reimbursement whereas a nominated or confirming is not protected and risks not being reimbursed.246 C. Deferred payment credit The more controversial question has been the one of banks that discounted a deferred payment letter of credit. In these credits, the bank agrees that presentation of documents does not correspond to the payment to the beneficiary. The bank is bound to pay at a future date mentioned in the instrument. Two questions arise in that situation. Is a bank entitled to discount payment whereas the payment, according to the terms of the letter of credit, must occur at a certain date? Secondly, if such a way to do is legal, who bears the risk of fraud when the fraud is discover between the discounted payment and the maturity date?

236 Enonchong (n 1) 131. 237 s. 38 (2) of the Bills of Exchange Act 1882. 238 Discount-Records Ltd v Barclays Bank Ltd [1975] 1 Lloyd's Rep 444 (Ch); Banco Santander SA v Bayfern Ltd [2000] Lloyds Rep Bank 165 (CA). 239 Banque de la Nouvelle-Écosse (n 223). 240 s. 29 of the Bills of Exchange Act 1882. 241 Article 5-109(a)(1)(iii) of the UCC. 242 First Commercial Bank v Gotham Originals Inc (1985 CA NY) 486 NYS 2d 715; All Services Exportacao Comercia SA v Banco Bamerindus Do Brazil SA (1990 2nd Circ) 921 F2d 32. 243 Article 4-303 of the UCC. 244Eg: B Kozolchyk, ‘The immunization of Fraudulently Procured Letter of Credit Acceptances : All Services Exportacao Comercia SA v Banco Bamerindus Do Brazil SA and First Commercial Bank v Gotham Originals’ (1992) 58 Brooklyn L Rev 369. 245 Article 5-102(a)(8)(ii) of the UCC (emphasis added). 246 Cass Comm, 11 October 2005, Banque et Droit, 2006, p. 71.

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In English law, the point has been clarified by the much commented247 Banco Santander case.248 When a bank discounts a deferred payment credit without having been expressly authorized to do so, it is acting outside its mandate and at its own risk. The Court of appeal held that ‘an agent may be entitled to go off and do something on its own account without being in breach of his mandate from the principal, but it does not follow that when he does do something on his own account, because he is not in breach of the mandate, the principal must indemnify him in relation to that which he has done’.249 The discounting bank bears the risk of fraud regardless of the discounting transaction taking the form of an assignment of the beneficiary’s claim to the bank. The Court of Appeal even reinforced a previous decision that an assignee cannot be in a better position than the assignor.250 The same reasoning has been developed by the French Court of Cassation after a judgment of the Court of Appeal of Paris in 1985.251 This solution is supported by the French252 and Belgian253 commentators. As in England, the legal qualification of the payment before the date of maturity is an advance made by the discounting bank at its own risk.254 In Switzerland, although the Federal tribunal had first ruled in favour of discounting payment,255 it departed in 2004 from its previous ruling in deciding that the bank that pays a deferred payment credit before the maturity date does so at its own risk.256 Ambiguity, however, lies in the fact that the Tribunal holds that by paying the bank honours the credit itself and does not give any separate advance.257 This general position of European courts caused much concern and resistance in the banking community.258 Nevertheless, its proponents have good reasoning. To elaborate on this, we will simply mention two reasons which it is possible to deem as being the most important. First of all, the parties have the choice between providing a negotiation credit and allowing the risk of fraud on the account party. As Waller L.J. said ‘if parties agree for whatever reason that they

247 A Arora, ‘Round up: banking law’ (2000) 21 (8) Comp Law 2000 234; EP Ellinger, ‘Development in banking law’ (2000) JBL 618; S Paterson, ‘Fraud and documentary credits’ (2001) 16(2) JIBL 37; D Aharoni, ‘Fraud and discounted deferred payment documentary credits: the Banco Santander case’ (2000) 15(1) JIBL 22. 248 (n 238). 249 ibid 172. 250 ibid 171. 251 Cass Comm, 7 April 1987, Rev Banque, 1987, p. 625. 252 Caprioli (n 22) 241-244; Stoufflet (n 187); JL Rives-Lange, ‘Note sous Cass 7 April 1987’ (1987) Banque 625. 253 M Delierneux, ‘La fraude et le crédit documentaire : qui supporte le risque ?’ (2010) 4 Dr banc fin 259; P Maeyart, Juridische aspecten bij exprtfinanciering foor middel van documentaire kredieten in het licht van de laatste herziening van de U.C.P. (Die Keure 1987) 38; J Van Ryn and J Heenen, Principes de droit commercial, vol 4 (Bruylant 1988) 503-504. Contra : J Berckmans, ‘Documentair kredit met uitgestelde betaling : bedenkingen van een practicus bij en recent vonnis van het Hod ban Beroep te Parijs’ (1986) Revue Banque 45-47; L Simont, ‘Misbruik bij documentair kredit’ (1986) TPR 90-91. 254 C Dehouck, ‘Les conséquences de la fraude dans le crédit documentaire à paiement différé en cas de paiement avant l’échéance par la banque confirmante’ in B Tilleman (ed) Droits des contrats : France, Suisse, Belgique (De Boeck & Larcier 2006) 9, 31. 255 Trib Fédéral, 11 June 1974, ATF 100, 1974, II, p. 145. 256 Trib Fédéral, 1st June 2004, ATF 130, 2004, III, p. 462. 257 N De Gauttrau, ‘Conséquences de la fraude dans le crédit documentaire à paiement différé: nouvel arrêt du TF’ (2004) Actualité n° 234 <www.unige.ch/cdbf> accessed 10 May 2012. 258 Enonchong (n 1) 134; Zsuzsanna (n 109) 126.

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will not provide a negotiable instrument, and do not provide by terms (…) the protection for assignees that a negotiable instrument would provide, they must live with the consequences’.259 The second argument is strongly linked to the first, documentary formalism of letters of credit requires the bank to strictly observe the terms, which are clear and precise, of the letter of credit. Therefore, any operation falling outside the scope of those terms must be treated as an independent transaction and cannot affect the account’s party right to invoke the fraud exception.260 This majority point of view has not been followed in Germany261 and in Korea262 where the discounting bank, acting in good faith, is entitled to be reimbursed when a fraud is discovered before the maturity date. Given the importance of discounts in banking practice,263 the same solution has been enshrined by the Uniform Commercial Code in the United States. Article 5-109(a)(1)(iv) provides an express protection for assignees of an 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.

II. After UCP 600 In 2007, the UCP 600 intervened to address the issue of discounted differed payment credit. Two new provisions are important regarding this. First, article 7, c) provides that, ‘reimbursement for the amount of a complying presentation under a credit available by acceptance or deferred payment is due at maturity, whether or not the nominated bank prepaid or purchased before maturity’. The consequence of this is that an assignment of rights from the beneficiary to the discounting bank is no longer necessary so that the bank be entitled of reimbursement at the maturity date. Secondly article 12, b) states that, ‘by 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’. All the debate now lies on the impact of this authorization. Certain commentators argue that this is a new rule creating a legal basis to bear the risk of fraud discovered between the prepayment and the maturity date on the issuing bank and the account party.264 Others consider that this authorization is only a faculty, a right given to the nominated bank which may still use it at its own risks.265 Both sides have their proponents. The one which has presided at the spirit of the International Chamber of Commerce is without any doubt the first. G. Affaki, vice president at the banking commission of the International Chamber of Commerce stated that the modification of the rules was clearly intended to set aside the case law of many jurisdictions which affected the secondary market of discounts in

259 Banco Santander (CA) (n 238) 174. 260 Dehouck (n 254) 27. 261 OLG Frankfurt-am-Mayn, 23 March 1981, WM, 1981, n° 17, 445. 262 Supreme Court of Korea (2nd ch), 24 Januari 2003 (Industrial Bank of Corea/ BNP Paribas). 263 Aharoni (n 247) 25; JP Mattout, ‘Les nouvelles Règles et usances 600 de la C.C.I. relatives aux crédits documentaires’ in AP André Dumont and others, Le crédit documentaire (Anthémis 2010) 17, 24-25. 264 G Affaki, ‘Le nouveau droit des crédits documentaires : les règles et usances 600’ (2007) 112 Banque et droit 3; Mattout (n 263) 24; M Delierneux, ‘La fraude et le crédit documentaire : qui supporte le risque ?’ (2010) 4 Dr banc fin 259. 265 D Doise, ‘La révision 2007 des règles et usances uniformes relatives aux crédits documentaires (RUU 600)’ (2007) 1 RDAI 106.

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the banking practice.266 He also pointed out that the new UCP was in line with the UCC which, as we have seen is in favour of the discounting bank.267 M. Delierneux is of the same opinion albeit putting forward a different reasoning.268 First she examines the relation between the issuing bank and the discounting bank. According to her, the new provision would be useless if the authorization given by the bank had no impact on the risk taken by this nominated bank.269 If the issuing bank has submitted the letter of credit to the UCP 600, it has accepted to take the risk of a fraud in case of discounted payment. Indeed, nothing prevents the issuing bank from excluding the application of this article.270 The second question is whether this new rule which sets aside the Banco Santander case,271 affects the right of the account party to invoke the fraud. Different elements can be invoked. On the one hand, the party had required the opening of a differed payment credit, which is much favourable to him because, inter alia, he or she should have time to prove the fraud before payment. Unfortunately a prepayment in unconformity with the terms of the letter of credit, would undermine this choice. On the other hand, it is up to the account party to choose its partner and therefore if he has not protected himself by excluding the application of article 12, b) from the credit, he should bear the risk of fraud. This second opinion is shared by M. Delierneux.272 The opposite of this opinion regarding this debate is illustrated by Dominique Doise.273 He stresses that the reimbursement of the issuing bank to the paying bank is only due if the bank, ‘has honoured a complying presentation’.274 However, the term “honour” relates to a payment at maturity.275 A discounting bank could therefore not be entitled of reimbursement in case of prepayment. D. Doise also adds that the Affaki’s point of view mean that all letters of credit can be realized by negotiation; which would render useless many provisions of the UCP with respect to the different modes of realization of the credit.276 This last remark is an objection which is made by many commentators who acknowledge that the new version of the UCP sets aside the Banco Santander case and its equivalents overseas. It has been stated that the UCP 600 ‘produced the undesirable result of effectively removing a useful option or risk apportionment’.277 In addition, this interpretation is based, inter alia, on the premise that the parties are free to exclude the application of article 12, b). However, it will be cumbersome to do so in practice because unless there is a special agreement with the seller, the applicant will be asked to procure a letter of credit on usual terms whereas a credit excluding some provision of the UCP cannot be regarded as such.278

266 Affaki (n 264) 10. 267 ibid 11. 268 M Delierneux (n 264) 263-264. 269 This is supported by E Adodo, ‘The legal effect of nomination under the new UCP 600’ (2008) 23(4) JIBLR 231, 236. 270 Article 1 of the UCP 600. 271 (n 238). 272 Although a counter-argument is also put forward by Delierneux concerning the choice of contractual partner made by the beneficiary: Delierneux (n 22) 16. 273 Doise (n 140) 60. 274 Article 7, c) and 8, c) of the UCP 600. 275 Article 2 of the UCP 600. 276 Doise (n 140) 60-61. 277 K Takahashi, ‘The introduction of Article 12(b) in the UCP 600: was it really a step forward?’ (2009) 24(6) JIBLR 285, 286. See also: Mattout (n 264). 278 ibid 285.

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In Belgium, the Court of Appeal of Antwerp in a 2010 has followed the first interpretation of the new UCP 600.279 It has been held that the purpose of the modification was precisely to put an end to the issue of fraud discovered after a discounting payment but before the maturity date280. Before finishing this section, some precisions still have to be made. First, it is routine banking practice for a confirming bank to discount future payment obligations.281 Therefore, the new UCP rules, albeit being less favourable to issuing banks, have been well received by the banking community.282 Secondly, the debate about the scope of article 7 and 12 does not allow us to forget that those articles offer a limited amount of protection. The authorization provided in the Uniform Customs and Practices only concerns a nominated bank that has pre-paid a deferred payment credit. Therefore, if another bank decides to provide finance to the beneficiary via a discount, this bank, in a majority of countries, is not entitled to claim reimbursement if the fraud is discovered before the maturity date.283 In addition, the nominated bank, so as to enjoy the protection, must have acted in its capacity of ‘nominated bank’.284

279 Antwerpen, 20 December 2000, DAOR, 2001, p. 338. 280 ibid [17]. 281 This has been stated by an expert witness in Banco Santander SA v Bayfern Limited [1999] Lloyd’s Rep Bank 239 (QB) 247. 282 M Hwaidi, The implications of Banco Santander SA v Bayfern Ltd on deferred payment under documentary credit in UCP 600 (2011) 5 IBLJ 569. 283 Enonchong (n 1) 136. 284 Fortis Bank SA/NV (n 94).

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Title 4: Towards the recognition of other exceptions

Section 1: Nullity As fraud is limited in many jurisdictions to instances in which the beneficiary at the time of presentation has knowledge of, this has given rise to a debate on whether or not a nullity exception which would uncover situations where the documents are null and void, no matter the beneficiary’s state of mind, should be recognized. This exception, separate from the fraud exception, would entitle a bank to withhold payment when the apparently conforming documents are void regardless of fraud by the beneficiary. A document can be void because is has been forged or because it has been created under an honest error related for example to the errans’ authority to sign the document.285 In England, the House of Lords has clearly rejected the recognition of a forgery exception in such instances if the beneficiary has no knowledge of that fraud.286 However, in those circumstances, some countries allow the banks to refuse to make payment under the fraud exception. As we have seen, this is the case in Belgium and probably in France. These states have adopted an objective conception of fraud.287 Nevertheless, because of the possibility to have a nullity without forgery, it is also worth examining the question of the nullity exception in these countries. We will first start by trying to define what a nullity is. We will proceed to examine some English case law dealing with this exception before focusing on a judgment of the Court of Appeal of Singapore which has recognized such an exception. We will continue with a brief overview of other law and we will end this section by some policy considerations militating in favour or against the recognition of the nullity exception.

II. What is a cause for nullity?

The concept of nullity has not been really developed with respect to documentary credits.288 There have been in fact many difficulties in defining this concept.289 This initially uncovers the reluctance of case law to adopt an exception based on a concept so uncertain. It follows that in English law, there have been different views as to what constitutes a nullity. In Tek Chao v British Traders and Shippers,290 a misdated bill of lading has been held ‘valueless but not a complete nullity’291 whereas in Egyptian International Foreign Trade Co v Soplex Wholesale Supplies (The Raffaella) such a bill of lading which additionally contained a misstatement of the vessel’s name has been described as a ‘sham piece of paper’.292 Finally in United City Merchants, a bill of lading with a wrong date of lading has been held ‘far from

285 Enonchong (n 1) 146. 286 United city Merchants (n 13). 287 Cf. chapter 3, section 2. 288 K Donnelly (n 131) 317. 289 L Chin and Y Wong, ‘Autonomy A Nullity Exception at Last?’ (2004) LMCLQ 14, 17. 290 [1954] 2 QB 459 (QB). 291 ibid 476. 292 [1984] 1 Lloyd's Rep 102 (CA) 116.

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being a nullity’.293 This demonstrates disagreement on the extent to which a bill of lading constitutes nullity. English case law is therefore well illustrative of the uncertainty surrounding the definition of a nullity.294 However, it should not prevent us from putting forward some elements that could help judges to build a workable definition. The starting point to determine whether a document is a nullity has been suggested to consider either whether the falsity or the error in the documents destroys ‘the whole or essence of the instrument’295 or whether this instrument can be construed as being without legal effect.296 Both suggestions are actually, as stressed by Donnelli, consistent with each other.297 Following this approach, a misdated bill of lading should be considered as valid given that the bill of lading is still a document which entitles the holder to take the goods lawfully from the ship.298 The judgment of the House of Lords is United City Merchants is thus in conformity with the definition proposed. However, it is not the case of the judgment of the Court of Appeal in Montrod Ltd v GuundkOtter Fleichvertriebs GmbH.299 In this case, an inspection certificate had been signed by the beneficiary who honestly but mistakenly believed that he was authorised to do so on behalf of the applicant. The Court held that the certificate was not void. However, applying the “without legal effect” approach, it is difficult to imagine that the certificate which had to be signed by the applicant could have had any legal effect.300 It is therefore important to argue that this part of the decision must be disapproved.

III. Legal recognition In English law, there are three important decisions that deal with the nullity exception. The Court of Appeal’s decision and the House of Lords’s decision in United City Merchants together with the Court of Appeal’s decision in Montrod. In United City Merchants, the question had been left open but the judicial comments on this point differ. The Court of Appeal took the view that a nullity exception should be recognized. Taking the example of a bill of lading containing a forged signature, Ackner L.J. said obiter that ‘he could see no valid basis upon which the bank should be entitled to pay and debit the account party. (…) (The bank) ought not to be under on obligation to accept or pay against documents which he knows to be waste paper’.301 Lord Diplock in the House of Lord’s judgment, before deciding to leave open the question of the rights of an innocent beneficiary in such situations, stated that he did not see any reason why an innocent beneficiary should be in a worse position than a holder in due course of the claim, after an assignment of claim for example. As we have already pointed out, those persons under English and American law receive the claim cleaned of ‘all defects’.

293 United City Merchants (n 13) 188. 294 Donnelly (n 131) 317. 295 A. Guest (Gen ed), Benjamin's Sale of Goods, 6th edn (Sweet & Maxwell 2002) [19-034]; R. Jack, Documentary Credits (Butterworths 1991) 198. 296 D Neo, ‘A Nullity Exception in Letter of Credit Transactions’ (2004) Singapore Journal of Legal Studies 46, 71. 297 Donnelly (n 131) 317. 298 Enonchong (n 1) 146. 299 [2001] EWHC 1032 (Comm), [2002] 1 WLR 1975. 300 Donnelly (n 131) 318. 301 United City Merchants (Investments) Ltd and Others v Royal Bank of Canada and Others [1982] QB 208 (CA) 246.

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Some years later, the question has been settled by Potter L.J. in Montrod. The answer is now much clearer. There is no nullity exception in English law.302 Potter L.J. indeed concluded that there were ‘sound policy reasons for not extending the law by creation of a general nullity exception’.303 However, the case only dealt with a document which could have been a nullity without being forged. Therefore it must be concluded that the position in respect of documents forged without the beneficiary knowing it is not entirely settled.304 Indeed, the House of Lord left the question opened and two Court of Appeal expressed their view, obiter, in two different ways. In these circumstances, the analysis of the arguments proposed at the end of this section will give the reader a better understanding of the interests at stake. With respect to documents being void without any forgery, on the other hand, the Montrod case, constitutes the state of English law, no nullity exception is available for the bank. In the Singaporean case of Beam Technology (MFG) PTE Ltd v Standard Chartered Bank,305 the Court of Appeal has recognized the nullity exception albeit confining it to strict limits. According to the Court, ‘the confirming bank is not obliged to pay if it has established within the seven-day period that a material document required under the credit is forged and null and void and notice of it is given within that period’.306 The exception therefore only applies when four conditions are met: when a document is forged, ie not in a case like the Montrod case; when the document is material, when it is a nullity and when the bank has knowledge of that nullity. The material requirement means that the exception does not apply to all documents required under the credit. However, no precise explanation has been given by the Court, what is source of uncertainty.307 Following on from this point, with respect to the definition of a nullity the Court expressed the view that this question had to be solved on the facts of each case because it was not possible to propose a general definition.308 Finally, the last requirement as for the fraud exception, concerns the bank’s knowledge of that nullity. A bank must have become aware of the defect in the documents within the seven-day period for examining the conformity of those instruments and must in addition, have given notice to the beneficiary of the rejection within this period. Hence, if the bank has already accepted to pay, failing to give a notice of rejection within seven days, a claim based on the nullity exception will be dismissed.309 In both the United States and in France, no information relating to the exception of fraud has been found. One might wonder whether this simply means that judges have yet to be confronted with this question. Alternatively, fraud may already commonly be accepted as a cause for derogation requiring no further attention. Indeed, the United States and France arguably attach equal importance to the quality of the documents presented by the beneficiary. Thus if a third party commits fraud and evidence of this fraud is found within documentation, it is likely for the fraud exception to apply. Therefore, we can assume that if a bank later acquires knowledge of the fact that a document tendered by the seller is a nullity, the bank will be entitled to refuse payment on the grounds of non-compliance, even if the documents ostensibly appear to conform to the letter of credit. 302 Montrod (n 173) [58]. 303 ibid. 304 Enonchong (n 1) 148. 305 [2003] 1 SLR 597. 306 ibid 610. 307 Enonchong (n 1) 151. 308 Montrod (n 173) [58] 309 Mees Pierson NV (n 177).

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IV. Policy considerations

A. Arguments against a nullity exception

Arguments against the recognition of a nullity exception can be found in Lord Diplock’s speech in United City Merchants and in the judgment of the Commercial Court and the Court of Appeal on Montrod. Commentators are divided, some supporting those judicial opinions,310 whilst others challenge them.311 A first argument put forward by the first instance judge in Montrod was the lack of authority supporting the existence of a nullity exception. Although the only judicial opinion at that time left the question open and in spite of the silence of the UCP on this point, the lack of authority has never been a constraint to recognizing an exception.312 On the contrary, such an argument would mean that no common law development is possible, which is absurd.313 In addition, it has never been contested that the UCP is to be supplemented by domestic rules.314 The fraud exception itself is governed by national law as we have seen. In United City Merchants, Lord Diplock expressed his view that it did not see any valid reason why a holder in due course of the letter of credit should be in a better position than an innocent beneficiary in case of fraud affecting the documents.315 To remind us, a holder in due course is insulated from defences available against prior parties. This argument has strongly been criticised by Goode, on the basis of the mechanism itself which gives more right to a holder in due course.316 He concludes that ‘the beneficiary under the credit is not like a holder in due course of a bill of exchange; he is only entitled to be paid if the documents are in order’.317 In Lambias,318 Goh J.C. for the High Court of Singapore also challenged the Diplock’s argument in these terms: ‘I think the short answer to this is that as a party to the underlying contract, he (the beneficiary) has an additional recourse against the buyer which is not open to a holder in due course’.319 The next argument holds that a nullity exception would be unfair for the beneficiary in a chain of contract. In Montrod, Potter L.J. argued that ‘such an exception would be likely to act unfairly upon beneficiaries participating in a chain of contracts in cases where their good faith is not in question’.320 However, all is a question of balance of interests.321 If a document which is a nullity does not prevent the bank from making payment to an innocent beneficiary, the buyer bears the loss. Conversely, if the bank may refuse payment, this is the seller who

310 A Malek and D Quest (n 168) [9.23]. 311 R Goode, Commercial Law (4th edn, Penguin 2009) 1104-1106; R Hooley, ‘Fraud and letters of credit; is there a nullity exception?’(2002) 61(2) CLJ 279. 312 Neo (n 296) 54. 313 (n 6). 314 Eg: ibid 321; Caprioli (n 6); Delierneux, ‘Crédits documentaires : droit applicable, tribunaux compétents et valeur normative des Règles et usances codifiées par la Chambre de commerce internationale’ documentaire’ (n 6). 315 (n 13) 187-188. 316 R Goode, ‘Abstract Payment Undertakings’ in P Cane and J Stapleton, Essays for Patrick Atiyah (Clarendon 1991) 231. 317 Quoted in Beam Technology (n 305) 610. 318 Lambias (Importers & Exporters) Co Pte Ltd v Hong Kong & Shanghai Banking Corporation [1993] 2 SLR 751. 319 ibid. 320 Montrod (n 173) 1992. 321 Donelly (n 288) 324.

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bears the loss. Hence this argument of unfairness is weak given that the outcome of the discussion will inevitably be seen as unfair for one of the parties. Some argue that as the final purpose of letters of credit is to give to the beneficiary an assurance of payment, the risk should be supported by the buyer. Deciding otherwise would destroy the confidence in the system of financing international trade.322 In the opposite side, in United City Merchants, Stephenson L.J. for the Court of Appeal expressed the view that the risk should bear on the beneficiary because banks trust beneficiaries to present honest documents.323 Moreover, it is argued that the beneficiary should have been more vigilant to avoid being deceived by the third party forger.324 We agree with this final point of view. Potter L.J. in Montrod also rejected the nullity exception because ‘if a general nullity exception were to be introduced as part of English law it would place banks in a further dilemma as to the necessity to investigate facts which they are not competent to do and from which the UCP 500 is plainly to exempt them’.325 The same reasoning can be put forward under the UCP 600. However similarly to the fraud exception, we do not see why the bank should be required to investigate facts. The nullity exception, as in Singapore, should be limited to cases where the bank had clear knowledge before payment of the nullity.326 We must nevertheless admit that in some cases there is doubt as to whether the evidence of the nullity is clear enough. In these cases, the banks will be placed in a dilemma as whether to pay or not.327 Nothing differs here from the position of a bank with respect to the fraud exception. There is a final argument, probably the strongest, that highlights the possibility for the introduction of such an exception to create uncertainty because it does not seem possible to formulate a general nullity exception with precision.328 As we have stressed in the first part of this question, what constitutes a nullity is not easy to determine. In addition, in Singapore, only material documents which constitute a nullity entitle a bank to withhold payment. However, how can a bank be certain it is facing such a document? As pointed out by Enonchong, if the assessment whether the document is a nullity can only be made by a judge after legal proceedings, a nullity exception will undoubtedly complicate the task of the banks which have to take a decision within few days. Although true, this problem is not insurmountable.329 Banks, to some extent, already face uncertainty with respect to the fraud exception.330 Indeed, a distinction between an established fraud and a mere allegation of fraud or breach of contract is not always easy to make. This has not prevented the courts from recognizing such an exception.

322 Enonchong (n 1) 154. 323 (n 301) 243. 324 Enonchong (n 1) 153. 325 (n 173) 1992. 326 Enonchong (n 1) 153; Donnelly (n 131) 324. 327 Enonchong (n 1) 153. 328 Montrod (n 173) 1992. 329 Neo (n 296) 58. 330 ibid.

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B. Arguments in favour of a nullity exception Arguments in favour of the nullity exception can be found in the Singaporean Court of Appeal judgment Beam Technology331 and in the overturned decision of the Court of Appeal in United City Merchants. Many commentators intervened to give weigh to those arguments. The first argument introduces the notion that the beneficiary’s right of payment is subject to the presentation of conforming documents. However, the presentation of a document that is a nullity is not a complying presentation since it is not a genuine document.332 The key to the answer of this lies within the meaning of ‘conforming documents’.333 If conformity requires presenting the genuine documents required under the credit, this argument makes sense. Nevertheless, some argue that it is contrary to the obligation of the bank to examine documents with reasonable care and to pay when the documents appear to merely be conformed on their face.334 In addition, if any forged presented document implied that no complying presentation had been made,335 a bank which does not have knowledge of the fraud or of the nullity would be in breach of its mandate if it pays the beneficiary. Therefore, the account party would be entitled to refuse reimbursement, what would be illogical.336 Next, this argument seems to be hardly in conformity with English law which does not want to recognize the effect of an objective fraud. An honest beneficiary is entitled to payment when he presents a document which has been forged by a third party but which is not a nullity.337 This first argument would mean that in those cases, even when the forged indication is not a material one, a bank would be entitled to refuse payment. The typical example is a forged date of shipment which would nevertheless have entitled the beneficiary to be paid.338 Although this last objection is not decisive, knowing that some countries have adopted the objective approach of fraud,339 the idea to touch to the meaning of conforming presentation does not seem a good one given the implications that it would have. Another basis has therefore been suggested to justify the recognition of a nullity exception: the need not to deprive the bank of the security for its advance.340 After having paid the beneficiary, a bank has a right to be reimbursed by the account party. In this regard, banks will generally try to take securities from the applicant in case this latter turns out to be unwilling to pay or insolvent. According to a legal axiom a bill of lading represents the goods and gives its owner a title to take possession of the goods, constituting an ideal security for banks.341 Hence if a bank is obliged to pay in spite of the nullity of the documents, the bank would be required ‘to knowingly forgo its security’.342 In United City Merchants, the Court of Appeal supported this view. Ackner L.J. stated that a bank ‘ought not to be under an obligation to accept or pay against documents which he knows to be waste paper. To hold otherwise would be to deprive the banker of that security for his advances, which is a cardinal feature of the 331 (n 305). 332 Neo (n 296) 59; Donnelly (n 131) 325. 333 Donnelly (n 131) 326. 334 ibid. 335 As it is argued by some authors, such as: Guest (n 295) [23-143] [23-144]. 336 Enonchong (n 1) 155. 337 Cf chapter 3, section 2, III. 338 Enonchong (n 1) 154. 339 Subject to the good faith requirement. 340 Beam technology (n 305) [30-31]; United City Merchants (CA) (n 301) 246, 254. See also: E Elligen ‘Documentary Credits and Fraudulent Documents’ in C Chinkin, R Davidson, W Ricquier, Current Problems of International Trade Financing (Butterworths 1983); Zsuzsanna (n 109) 107. 341 Donelly (n 288) 326. 342 Mees Pierson NV (n 177) 408.

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process of financing carried out by means of the credit.’ 343 Griffiths L.J. also pointed out that ‘it is therefore of vital importance to the bank not to take up worthless documents.’344 However, this argument is also opposed. In practice, banks do not much rely on the documents to secure their reimbursement.345 They have actually other securities such as general floating charge over the company’s asset or a parent company guarantee346 or even a cash deposit as in Bolivinter Oil.347 In addition, this argument cannot justify the recognition of a nullity exception when the nullity does not affect the bank’s security interest.348 As a reminder, in Montrod, a certificate of inspection was deemed worthless. However, it had merely been required as a “locking device” to delay payment and therefore it did not hold value for the bank. In the Singaporean case of Mees Pierson, the challenged document was a health certificate without value neither for the bank.349 Accordingly, is has been argued that this approach should be given up because of the unwanted distinction between nullities which are or are not security documents.350 According to us, an easier way to support the nullity exception is to recognize that the mandate of the bank to pay the beneficiary is limited in cases of nullity of the documents which the bank had knowledge of at the time of payment. The approach would be the same as the approach adopted by some commentators with respect to fraud. Nevertheless, in order to recognize such principle, policy considerations should still support the introduction of a nullity exception. A first policy consideration relates to the fight against fraud in international trade. Documentary fraud has been described as a ‘cancer in international trade’.351 Hence, if the risk of fraudulent documents bears on the beneficiary, this one will have more than an incentive to keep an eye on those parties from whom they obtain documents.352 Therefore the exception would help eliminate fraud in international trade. R Hooley stressed in this regard that maintaining trust and sanctity in international trade would far outweigh the benefit of certainty and precision in international trade.353 Conversely, it is argued that a nullity exception is unlikely to have significant deterrent effect when the beneficiary is not aware of the fraud.354 Moreover, the nullity exception does not only cover forged documents. The second consideration concerns the allocation of risk. As we have already pointed out in the section related to the arguments against the recognition of a nullity exception, it has been suggested that it is fairer to put the burden of the loss on the seller instead of the buyer.355 Although technically speaking, the seller is not obliged to present documents without any defect to be paid given that the bank is under an obligation to make payment as soon as the documents appear to comply on their face with the credit, we do not see why the only party to be in a position to police the validity of the documents produced by thirds parties should not

343 United City Merchants (CA) (n 301) 246. 344 ibid 254. 345 Malek (n 168) [4.33]. 346 Enonchong (n 1) 155. 347 Bolivinter Oil SA (n 20). 348 Donelly (n 288) 327. 349 (n 177) 350 Donelly (n 288) 327. 351 Standard Chartered Bank v Pakistan National Shipping Corp (No.2) [1998] 1 Lloyd's Rep 684 (HL) 686. 352 Donelly (n 288) 328. 353 R Hooley, ‘Fraud and Letters of Credit’ [2002] CLJ 279, 281. 354 Enonchong (n 1) 56. 355 Neo (n 296) 62.

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bear the risk of the consequences attached to the nullity of those documents, presented by him to the bank.356 In addition, to the extent that the heart of the letter of credit lies on the right of the beneficiary to be paid under complying presentation of documents instead of being paid by the buyer at the delivery of the goods, one would expect this party to avoid the presentation of documents that are void. Indeed this is his obligation to present conforming documents that is affected by the error or the fraud of another party. Hence irrespective of whether a conforming presentation requires or not per se the presentation of genuine documents, it can at least be argued that since it concerns the seller’s obligation, it is fairer to make bear the risk of nullity on him. It is by the way conform to the statement according to which there is no obligation for the bank to accept documents that are ‘almost the same or will do just as well’.357 We can conclude that although not fully recognized and even rejected to some extent by English law, the question of the nullity exception is not yet totally resolved. Some authors still strongly support this recognition. On the other hand, some jurisdictions recognize already this new exception to the independence principle in their national law and others should be more inclined to adopt it. Therefore, if the trend goes towards more recognition and more support from the doctrine, we can expect new development in English law towards this direction.

Section 2: The recklessness exception An alternative to the recognition of the nullity exception is the recognition of a recklessness exception. This exception would apply when the beneficiary has presented documents recklessly, careless whether they be true or false,358 valid or void.359 Thus, a bank would be entitled to withhold payment to a beneficiary who was not guilty of fraud but who has facilitated the creation or presentation of forged documents or documents which otherwise are nullities. This rule may thus be seen as an extension of the fraud exception because the reckless conduct of the beneficiary is assimilated to knowledge of fraud. In Derry v Peek, this assimilation had already been made in 1889. However, until recently no follow up had been given to this statement. In Montrod, more recently, Potter L.J. stated that he ‘would not seek to exclude the possibility that, in an individual case, the conduct of a beneficiary in connection with the creation and/or presentation of a document forged by third party might, though itself not amounting to fraud, be of such character as not to deserve the protection available to a holder in due course’.360 However, the Court of Appeal did not decide the question because in Montrod judges came to the conclusion that there were no finding of recklessness. In Singapore, the recklessness exception has been considered by the High Court of Singapore, in Lambias. The Court held that a further ground was available for the bank to justify the refusal to pay the beneficiary given that although not guilty of fraud the beneficiary ‘was nonetheless in some way clearly responsible for the turn of events that led to the perpetration of the fraud or forgery’.361 It added that ‘the law cannot condone actions,

356 Donelly (n 288) 328. 357 Equitable Trust Co of New York (n 99) 52. 358 Derry v Peek (n 171). 359 Enonchong (n 1) 156. 360 (n 173) [59]. 361 (n 318) 764.

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which although not amounting to fraud per se, are of such recklessness and haste that the documents produced as a result are clearly not in conformity with the requirements of the credit’.362 Hence we can already conclude that the recklessness exception in spite of the absence of any leading case setting up its existence seems to be easily accepted by English and Singaporean judges and commentators.363 Nevertheless from our point of view, this is only an extension of the fraud exception and not a separate ground which justifies a departure from the independence principle. Indeed, in the three cases of Derry v Peek, Montrod, and Lambias, the court each time referred to the fraud committed by a third party which could affect the beneficiary’s right to be paid by the bank. However, some commentators link this exception to the nullity exception.364 The recklessness of the beneficiary would thus have an impact only if he has presented recklessly a document which is in fact a nullity. Nevertheless, this approach, which is supposed to bridge as far as possible the gap created by the absence of a nullity exception, seems different to the one suggested by the aforementioned cases. If the recklessness exception covers only nullities, the reckless presentation of documents which are forged without being void would not be covered. On the other hand, a bank would be entitled to withhold payment in case of presentations of documents which are void because of an error and not because of a fraud, what has not yet been mentioned in case law. The ideal solution would be to encompass in the recklessness exception both situations. This would arguably not be unfair because a beneficiary performing his obligation diligently will never be affected. However, as we have said, this broader formulation of the exception does not yet seem the one that the case law is prepared to recognize. Finally with respect to other jurisdictions, it is noteworthy that in French and Belgian law, given that an objective approach of fraud is adopted, this recklessness exception is not necessary, except if the broader definition is adopted.

Section 3: Unconscionability The unconsionability exception tries to cover situations where the beneficiary’s conduct in demanding payment is unconscious or lacking in good faith.365 There is neither defects in the documents nor a fraud by the beneficiary or which he should have knowledge of. However, the beneficiary tries to take an unfair advantage of his right to require payment. In civil law countries, the demand would constitute an abuse of right. Whereas fraud is characterized by a total absence of right to receive payment, abuse presupposes the existence of such a right but additionally imposes an 'inherent limit' on its exercise.366 This exception is likely to apply in many cases where a standby letter of credit, performance bond or a demand guarantee is issued. For example, a party could try to use the threat of a demand for payment under a demand guarantee as to put pressure on the account party to

362 ibid 765. 363 Enonchong (n 1) 156. 364 ibid 156. 365 ibid 159. 366 A Pierce, Demand Guarantees in International Trade (Sweet & Maxwell 1993) 198.

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negotiate a new contract or to accept less favourable terms. It would also be abusive to require payment under a standby letter of credit when the breach of contract of the account party is the consequence of the breaches of the beneficiary himself. For example, in Royal Design Studio Pte Ltd. v Chang Development Pte Ltd,367 a builder failed to complete construction on time because the buyer had failed first to make periodic payments necessary for the builder to have sufficient funding to build on schedule. A beneficiary is also acting in bad faith or unconsciously when he demands payment for the full amount under a letter of credit which guarantees the repayment of advances whereas most of the advances had been repaid. In all of the above cases, the beneficiaries had an absolute right to be paid under the instrument. However the recognition of an unconscionability exception would prevent all of them from finally being paid. The breeding ground for the development of this exception lies undoubtedly in the field of guarantees of payment. However case law, contrary to certain authors,368 does not seem to distinguish the solution given in that field with the one that should be applicable with respect to documentary credits, where the bank does not intervenes only in case of failure of the principal debtor. Hence, the question of the consequence of the nullity of the underlying contract on the bank’s obligation to pay the beneficiary of a letter of credit could be resolved by this way. In addition, although it is less obvious, there will certainly be other cases where the demand of payment under a documentary credit would be considered as unconscious. Nevertheless, given that the importance of this exception is worthier in the field of standby letters of credit and although this issue could cover many pages, we will try to sum up the state of law in different jurisdiction to give an overview of whether or not the bad faith of the beneficiary can be taken into account by the bank short of any situations of fraud.

I. English law First of all, the unconscionability exception must be distinguished in English law from the well-established doctrine of unconscionable conduct which applies when the complainant’s consent to the unfair transaction was vitiated because of a morally reprehensible act of the defendant short of fraud, duress, or undue influence.369 Here the unconscionable conduct happens in the performance of the contract. Only the TTI Team Telecom International Ltd v Hutchinson 3G UK Ltd case in England has accepted, and even then obiter, the unconscionability exception as a separate ground enabling the bank to withhold payment.370 In this case, the court concluded that ‘a lack of good faith has for a long time provided a basis to restrain a beneficiary from calling a bond or guarantee’.371 Three previous cases were invoked in order to support this statement. The problem however is that many commentators challenge the conclusion of the court.372 In the first case invoked in TTI,373 only one of the three judges had based his decision on a breach of

367 [1990] 1 SLR 1116, 1119. 368 Those authors argue that there are reasons why the independence principle should not operate to the same extent for demand guarantee as it is applicable for documentary credits. Therefore the unconscionability exception should be limited to independent guarantee: C Debattista, 'Performance Bonds and Letters of Credit: A Cracked Mirror Image' (1997) JBL 289; A Fedotov, ‘Abuse, unconscionability and demand guarantees: new exception to independence’ (2008) 11 Int'l Trade & Bus L Rev 49, 57. 369 N Enonchong, Duress, undue influence and Unconscionable Dealing (Sweet &Maxwell 2006) Part II. 370 (n 156). 371 ibid [34]. 372 Enonchong (n 1) 164. 373 Elian and Rabbath v Matsas and Matsas [1966] 2 Lloyds Report 495 (CA).

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faith and subsequent cases have confined this case to a special one374 which did not concern letters of credit but ‘merely an ordinary guarantee’.375 In the second judgment,376 the court used the expression ‘lack of good faith’ as to refer to the fraud exception.377 Finally in the third case,378 the court only opened the possibility to recognize other exceptions to the independence principle than the fraud exception.379 However, the unconscionability exception had not been mentioned. Hence, in HLC Engenharia E Gestao de Projectos SA v AMN Amro Bank NV,380 it was held that ‘the authorities are far from clear-cut’ on this points.381 This summarizes well the state of English law in that question. The negative comments which have followed the TTI case in English doctrine and the reluctance of case law to recognize such an exception must without any doubt be linked to the unwillingness of English court to recognize a general doctrine of good faith in the performance of contracts.382 That is why we share the view that it is unlikely to find in the future any new positive development towards the recognition of an unconscionability exception in English law. II. Singaporean law In Singapore, the courts originally held that the fraud was the sole exception available. Later on, as for the nullity exception, the unconscionability exception has been recognized implicitly383 and next expressly in Bocotra Constr Pte Ltd v Attorney Gen (No 2).384 In this case, it has been held that ‘whether there is fraud or unconscionability is the sole consideration in applications for injunctions restraining payment or calls on bonds to be granted’.385 Although this decision has been interpreted in different ways by subsequent judgments, some holding that the Bocotra case did not introduce a new exception separate from the fraud one,386 some holding the contrary,387 finally the Court of Appeal four years later explained the Bocotra case as follows:

The concept of “unconscionability” was adopted after deliberation, and was not inadvertently inserted as a result of a slip; nor was it intended to be used synonymously or interchangeably with “fraud.” There is nothing in that judgment which can be said to indicate or suggest that the court did

374 Group Josi Re (n 220) 357. 375 ibid. 376 Cargill International SA and Another v Bangladesh Sugar and Food Industries Corporation [1996] 4 All ER 563 (Com Court). 377 Confirmed by Enonchong (n 1) 166. 378 Potton Homes Ltd v Coleman Contractors Ltd [1984] 28 BLR 19 (CA). 379 ibid 28. 380 [2005] EWHC 2074 (QB). 381 ibid [38]. 382 Union Eagle Ltd v Golden Achivement Ltd [1997] AC 514 (PC); Director General of Fair Trading v First National Bank [2001] UKHL 52, [2002] 1 AC 481. 383 Royal Design Studio Pte Ltd v Chang Development Pte Ltd [1990] 1 SLR 1116; Kvaerner Singapore Ltd v UDL Shipbuilding (Singapore) Pte Ltd [1993] 3 SLR 350. 384 [1995] 2 SLR 733, 744. 385 ibid 746. 386 New Civilbuild Pte Ltd v Guobena Sdn Bhd [1999] 1 SLR 374. 387 Min Thai Holdings Pte Ltd v Sunlabel Pte Ltd & Anor [1999] 2 SLR 368, 375; Sin Kian Contractor Pte Ltd v Lian Kik Hong unreported cited in R Johns, ‘Fairness at the expense of commercial certainty: the international emergence of unconscionability and illegality as exceptions to the independence principle of letters of credit and bank guarantees’ (2011) 31 NILULR 297, 303.

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not decide that “unconscionability” alone is not a separate ground as distinct from fraud. We accept that to that extent, Bocotra is a departure, and if we may respectfully say so, a conscious departure, from the English position.388

The court confirmed its position in Dauphin Offshore Engineering & Trading Pte Ltd v Private Office of HRH Sheikh Sultan bin Kalifa bin Azyed al Nahyan389 Singaporean courts do not give a precise definition of unconscionability. Instead, they have adopted a case by case approach. In Dauphin it was held that ‘what kind of situation would constitute unconscionability would have to depend on the facts of each case. (…) There is no pre-determined categorisation.’390 In a posterior case, the Court of Appeal again recalled that ‘in determining whether a call on a bond is unconscionable, the entire picture must be viewed, taking into account all the relevant factors’.391 To conclude with this jurisdiction, it is also noteworthy that albeit, at first, judges required in interlocutory proceedings a clear case of unconscionability to grand an injunction,392 subsequent cases have adopted the lower standard of ‘a strong prima facia case’.393

III. US law The Uniform Commercial Code of the United States has not recognized an unconscionability or bad faith exception in addition to the fraud one. Given the statutory recognition of this latter exception, judges have been reluctant to introduce via case law a new exception. In one US case, however, Mid-America Tire v PTZ Trading Ltd Import and Export Agents,394 a dissenting judge declared that the beneficiary was guilty of fraud because it had violated its obligations of ‘good faith, diligence, reasonableness, and care’. Nevertheless this assimilation seems to go too far. Any unreasonable conduct cannot amount to fraud.395 However, this absence of legal recognition does not allude to American law being redundant in cases of unconscionability. With respect to guarantees, various unconscious conducts have been encapsulated in a broad definition of fraud. The concept of “fraud in the transaction” has been developed in such a way as to include some situations characterized by their lack of good faith.396 For example in Harris Corporation,397 in assessing whether a demand for payment under a guarantee was fraudulent, the court pointed out that the contract had been substantially performed by the account party prior to the supervening event which caused the default. In Rockwell v Citibank, the court ruling that there was fraud stated that 'the fraud inheres in first causing the default and then attempting to reap the benefit of the guarantee'.398 In Dynamics corporation, the court even held that a beneficiary is not allowed to 'take

388 GHL Pte Ltd v Unitrack Building Construction Pte Ltd [1999] 4 SLR 604, 610. 389 [2000] 1 SLR 657. 390 ibid 668. 391 Eltraco International Pte Ltd v CGH Development Pte Ltd [2000] 4 SLR 290, 299. 392 Bocotra (n 384) 747; Dauphin (n 389) [57]. 393 Chartered Electronics Industries v Development Bank of Singapore Ltd [1999] 4 SLR 655; McConnel Dowell Construction (Aust) Pty Ltd v Sembcorp Engineers and Constructors Pte Ltd [2002] 1 SLR 199 [74]; Leighton Contractors (Singapore) Pte Ltd v J-Power Systems Corp 25 [2009] SGHC 7. 394 (2000 Ohio App) 43 UCCRS 964. 395 Enonchong (n 1) 181. 396 Fedotov (n 368) 62. 397 Harris Corporation v National Iranian Radio and Television (1982 11th Cir) 691 F2d 1344 . 398 Rockwell International Systems v Citibank (1983 2nd Cir) 719 F2d 583, 588.

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unconscious advantage of the situation and run off with [the principal's] money on a pro forma declaration which has absolutely no basis in fact'.399 However, these statements have never been so clearly applied to letters of credit. Therefore, one might wonder, despite the fact that independent guarantees and letters of credit are both regulated by the independence principle, whether the exceptions to this rule should or not similarly be applied.

IV. French and Belgian law In France and Belgium, a general doctrine of abuse of rights has been deducted from article 1134 of the civil code.400 Therefore it has not been difficult for those countries to recognize a further exception to the principle of independence to letters of credits on this basis. In France, the Cour de Cassation in the leading case, Société Télécoise v Union Méditerranéenne de banquet, has allowed an appeal against a judgment of the Court of Appeal which had refused to grant an injunction because the abusive demand for payment did not amount to fraud. 401 The Cour de Cassation explicitly stated that the abuse of right was a separate and addition exception to the principle of independence of letters of credit. Subsequent cases have intervened to grant an injunction in case of abusive demand.402 French law has also stressed that this abuse of right exception means that a bank which pays with full knowledge of the facts which shows that the demand is abusive is not entitled anymore to reimbursement from the issuing bank or from the account party.403 The bank should have refused to pay. In Belgium, the Cour de Cassation is not yet intervened with respect to the application of good faith in letters of credit. However, lower courts have already applied this exception.404 A tribunal from Liège has pointed out that good faith derogates from the principle of independence.405 In France and Belgium, an abuse of right is defined as a conduct that exceeds manifestly the limits of the exercise of this right by a diligent and prudent person.406 The word “manifestly” limits the leeway of the judge and tries to avoid uncertainty.407 Despite the assertion that fraud and the abuse of right are two different exceptions, commentators have shown that these words are used interchangeably.408 Neither lawyers nor judges seem precise in distinguishing which exception is relevant in each instance.

399 (n 102) 999. 400 In France: M Rotondi, ‘Le rôle et la notion de l’abus de droit’ (1980) RTDC 66. In Belgium : F Baert, ‘De geode trouw bij de uitvoering van overeenkomsten’ (1956-57) RW 489; P Van Ommeslaghe, ‘L’exécution de bonne foi, principe général de droit ?’ (1987) RGDC 103; JF Romain, Théorie critique du principe général de bonne foi en droit privé (Bruylant 2000). 401 Cass Comm, 20 January 1987, JCP, éd E, 1987, No 14882. 402 Eg: Lyon, 17 May 1991, Dalloz, 1993, Somm, 99; Trib Lyon, 3 July 1991, Dalloz, 1993, Somm, 100; Paris, 22 January 1991, Dalloz, 1991, Somm, 200. 403 Cass Comm, 2nd December 1997, D Aff, 1998, p. 107. 404 Trib Liège, 2 July 2002, RDC, 2004, p. 183. 405 ibid 187. 406 In France: Pau, 15 February 1973, JCP, 1973, II, n°17584, p. 283. In Belgium: Cass, 10 September 1971, Pas, 1972, I, p. 28. With respect to the application of good faith in contractual relationships: Cass, 19 September 1983, Pas, 1984, I, p. 55. 407 Romain (n 227) 30. 408 Romain (n 227) 45; Fedotov (n 368) 66.

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V. Other jurisdictions A brief overview of other jurisdictions also shows that the practice is inconsistent from countries to countries. In Malaysia, the Court of Appeal intervened to reject the unconscionability exception which had been recognized by lower judges.409 According to the Court, ‘the only exception is in the case of fraud’.410 However, the pressure of some High Court judges, inspired by Singaporean law is still there. In a recent case a judge of the High Court declared, despite of the judgment of the Court of Appeal, that the unconscionability principle ‘is a sound principle’.411 In Australia, the common law has been rejected as a basis for the recognition of the unconscionability exception.412 However, section 51AA of Australian Trade Practices Act, which provides that ‘a corporation must not, in trade or commerce, engage in conduct that is unconscionable within the meaning of the unwritten law, from time to time, of the states and Territories’ has been used to adopt in Australian law the bad faith exception.413 It has been held that ‘the effect of the statute, applying as it does to international trade and commerce, is to work a substantial inroad into the well established common law autonomy of letters of credit and performance bonds and other bank guarantees’.414 What constitutes an unconscionable conduct covers by the unwritten law, as mentioned in section 51AA, is however not yet settled, creating many debates.415 Some commentators even argue that, given this uncertainty, unconscionability should exclusively be an argument available in court.416 Therefore, a bank would not be entitled to refuse payment on the basis of its own appraisal.

VI. Policy considerations Without entering into the debate regarding the benefits that this exception may bring to international trade especially in the field of performance bond and other guarantees,417 it is important to stress the dangers that the introduction of such an exception in national law may create and that judges must keep in mind in developing case law. The first danger is the imprecise and vague definition of unconscionability.418 In an area where clarity and certainty are highly valued,419 it is of upmost importance to limit the scope of such a broad concept so as not to be dependent on judges to assess the parties’ rights. We

409 Radio General Trading Co v Wayss & Freyta [1998] MLJ 346; Cygal Berhad v Bandar Subang Sdn Bhd [1998] 650 MLJU 1; Bains Harding (Malaysia) v Arab-Malaysia Merch Bank [1996] 1 MLJ 425. 410 LEC Contractors v Castle Inn [2000] 3 MLJ 339, 359. 411 Pasukhas Constuctions v MTM Millenium Holdings [2009] 8 MLJ 1. 412 Olex Focas Pty Ltd v Skodaexport Co Ltd [1998] 3 VR 380 [59]. 413 ibid [73-74]. 414 ibid [70]. 415 R Baxt, ‘A Bombshell on Unconscionable Conduct’ (1997) 25 Austl Bus L Rev 227; R Buckley, ‘Unconscionability Amok, or Two Readily Distinguishable Cases?’ (1998) 26 Austl Bus L Rev 323, 326; E Zillman, ‘A Further Erosion Into Bank Guarantees?’ (1997) 13 BLDG & CONSTR L 354. 416 Fedotov (n 368) 81. 417 For more details, Fedotov (n 368) 79. 418 K Loi points out with relevance that this issue also existed some years ago with respect to the fraud exception. Nevertheless, the definition stabilised over time as a result of judicial and academic refinement. Therefore, the vagueness of the unconsionability concept cannot be seen as a conclusive objection against the recognition of this new exception. K Loi, ‘Two decades of restraining unconscionable calls on performance guarantees’ (2011) 23 SAcLJ 504, 512. 419 Enonchong (n 1) 170.

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have seen that in French law, this danger is supposed to be resolved by the requirement of “manifestly” abusive conduct. Secondly, the recognition of a bad faith exception is likely to result in more frequent judicial intervention in the field of letters of credit which would undermine the principle according to which letters of credits are the equivalent of cash.420 Finally, such an exception contain the risk of involving the courts at the interlocutory stage, in disputes that are essentially relating to the performance or breach of the underlying contract whereas such disputes should be resolved in separate proceedings.421 Two cases illustrate those risks. In Australia, an injunction has been granted to refrain the bank from making payment to the beneficiary of a letter of credit because one the other hand the account party alleged that the seller had shipped defective goods because of which he had spent considerable expanse to have repaired and because on the other hand the beneficiary was about to go into bankruptcy.422 Therefore any further claim would likely to be unsuccessful because the buyer was not a secured creditor. Although judges concerns regarding the account party who would likely to lose money were understandable, this decision breaches totally the independence principle. The account party was aware of the risk of insolvency when accepting to issue a letter of credit. It is well-known that a letter of credit is ‘a mechanism of risk allocation the purpose of which is to ensure that the beneficiary is paid before the resolution of any dispute between the parties arising from the underlying contract’.423 This unconscionability exception should not extent to all ‘unfair’ situations. However, a non-limited definition bears the risk of an increasing number of judgments similar to this one based on the unconscionability exception. In France, a call by the issuing bank under its counter-guarantee has been held manifestly abusive because the issuing bank did not intend to pay the beneficiary under its demand guarantee. It simply wanted to invoke the fact that the guarantee had expired.424 The problem is that the issuing bank’s defence will not always been successful. Therefore, holding that a demand under a counter-guarantee is abusive because the bank intends to raise a defence against the beneficiary is reasoning which arguably goes too far.425 In Singapore, where injunctions have first been granted quite easily on the basis of the unconscionability exception, the courts, as the abovementioned dangers made concrete, now appear to be more reluctant to do so.426 Therefore, it is particularly relevant to quote as a conclusion for this section a statement of one of those Singaporean Court in this regard: ‘it is important that the courts guard against unnecessarily interfering with contractual arrangements freely entered into by the parties. The parties must abide by the deal they have struck’.427

420 ibid 170. 421 ibid 171. 422 Boral Formwork & Scaffolding Pty Ltd v Action Makers Limited [2003] NSWSC 713. 423 Enonchong (n 1) 171. 424 Paris, 22 January 1991, Dalloz, 1991, Somm, 200. 425 Supported by Enonchong (n 1) 182. 426 Anwar Siraj v Teo Hee Lai Building Constr Pte Ltd [2003] 1 SLR 394; McConnell (n 393); Eltraco International Pte Ltd v CGH Development Pte Ltd [2000] 4 SLR 290. 427 Eltraco (n 426) [30] adopted in Anwar as well (n 426) [16].

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Section 4: Illegality In addition to nullity and unconscionability, illegality is also pleaded as an independent non-fraud exception to the independence principle. The question is whether the illegality in the underlying contract may taint the letter of credit so that a bank is entitled to withhold payment in such circumstances. If the letter of credit itself is also affected by nullity, there is no need to apply this exception, as the independence principle is not breached. The underlying contract can be illegal for different grounds. It can infringe lending limits on credits;428 it can violate exchange control laws429 or be contrary to a government ban on payments to certain persons or countries.430 With respect to the last example, we can mention the UK ban following the Iraqi invasion of Kuwait on 2 Augustus 1990 on paying to any person in Iraq or Kuwait.431 The legal basis usually invoked in favour of the recognition of such exception is the maxim ex turpi causa non oritur actio, ie the same basis as the one attributed to the fraud exception.432 This general illegality defence means that ‘no court will lend its aid to man who founds his cause of action upon an immoral or an illegal act’.433 On the basis of this rule, if B agrees to murder C in exchange of a sum of money paid by A but borrowed to D, the loan agreement will be illegal if D is aware of the illegal purpose of the transaction. The illegality exception extends this rule to a situation where A instead of asking D a loan, asks him to issue a letter of credit in favour of B. Would it not be more logical to allow D to withhold payment to B after the murder if D acquires knowledge of the unlawful purpose of the underlying transaction? First of all, we will examine the state of English authorities. We will subsequently provide a brief overview of other jurisdictions. We will end this section by the conditions that should govern such an exception.

I. English law In Group Josi Re,434 it was argued that as the underlying insurance contract was illegal since the claimants where not authorized to carry on insurance business in England, the letters of credit were also affected by illegality. The judge of first instance decided that the principle of autonomy prevailed over the underlying illegality. In the Court of Appeal, another interpretation of the Financial Services Act of 1986 has been adopted, deeming it not necessary for the court to decide the question of the illegality exception. However, Saville L.J. stated obiter that he shared the point of view of the first judge on this point435 whereas by contrast, Staughton L.J. expressed the view that the letter of credit could be affected by the illegality of the insurance contract so that a court could prevent a bank from making payment

428 Id International Dairy Queen Inc v Bank of Wadley (1976 MD Ala) 407 F Supp 1270. 429 A Mugasha, ‘Enjoining the Beneficiary’s Claim on a Letter of Credit or Bank Guarantee’ (2004) 5 JBL 515. 430 Itek Corp v First Nat Bank (1981 D Mass) 511 F Supp 1341; Harris Corp v National Iranian Radio & Television (1982 11th Cir) 691 F2d 1344; General Cable Ceat SA v Futura Trading Inc (1983 SDNY) 1983 WL 1156; Shanning International Ltd (in liq) v Lloyds TSB Bank plc [2001] UKHL 31, [2001] 1 WLR 1462. 431 Directions 1990 (SI 1990/1591); Directions 1990 (SI 1990/1616); etc. 432 N. Enonchong, ‘The Autonomy Principle of Letters of credit: an Illegality exception ?’ (2006) LMCLQ 404. 433 Holman v Johnson [1775] 1 Cowp 341, 343. 434 (n 220). 435 (n 220) 368.

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or the beneficiary from demanding it.436 In related proceedings, one year before, another judge declared that illegality in addition to fraud was a separate ground of defence.437 Things have become clearer in English law with Mahonia Ltd v JP Morgan Chase Bank (No2).438 In this case, it was pleaded that the underlying contract was illegal because it provided one party with a disguised loan so as to enable this party to manipulate its account in breach of US law. In an action for summary judgment, Colman J. expressed that view that an illegality exception should be recognized and dismissed Mahonia’s application holding that the bank had at least a strongly arguable case.439 He declared that the uncertainty in this area is one that has to be settled by the court trial.440 At trial, Cooke J., although allowing the claim because the beneficiary was not aware that the other party’s accounting was illegal, was prepared to recognize the illegality exception. He went on to consider that the autonomy principle did not prevent a letter of credit from being tainted by the illegality of the underlying transaction. Mahonia cannot be seen as the leading case in English law because the Cooke’s statement was only obiter. However, it is at least a strong indication of the direction taken by English courts.441 Thus, in subsequent cases, some opinions have shown the same trend. In Oliver and Anor v Dubai Bank of Kenya,442 it was held that the exceptions to the independence principle are fraud and ‘possibly illegality’.443 In Lancore Services Ltd v Barclays Bank Plc,444 the reasoning of the judge concerning illegality and card payment was based on the recognition of the existence of such an exception in the field of letters of credit.

II. Other jurisdictions In the United States, there is no illegality exception recognized by the UCC. However, some a minority of commentators strongly argues for the recognition of such an exception and one even suggests that despite the lack of express provision, the UCC does not exclude the possibility for a bank to refuse to honour its payment in case of illegality affecting the underlying contract.445 In one case, an American judge expressed the same idea in his obiter.446 It was suggested that although the court did not apply the illegality exception, this defence would have been available if the allegations of illegality had not been conclusory and if the illegality had been ‘central to or a dominant part of the plaintiff’s whole course of conduct in performance of the contract’.447 However, the majority point of view is that article 5-109 of the UCC does not include an illegality exception and therefore banks must pay the beneficiary in such circumstances. In addition, under the previous version of article 5, judicial

436 ibid 362. 437 Deutsche Ruckversicherung AG v Walbrook Insurance Co Ltd [1995] 1 WLR 1017 (Com Ct) 1027. 438 [2004] EWHC 1938 (Comm). 439 [2003] EWHC 1927(Comm), [2003] 2 Lloyd’s Rep 911. 440 ibid 69. 441 Enonchong (n 1) 192. 442 [2007] EWHC 2165 (Comm). 443 ibid [12]. 444 [2008] EWHC 1264 (Ch), [2008] 1 CLC 1039. 445 G Mc Laughlin ‘Standby Letters of Credit and Guaranties: An Exercise in Cartography’ (1993) 34 Wm & Mary L Rev 1139; G McLaughlin, ‘Letters of Credit and Illegal Contracts: The Limits of the Independence Principle’ (1989) 49 OHIO ST LJ 1197. 446 Ross Bicycles, Inc v Citibank, NA (1994 ND NY) 577 NYS2d 827. 447 Ross Bicycles (n 446) 828.

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opinions expressly rejected illegality as a defence for banks which refuse to pay the beneficiary.448 In Australia, there is only one obiter remark which suggests that illegality may be available as a separate exception from fraud.449 In Canada, in contrast, an obiter held that a letter of credit was not tainted by illegality in the underlying contract.450 In many subsequent cases, this statement has been cited with approval.451 In Singapore, there appears to be against the exception. Nevertheless, as for the other countries, this statement is only based on one obiter remark.452 Finally in France and Belgium article 1131 of the Civil Code provides that an illegal contract is void ab initio whereas in England the contract is only unenforceable. It has therefore been argued that since the underlying contract is void the letter of credit must also be a nullity. However, as we have seen, nullity of the underlying contract does not in principle affect the bank’s obligation. There is nevertheless one exception: instances where the underlying contract violates international public order.453 Therefore, the illegality exception is construed narrowly. The prohibition of payment is confined to instances like sales of arms or narcotics but does not extend to any contract voidable on the grounds that it contravenes imperative statutory provisions.454 In addition, mere domestic economic laws which affect the underlying contract have no impact on the bank’s obligation.455

III. Conditions of application In countries where the illegality exception is recognized, the scope of this defence must be narrow so as not to threaten the independence principle.456 In order to have a better understanding of the exception, we are going now to briefly list the condition of application that seems to be applicable in English law. Those conditions are mainly based on the Mahonia case.457 First, the alleged illegality, as in the case of the general illegality defence, must be serious.458 The difficulty is to determine what a minor illegality is and what is serious. In Mahonia, Cooke J. adopted the test of whether the illegality involved deliberate wrongdoing or not.459

448 KMW International v Chase Manhattan Bank, NA (1979 2d Cir) 606 F2d 10, 16; Centrifugal Casting Mach Co, Inc v American Bank &Trust Co (1992 10th Circ) 966 F2d 1348, 1352. 449 Fletcher Construction Australia (n 225). 450 Morguard Bank of Canada v Reigate Resources (Canada) Ltd and Canada Trust Company (1985) 40 Alta LR (2d) 77. 451 Standard Trust Co v Bank of Nova Scotia (2001) NFCA 27; Royal Bank of Canada v Gentra Canada Investments Inc (2000) OTC 86; Morguard Trust Co v Bank of Canada (1988) 10 ACWS (3d) 416; Cineplex Odeon Corp v 100 Bloor Street West General Partnership Inc (1993) OJ NO 112. 452 Amerian Home Assurance Co v Hong Lam Marine Pte Ltd [1999] 3 SLR 682 [68]. 453 Bruxelles, 18 December 1981, Rev Banque, 1982, p. 99; Trib Bruxelles, 8 October 1985, RDC, 1986, p. 648; Trib Namur, 12 September 1994, RDC, 1995, p. 68. See also: R Bertrams, Bank guarantees in International Trade (Kluwer 2004) 378. 454 In Belgium: Trib Namur (n 453). In France: Cass, 13 December 1983 (n 64). Contra: Paris, 14 January 1993, JCP, éd G, 1993, No 22069. 455 Bertrams (n 453) 380. 456 Enonchong (n 1) 193. 457 (n 438). 458 St John Shipping Corporation v Joseph Rank Ltd [1957] 1 QB 267 (QB) 288-289. 459 ibid [430].

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Thus, an illegal arms transaction or a sale and purchase of heroin are considered as sufficiently serious illegality460. Secondly, the bank must be aware of the illegality and must be able to prove it. The standard of proof related to illegality seems to be the same as in the fraud exception. Against an action for summary judgment, it is likely that the bank will have to prove that it has a real prospect of succeeding at trial on the illegality exception.461 However, this is at the time of the hearing that the bank must have a sufficient knowledge of the illegality.462 That means that a bank may invoke illegality to refuse to pay the beneficiary even if at that time it does not have evidence of clear illegality provided that it will be able to prove it at any hearing in a claim brought by the beneficiary. Next, concerning injunctions, the account party should have a seriously arguable case to obtain an injunction against the bank or the beneficiary on the ground of illegality.463 Finally, it is necessary to establish a clear illegality during court proceedings in order for the claim to be successful.464 The third condition requires the beneficiary to be a party to the illegality in the underlying contract or to have knowledge of it. This results from the general illegality defence.465 In most cases, the beneficiary will not be aware of the illegality. In addition, English courts appear not to be quick to find that the seller of a letter of credit had knowledge of the illegal purpose even when this latter facilitates the illegal transaction.466 Therefore the scope of the exception appears to be strongly confined. The last condition to meet is related to the degree of connection between the illegality and the letter of credit. It has been held that in order to taint the letter of credit, the illegality must be closely connected to the letter of credit.467 However, the criteria used to determine whether in a particular case the degree of connection is sufficient to affect the letter of credit are not settled. For more details on the tests that are proposed, we refer the reader to academic commentary listed below.468 It is possible to conclude that when illegality is recognized as an exception to the independence principle, the parties are forced to overcome high hurdles before it will be applied; even though it seems more probable that a claim succeeds in England rather than in France or Belgium. Nevertheless, it is clear that this exception has a scope much narrower than the fraud exception.

460 Mahonia Ltd v JP Morgan Chase Bank (No 1) (summary judgment) [2003] EWHC 1927(Comm), [2003] 2 Lloyd’s Rep 911 [68]. 461 Enonchong (n 1) 194. 462 Mahonia (No1) (n 460) [69]. 463 Enonchong (n 1) 194. 464 Group Josi Re (n 220) 362. 465 Mason v Clarke [1955] AC 778 (HL). 466 Eg: Fielding & Platt Ltd v Najjar [1969] 1 WLR 357 (CA). 467 Mahonia (No1) (n 460) [428]. 468 H Stowe, ‘The “Unruly House” has Bolted’ (1994) 57 MLR 441; R Buckley, ‘Law’s Boundaries and the Challenge of Illegality’ in R Buckley (ed), Legal Structures (Chancery Wiley Law publications 1996) 233; N Enonchong, Illegal Transactions (Lloyds of London Press, 1998) 181; Enonchong (n 1) 197.

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Conclusion Letters of credit have been created in practice as a new mean of payment. They have met worldwide success because of their commercial utility. Indeed, due to their independence from the underlying contract, letters of credit amount to “cash in hand” payment. In this context, this paper has tried to highlight the circumstances in which a bank may withhold payment to the beneficiary. The UCP 600 are silent on this topic. With the exception of cases in which documents tendered by the beneficiary do not comply with the requirements of the letter of credit, the bank’s obligation to pay the beneficiary is almost unconditional. The circumstances which entitle a bank to refuse payment are therefore obviously limited. Fraud is the only circumstance which entitles a bank to withhold payment in every country. More precisely, when a fraud committed by the beneficiary is materialized in the documents reflecting a lack of authenticity or a lack of sincerity of the documents, a bank aware of this deficiency may, and sometimes is held to refuse payment. If the account party has been induced to the contract by misrepresentation or in case of fraud in the underlying contract some countries apply the exception as well whereas others do not. Similarly, fraud committed by a third party is sometimes taken into account. Other exceptions to the independence principle have been developed in some regions in order to place fairness above the strict mechanism of payment chosen by the parties. The illegality exception seems to have been more or less accepted by the international community provided that this concept is understood narrowly. Any illegality cannot be taken into account. A serious illegality or, in France and Belgium, a breach of international public order, must be proven. Nullity and unconscionability are more controversial. In every exception, divergences between jurisdictions reflect the priorities given by judges between all the different interests involved in a letter of credit. On the one hand, the beneficiary must be paid to safeguard commercial certainty. By asking his bank to issue a letter of credit the account party agreed to pay first and to question later. Payment by the bank does not prevent the account party from directly claiming from the beneficiary the remedies he has in his possession. Therefore, the bank has no role to play in their disputes. This concern explains why English law protects every beneficiary who acts in good faith and does not recognize a general nullity or unconscionability exception. On the other hand, the buyer might never get his money back in case of payment made by the bank if the seller is of bad faith or bankrupt. The time used to take the money back may also incur large costs. It is therefore advisable that the beneficiary asks the bank to withhold payment in certain circumstances, at least temporarily. In this regard, a strict interpretation of the beneficiary’s obligation to tender complying documents is used to protect the account party. A more general idea of fairness also plays a role in certain jurisdictions in order to reject abusive demand of payment. This led to the recognition of nullity and unconscionability in some countries. These different priorities explain for example why Belgium is more reluctant than France to touch on the independence principle in spite of the fact that they are both familiar with very similar legal concepts.469 Finally, the bank’s reputation must also be taken into account when assessing its obligation to make payment. An infringement to the bank’s international reputation cannot be compensated by damages. Therefore, it is strongly

469 Romain (n 227) 35.

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recommended to give banks a clear indication related to the situations in which they are entitled to withhold payment. Arguably, legislative interventions should give more precision and indication to banks regarding this matter. Personally, we think that the nullity of the presented documents as well as the instances of fraud which do not involve the beneficiary should be recognized as circumstances in which a bank is entitled to refuse payment to the beneficiary. Letters of credit already provide certainty of payment for the beneficiary tipping the balance of risk in favour of the beneficiary.470 This latter will be paid even though, on the basis of the underlying transaction alone, he could be deprived of this money. This risk has been accepted by the account party. However ‘protecting the seller from defences based on the underlying sale contract does not mean that he should also be protected from defences that are related to the documents themselves’.471 Although the bank must not go into detail when assessing the sincerity of the documents, this does not mean that we cannot hold the beneficiary liable for any defect discovered in it. If a bank becomes aware of the nullity or the fraudulent aspect of the tendered documents, we do not see any reason why the beneficiary should still have a right to be paid. His sole obligation is to submit conforming documents to the bank in order to be paid. According to us, the risk linked to the deficiencies inherent of the documents themselves must be born by the beneficiary who has the obligation to obtain and produce these documents. This is the small counter-part to the risk taken by the buyer. On the other hand, we do not think that the extension of the unconscionability exception from independent guarantee to letters of credit is appropriate. Despite the fact that both instruments are subject to the same principle of independence, divergences in their nature may justify different degrees in its application.472 In letters of credit, the bank’s intervention is the method of payment. It is not subsidiary. If there is no defect in the documents, it is possible to argue that any risk of abuse has been accepted by the account party and will be resolved by a separate dispute after payment. In addition, as unconscionability in currently a vague concept, and is not elaborated on in statutes this exception is more likely to affect legal certainty and the commercial utility of letters of credit. As we have stressed above, no matter which exception is or is not recognized, the most important element is to limit as much as possible the leeway of the judges and the banks so as to avoid interfering too much with the bank’s obligation when the rules of the game are respected by both parties. The question then becomes “what are those rules”? This is without any doubt a question to be resolved by national law. Nevertheless, arguably, they should include the presentation of genuine and truthful documents by the beneficiary. If this obligation is correctly performed, there is no reason to favour any kind of fairness at the expense of commercial certainty.

470 Longwa Kayembe (n 203) 29. 471 Neo (n 296) 58. 472 Debattista (n 368) Fedotov (n 368).

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A. Table of cases I. Australian cases Contronic Distributors Pty Ltd v Bank of New South Wales [1984] 3 NSWLR 110 Olex Focas Pty Ltd v Skodaexport Co Ltd [1998] 3 VR 380 NEI Pacific Ltd v Cigna Insurance Australia Ltd (Unreported, NSWSC, 29 August 1991) Fletcher Construction Australia Pty Ltd v Varnsdorf Pty Ltd [1998] 3 VR 812 Boral Formwork & Scaffolding Pty Ltd v Action Makers Limited [2003] NSWSC 713 II. Belgian cases Cass, 10 September 1971, Pas, 1972, I, p. 28 Trib Bruxelles, 16 November 1978, Rev Banque, 1980, p. 249 Antwerpen, 23 Septembre 1981, RW, 1981-1982, p. 2168 Bruxelles, 18 December 1981, Rev Banque, 1982, p. 99 Trib Bruxelles, 18 April 1985, RDC, 1985, p. 727 Trib Bruxelles, 8 October 1985, RDC, 1986, p. 648 Bruxelles, 13 June 1991, Dalloz, 1992, p. 306 Trib Verviers (Prés.), 8 February 1996, RDC, 1997, p. 781 Trib Gent (Prés.), 6 Januari 1998, TGR, 1998, p. 182 Trib Namur, 12 September 1994, RDC, 1995, p. 68 Trib Gent (Prés.), 16 November 1999, AJT, 1999-2000, p. 406 Bruxelles, 14 February 2000, DAOR, 2000, p. 269 Bruxelles, 8 May 2000, RDC, 2001, p. 802 Trib Bruxelles, 12 December 2000, RDC, 2001, p. 812 Antwerpen, 20 December 2000, DAOR, 2001, p. 338

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Trib Lyon, 3 July 1991, Dalloz, 1993, Somm, 100 Paris, 24 April 1992, Dalloz, 1993, p. 102 Cass Comm, 15 July 1992, Dalloz, 1994, p. 28. Paris, 14 January 1993, JCP, éd G, 1993, No 22069, note Dumesnil-Rossi Grenoble, 20 September 1994, Banque & Droit, 1995, n° 40, p. 34 Cass Comm, 9 April 1997, JCP, éd E, 1997, n° 30, II, p. 167 Cass Comm, 24 June 1997, n° 95-10.259 (unreported) Cass Comm, 2nd December 1997, D Aff, 1998, p. 107 Versailles, 28 February 2002, JCPE, 2003, n° 15, p. 396 Cass Comm, 11 October 2005, Banque et droit, 2006, p. 71 Cass Comm, 20 June 2006, Droit et patrimoine, 2006, September, p. 87 Cass Comm, 16 December 2008, Dalloz, 2009, p. 161 VII. German case OLG Frankfurt-am-Main 23 March 1981, WM, 1981, n° 17, 445 VIII. Korean case Supreme Court of Korea (2nd ch), 24 January 2003 (Industrial Bank of Corea/ BNP Paribas) IX. Malaysian cases Bains Harding (Malaysia) v Arab-Malaysia Merch Bank [1996] 1 MLJ 425 Cygal Berhad v Bandar Subang Sdn Bhd [1998] 650 MLJU 1 Radio General Trading Co v Wayss & Freyta [1998] MLJ 346 LEC Contractors v Castle Inn [2000] 3 MLJ 339 Daewoo Engineering & Construction Co Ltd v The Titular Roman Catholic Archbishop of Kuala Lumpur [2004] 7 MLJ 136 Pasukhas Constuctions v MTM Millenium Holdings [2009] 8 MLJ 1

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X. Singaporean cases Royal Design Studio Pte Ltd v Chang Development Pte Ltd [1990] 1 SLR 1116 Kvaerner Singapore Ltd v UDL Shipbuilding (Singapore) Pte Ltd [1993] 3 SLR 350 Lambias (Importers & Exporters) Co Pte Ltd v Hong Kong & Shanghai Banking Corporation [1993] 2 SLR 751 Kumagai-Zenecon Construction Pte Ltd v Arab Bank plc [1997] 2 SLR 805 Amerian Home Assurance Co v Hong Lam Marine Pte Ltd [1999] 3 SLR 682 Chartered Electronics Industries Ptd Ltd v Developments Bank of Singapore [1999] 4 SLR 655 GHL Pte Ltd v Unitrack Building Construction Pte Ltd [1999] 4 SLR 604 Min Thai Holdings Pte Ltd v Sunlabel Pte Ltd & Anor [1999] 2 SLR 368 New Civilbuild Pte Ltd v Guobena Sdn Bhd [1999] 1 SLR 374 Dauphin Offshore Engineering & Trading Pte Ltd v Private Office of HRH Sheikh Sultan bin Kalifa bin Azyed al Nahyan [2000] 1 SLR 657 Eltraco International Pte Ltd v CGH Development Pte Ltd [2000] 4 SLR 290 Mess Pierson NV v Bay Pacific (S) Pte Ltd [2000] 4 SLR 393 Credit Agricole Indosuez v Banque Nationale de Paris [2001] 2 SLR 1 McConnell Dowell Constructors (Aust) Pty Ltd v Sembcorp Engineers and Constructors Pte Ltd [2002] 1 SLR 99 Anwar Siraj v Teo Hee Lai Building Constr Pte Ltd [2003] 1 SLR 394 Beam Technology (MFG) PTE Ltd v Standard Chartered Bank [2003] 1 SLR 597 Leighton Contractors (Singapore) Pte Ltd v J-Power Systems Corp 25 [2009] SGHC 7 XI. Swiss cases Trib Fédéral, 11 June 1974, ATF 100, 1974, II, p. 145 Genève, 16 July 1985, Dalloz, 1986, p. 219 Genève, 12 September 1985, JCP, 1985, p. 609

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Genève, 3 December 1987, Dall IR, 1988, p. 184 Genève, 27 April 1989, SJ, 1990, p. 109 Trib Fédéral, 11 January 1989, ATF 115, 1989, II, p. 67 Trib Fédéral, 7 November 1996, SJ, 1997, p. 245 Trib Fédéral, 1st June 2004, ATF 130, 2004, III, p. 462 XII. US cases Old Colony Trust Co v Lawyers' Title & Trust Co (1924 2nd Cir) 297 P 152 Sztejn v J Henry Schroder Banking Corporation (1941 NY Sup) 31 NYS 2d 631 Rosenfeld v Banco International (1967 NY Sup) 4 UCCRS 212 Merchants Corp of America v Chase Manhattan Bank, NA (1968 NY Sup) 5 UCCRS 196 Dynamics Corporation of America v Citizens & Southern National Bank (1973 ND Ga) 356 F Supp 991 NMC Enterprises, Inc v Columbia Broadcasting System, Inc (1974 NY Sup) 14 UCCRS 1427 Courtaulds North America Inc v North Carolina National Bank (1975 4th Cir) 528 F2d 802 Id. International Dairy Queen Inc v Bank of Wadley (1976 MD Ala) 407 F Supp 1270 United Bank, Ltd v Cambridge Sporting Goods Corp (1976 NY Sup) 20 UCCRS 980 Bossier Bank & Trust Co v Union Planters Nat Bank (1977 Tenn App) 21 UCCRS 254 Shaffer v Brooklyn Park Garden Apartments (1977 Minn) 20 UCCRS 1269 Flagship Cruises Ltd v New England Merchants (1978 1st Cir) 569 F2d 699 Housing Securities, Inc v Maine Nat Bank (1978 Me) 2 ALR 4th 650 O'Grady v First Union Nat Bank (1978 NC App) 26 UCCRS 146 American Bell International, Inc v Islamic Republic of Iran (1979 SDNY) 27 UCCRS 223 East Girard Savings Associations v Citizens National Banks (1979 5th Cir) 593 F2d 598 Insurance Co of N Am v Heritage Bank (1979 3rd Cir) 595 F2d 171 KMW International v Chase Manhattan Bank, N. A. (1979 2nd Cir) 27 UCCRS 203

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Siderius, Inc v Wallace Co (1979 Tex App) 27 UCCRS 191 United Technologies Corp v Citibank, NA (1979 SDNY) 27 UCCRS 212 Cappaert Enterprises v Citizens and Southern Intern Bank of New Orleans (1980 ED La) 486 F Supp 819 First Nat Bank v Rosebud Housing Authority (1980 Iowa) 29 UCCRS 209 Prutscher v Fidelity International Bank (1980 SDNY) 30 UCCRS 1632 Itek Corp v First Nat Bank (1981 D Mass) 511 F Supp 1341 Re Pine Tree Electric Co (1981 D Me) 33 UCCRS 343 Roman Ceramics Corp v Peoples Nat Bank (1981 MD Pa) 32 UCCRS 522 Stringer Constr Co v American Ins Co (1981 Ill App) 32 UCCRS 1167 Summit Ins Co of New York v Central Nat Bank of Houston (1981 Tex App) 624 SW2d 222 Aluminum Corp v Bank of Virginia (1982 D Md) 544 F Supp 386, judgment aff'd (1983 4th Circ) 704 F2d 136 Harris Corp v National Iranian Radio & Television (1982 11th Cir) 35 UCCRS 222 Morgan v Depositors Trust Co (1982 Me) 33 UCCRS 1473 General Cable Ceat SA v Futura Trading Inc (1983 SDNY) 1983 WL 1156 Philadelphia Gear Corp v Central Bank (1983 5th Cir) 717 F2d 230 Raiffeisen-Zentralkasse Tirol reg Gen mbH v First Nat Bank in Aspen (1983 Colo App) 671 P2d 1008 Rockwell International Systems v Citibank (1983 2nd Cir) 719 F2d 583 Wyle v Bank Melli of Tehran (1983 ND Cal) 39 UCCRS 610 Itek Corp v First Nat Bank (1984 1st Cir) 730 F2d 19 Dallas Bank and Trust Co v Commonwealth Development Corp (1984 Tex App) 686 SW2d 226 Mitsui Manufacturers Bank v Texas Commerce Bank-Fort Worth (1984 2nd Dist) 39 UCCRS 603 First Commercial Bank v Gotham Originals Inc (1985 CA NY) 486 NYS 2d 715 Temtex Products, Inc v Capital Bank & Trust Co (1985 MD La) 623 F Supp 816

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Utica Mut Ins Co v Walker (1987 Ky App) 725 SW2d 24 Atlas Mini Storage, Inc v First Interstate Bank of Des Moines, NA (1988, Iowa App) 426 NW2d 686 Five Star Parking v Philadelphia Parking Authority (1989 ED Pa) 703 F Supp 20 All Services Exportacao Comercia SA v Banco Bamerindus Do Brazil SA (1990 2nd Circ) 921 F2d 32 Ward Petroleum Corp v Federal Deposit Ins Corp (1990 10th Cir) 903 F2d 1297 Crossroads Bank of Georgia v State Bank of Springfield (1991 Minn. App) 474 NW2d 14 Re Security Services, Inc (1991 Bankr WD Mo) 132 BR 411 Central Sav and Loan Ass'n v Stemmons Northwest Bank, NA (1992 Tex App) 848 SW2d 232 Centrifugal Casting Mach Co, Inc v American Bank &Trust Co (1992 10th Cir) 966 F2d 1348 Ross Bicycles, Inc v Citibank, NA (1994 NDNY) 577 NYS2d 827 Xantech Corp v Ramco Industries, Inc (1994 Ind App) 643 NE2d 918 Bisker v Nations Bank NA (1996 DC App) 686 A2d 561 San Diego Gas & Electric Co v Bank Leumi (1996 4th Dist) 42 Cal App 4th 928 Com Corp v Banco do Brasil, SA (1999 2d Cir) 171 F3d 739 Mid-America Tire v PTZ Trading Ltd Import and Export Agents (2000 Ohio App) 43 UCCRS 964 Voest-Alpine Trading USA Corp v Bank of China (2000 SD Tex) US Dist Lexis 8223 Re Lancaster Steel Co (2002 SD Fla) 284 BR 152 Mid-America Tire, Inc v PTZ Trading Ltd (2002 Ohio App) 95 Ohio St 3d 367 Amwest Sur Ins Co v Concord Bank (2003 ED Mo) 248 F Supp 2d 867 Daiwa Products, Inc v Nationsbank, NA (2004 Fla Dist) 885 So2d 884 SAVA gumarska in kemijska industria DD v Advanced Polymer Sciences, Inc (2004 Tex App) 128 SW3d 304 Shin-Etsu Chemical Co, Ltd v 3033 ICICI Bank Ltd (2004 NY App Div) 9 AD3d 171 Fisher v Dakota Community Bank (2005 5th Cir) 405 F Supp 2d 1089

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Grunwald v Wells Fargo Bank, NA (2005 Iowa App) 725 NW2d 324 Re Stonebridge Technologies, Inc (2005 5th Cir) 430 F3d 260 Re Cooper Mfg Corp (2006 Bankr SD Tex) 344 BR 496 Re Onecast Media, Inc (2006 9th Cir) 439 F3d 558 Morgan Creek Residential v Kemp (2007 3d Dist) 153 Cal App 4th 675 Shah Food Industries, Inc v Alario (2011 NY Sup) 917 NYS2d 306

B. Table of legislation

I. National law Civil code, article 1134, 2321 (France and Belgium) Bills of Exchange act 1882 (England) Federal code of obligation, article 466 (Switzerland) Uniform Commercial Code, article 5-109 (United States) Trade Practices Act 1974, section 51AA (Australia) Civil Procedure Rules 1998, part 24 (England) II. International conventions UN Convention on Independent Guaratees and Stanby Letters of Credit, 11 December 1995

III. Others

Uniform Customs and Practice for Documentary Credits, publ. 600 (ICC.Publication, 2007)

Standard Banking Practice for the Examination of Documents under Documentary Credits (ICC Publication, 2007) Official comment of article 5-109 UCC in Baird D, Eisenberg T, Jackson T (comp), Commercial and Debtor-Creditor Law. Selected Statutes (Foundation Press 2002)

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C. Secondary sources

I. Books Bertrams R, Bank guarantees in International Trade (Kluwer 2004) Caprioli E, Le crédit documentaire: évolution et perspectives (Litec 1992) De Gottrau N, Le crédit documentaire et la fraude (Bruylant 1999) Dieryck A, Les ouvertures de crédit (Bruylant 1945) Goode R, Commercial Law (4th edn, Penguin 2009) Guest A, Benjamin's Sale of Goods (6th edn, Sweet & Maxwell 2002) Enonchong N, The independence principle of letters of credit and demand guarantees (OUP 2011) -- --, Duress, undue influence and Unconscionable Dealing (Sweet &Maxwell 2006) -- --, Illegal Transactions (Lloyds of London Press 1998) Jack R, Documentary Credits (Butterworths 1991) T’Kint F, Sûreté et principes généraux du droit de poursuite des créanciers (Larcier 2004) Maeyart P, Juridische aspecten bij exprtfinanciering foor middel van documentaire kredieten in het licht van de laatste herziening van de U.C.P., (Die Keure 1987) Malek A and Quest D, Jack J, Documentary Credits (4th edn, Tottel Publishing 2009) Mattout JP, Droit bancaire international (3rd edn, Paris Banque 2004) Pierce A, Demand Guarantees in International Trade (Sweet & Maxwell 1993) Rives-Lange JL and Contamine-Raynaud M, Droit bancaire (5th edn, Dalloz 1990) Romain JF, Théorie critique du principe général de bonne foi en droit privé (Bruylant 2000) Tevini Du Pasquier S, Le crédit documentaire en droit suisse: droits et obligations de la banque mandataire et assignée (Helbing & Lichtenhahn, 1990) Van Ryn J and Heenen J, Principes de droit commercial, vol 4 (Bruylant 1988)

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II. Contributions to edited books Buckley R, ‘Law’s Boundaries and the Challenge of Illegality’ in Buckley R (ed), Legal Structures (Chancery Wiley Law publications 1996) Dehouck C, ‘Les conséquences de la fraude dans le crédit documentaire à paiement différé en cas de paiement avant l’échéance par la banque confirmante’ in Tilleman B (ed) Droits des contrats : France, Suisse, Belgique (De Boeck & Larcier 2006) Delierneux M, ‘Crédits documentaires : droit applicable, tribunaux compétents et valeur normative des Règles et usances codifiées par la Chambre de commerce internationale’ documentaire’ in André Dumont AP and others, Le crédit documentaire (Anthémis 2010) Doise D and Mayer V, ‘Section IV : Le crédit documentaire’ in Lamy Contrats internationaux (Lamy 2001) Doise D, ‘Les fraudes et dérives du crédit documentaire’ in André Dumont AP and others, Le crédit documentaire (Anthémis 2010) Ellinger E ‘Documentary Credits and Fraudulent Documents’ in Chinkin C, Davidson R, Ricquier W, Current Problems of International Trade Financing (Butterworths 1983) Goode R, ‘Abstract Payment Undertakings’ in Cane P and Stapleton J (eds), Essays for Patrick Atiyah (Clarendon 1991) Landry G, ‘L’autonomie du crédit documentaire : RUU 500, droit anglais et droit suisse’ in Tilleman B (ed) Droits des contrats : France, Suisse, Belgique (De Boeck & Larcier 2006) Mattout JP, ‘Les nouvelles Règles et usances 600 de la C.C.I. relatives aux crédits documentaires’ in André Dumont AP and others, Le crédit documentaire (Anthémis 2010) III. Articles Adodo E, ‘The legal effect of nomination under the new UCP 600’ (2008) 23(4) JIBLR 231 -- -- ‘A presentee bank’s duty when examining a tender of documents under the Uniform Customs and Practice for Documentary Credits 600’ (2009) 24(11) JIBLR 566 Affaki G, ‘Le nouveau droit des crédits documentaires : les règles et usances 600’ (2007) 112 Banque et droit 3 Aharoni D, ‘Fraud and discounted deferred payment documentary credits: the Banco Santander case’ (2000) 15(1) JIBL 22 Ann Connery N, ‘Letters of credit in real estate transactions’ (2007) 539 PLI/Real 651 Arkins J, ‘Swow White v Frost White: the new clod war in banking law’ (2000) 15 JIBL 31 Arora A, ‘Fraud and forgery in commercial documentary credits’ (1983) 9 Com L Bull 271

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-- --, ‘Round up: banking law’ (2000) 21 (8) Comp Law 2000 234 Baert F, ‘De geode trouw bij de uitvoering van overeenkomsten’ (1956-57) RW 489 Baggs C, ‘Letters of credit – knowledge of fraud’ (1993) 8(11) JIBL 216 Barnett M, ‘International trade finance - letters of credit, UCP 600 and examination of documents’ (2007) 22(12) JIBLR 660 Barr WR, ‘Cause of Action by Beneficiary against Bank for Wrongful Dishonor of Draft or Demand for Payment under Letter of Credit’ (2010) 6 COA 337 Baxt R, ‘A Bombshell on Unconscionable Conduct’ (1997) 25 Austl Bus L Rev 227 Berckmans J, ‘Documentair kredit met uitgestelde betaling : bedenkingen van een practicus bij en recent vonnis van het Hod ban Beroep te Parijs’ (1986) Rev Banque 45 Buckley R, ‘Unconscionability Amok, or Two Readily Distinguishable Cases?’ (1998) 26 Austl Bus L Rev 323 Buyle JP and Willems A, ‘Les usages en droit bancaire’ (1990) DAOR 76 Caprioli E, ‘La loi applicable aux contrats de crédits documentaires, approche de droit comparé’ (1991) RDAI 905 Chatterjee C, ‘Letters of credit transactions and discrepant documents: an analysis of the judicial guidelines developed by the English courts’ (1996) 11(12) JIBL 510 Chin L and Wong Y, ‘Autonomy A Nullity Exception at Last?’ (2004) LMCLQ 14 Coltoff JD P, ‘XIX. Letters of Credit A. General Considerations, Independent nature of letter’ 10 C.J.S. Bills and Notes § 400 De Marez D, ‘De beoordeling van het beroep op een bankgarantie op eerste verzoek’ (2000) AJT 319 -- -- ‘Garantieformalisme als eerste maatstaf bij de beoordeling van een beroep op een bankgarantie en de toepassing van deze regel bij de beoordeling van een “extend or pay” verzoek’ (2000) DAOR 304 Debattista C, 'Performance Bonds and Letters of Credit: A Cracked Mirror Image' (1997) JBL 289 Delierneux M, ‘Les Règles et Usances Uniformes de la CCI relatives aux crédits documentaires irrévocables, version 2007 – (RUU 600)’ (2008) 1 RDC 3 -- --, ‘La fraude et le crédit documentaire : qui supporte le risque ?’ (2010) 4 Dr banc fin 259

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Delierneux M and Centner C, ‘Les nouvelles Règles Uniformes de la CCI applicables aux garanties sur demande (URDG 758) sur un nouvel instrument à intégrer dans la pratique belge des garanties’ (2010) 3 RDC 215 Doise D, ‘La révision 2007 des règles et usances uniformes relatives aux crédits documentaires (RUU 600)’ (2007) 1 RDAI 106 Donnelly K, ‘Nothing for nothing: a nullity exception in letters of credit’ (2008) 4 JBL 316 Ellinger EP, ‘Development in banking law’ (2000) JBL 618 Enonchong N, ‘The Autonomy Principle of Letters of credit: an Illegality exception ?’ (2006) LMCLQ 404 Fedotov A, ‘Abuse, unconsiobaility and demand guarantees: new exception to independence’ (2008) 11 Int'l Trade & Bus L Rev 49 Frias Garcia R, ‘The autonomy Principle of letters of credit’ (2010) 3 MLR 67 Ganshof Van Der Meersch W, ‘Propos sur le texte de la loi et les principes généraux du droit’ (1970) JT 594 Hendrick Van Lier M ‘ Les garanties dites à première demande ou abstraites’ (1980) JT 345 Hooley R, ‘Fraud and letters of credit; is there a nullity exception?’(2002) 61(2) CLJ 279 Hwaidi M, The implications of Banco Santander SA v Bayfern Ltd on deferred payment under documentary credit in UCP 600 (2011) 5 IBLJ 569 Ippoliti M, ‘Letters of credit: have we fully recovered from three insolvency shocks?’ (1987) 9 U Pa J Int’l Bus L 595 Isaacs M and Barnett M, ‘International trade finance – letters of credit, UCP 600 and examination of documents’ (2007) 22(12) JIBLR 660 Johns R, ‘Fairness at the expense of commercial certainty: the international emergence of unconscionability and illegality as exceptions to the independence principle of letters of credit and bank guarantees’ (2011) 31 NILULR 297 Kawan K, ‘La fraude dans le crédit documentaire : Confusion ou Cohésion ?’ (1991) 6 RDAI 797 Kozolchyk C, ‘The immunization of Fraudulently Procured Letter of Credit Acceptances : All Services Exportacao Comercia SA v Banco Bamerindus Do Brazil SA and First Commercial Bank v Gotham Originals’ (1992) 58 Brooklyn L Rev 369 Leacock S, ‘Fraud in the international transaction: enjoining payment of letters of credit in international transactions’ 17 Vand J Transnat'l L 885 Loi K, ‘Two decades of restraining unconscionable calls on performance guarantees’ (2011) 23 SAcLJ 504

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Martin C, ‘Le crédit documentaire, la fraude et la révision 1983 des RUU’ (1985) RDAI 371 McLaughlin G, ‘Letters of Credit and Illegal Contracts: The Limits of the Independence Principle’ (1989) 49 OHIO ST LJ 1197 -- --, ‘Standby Letters of Credit and Guaranties: An Exercise in Cartography’ (1993) 34 Wm & Mary L Rev 1139 Michael A and Disabatino JD, ‘What constitutes fraud or forgery justifying refusal to honor, or injunction against honouring, letter of credit under UCC §5-114(1)(2)’ (1983) 25 ALR 4th 239 Mugasha A, ‘Enjoining the Beneficiary’s Claim on a Letter of Credit or Bank Guarantee’ (2004) 5 JBL 515 Myers R, ‘Uniform commercial Code. Article 5. Letters of credit’ MCF UCC 5 Intro Neo D, ‘A Nullity Exception in Letter of Credit Transactions’ (2004) Singapore Journal of Legal Studies 46 Paterson S, ‘Fraud and documentary credits’ (2001) 16(2) JIBL 37 Romain JF, ‘La fraude et l’abus manifeste dans les garanties bancaires autonomes : persistance ou transformation des concepts de droit commun dans la jurisprudence internationale, en particulier française et belge’ (2002) Dr banc fin 28 Rives-Lange JL, ‘Note sous Cass 7 avril 1987’ (1987) Banque 625 Rotondi M, ‘Le rôle et la notion de l’abus de droit’ (1980) RTDC 66 Simont L, ‘Les garanties indépendantes’ (1983) Rev Banque 591 -- --, ‘Misbruik bij documentair kredit’ (1986) TPR 71 Shearman & Sterling LLP, ‘Fortis Bank SA/NV v Indian Overseas Bank: letters of credit - discrepant documents’ (2010) 25 (6) JIBLR 60 -- --, ‘Letters of credit - discrepant documents’ (2012) 27(2) JIBLR 42 Smith G W, Irrevocable Letters of Credit and Third Party Fraud: The American Accord (1983) 24 Va J Int’l L 55 Stoufflet J, ‘Note sous Paris 30 avril 1985 et Paris 28 mai 1985’ (1986) Dalloz 199 Stowe H, ‘The « Unruly House » has Bolted’ (1994) 57 MLR 441 Takahashi K, ‘The introduction of Article 12(b) in the UCP 600: was it really a step forward?’ (2009) 24(6) JIBLR 285

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Van Der Haegen M, Le principe de l’inopposabilité des exceptions dans le crédit documentaire irrévocable (1986) 7 RDAI 721 Van Ommeslaghe P, ‘L’exécution de bonne foi, principe général de droit ?’ (1987) RGDC 103 Vasseur M, ‘Réflexions sur le crédit documentaire à paiement différé, à la suite des arrêts de la cour de Paris des 30 avril et 28 mai 1985, comparés à la jurisprudence suisse, allemande et italienne’ (1987) 57 Dalloz 63 Williams M, ‘Documentary credits and fraud: English and Chinese law compared’ (2004) JBL 155 Zillman E, ‘A Further Erosion Into Bank Guarantees?’ (1997) 13 BLDG & CONSTR L 354 IV Thesis Anna-Georgia P, ‘La fraude dans le crédit documentaire’ (DEA Droit des Affaires, Université Robert Schuman 2004) Chagnon R, ‘La fraude dans le crédit documentaire’ (Mémoire de maîtrise, Université de Montréal 1995) Miadana Rakotonanahary S, ‘La fraude et la dématérialisation du crédit documentaire’ (Mémoire de maîtrise, Université de Montréal 2005) Longwa Kayembe G, ‘The fraud exception in bank guarantee’ (LLM dissertation, University of Cape Town 2008) Zsuzsanna T, ‘Documentary credits in international commercial transactions with special focus on the fraud rule’ (Thesis, Athens 2006)