Article

Factual Summary: Beneficiary/Seller entered into a contract for the purchase of laetrile for US$362,600. Buyer caused Bank to issue an LC for US$191,000 in favor of Beneficiary/Seller. Maturity date of LC was 21 March 1997 while the goods under the LC were 100 tons of laetrile, permitting an allowance of 10%. Latest shipment date was 28 February 1997.

After the latest date for shipment, Beneficiary submitted all required documents to Intermediary Bank for negotiation. The bill of lading was backdated. The next day, Applicant sent a telefax to Issuer, alleging that the bill of lading was fraudulent and instructing Issuer not to make the payment. Issuer subsequently sent a letter to Intermediary Bank concerning the alleged fraud.

Applicant made several phone calls to Intermediary Bank, requesting it keep the documents and refrain from making payment. Applicant informed the transportation company that the bill of lading was fraudulent and they reserved the right to claim damages. Beneficiary subsequently sent a telex to Applicant, explaining its motive for backdating the bill of lading. Beneficiary alleged that Applicant agreed to the delayed shipment of the goods. As a result, they Beneficiary expected Issuer to accept the documents and make payment.

Subsequently, Beneficiary submitted a Letter of Indemnity from a representative of Applicant to Intermediary Bank which then contacted Issuer, stating that Beneficiary had submitted evidence to prove that Applicant had agreed to the delayed date of shipment and they had examined the required documents under the LC. Intermediary Bank then sent the documents to Issuer claiming payment. Issuer refused and returned all documents. Beneficiary then sued Issuer for wrongful dishonor. The trial court entered judgment for Beneficiary.

Legal Analysis:

1. Whether Applicant Had Accepted the Backdated Bill of Lading: Based on forensic analysis of handwriting contained on the Letter of Indemnity submitted by Carrier, it was ascertained that the Letter of Indemnity was signed by Applicant's representative. Court determined that Applicant's consent to the backdated bill of lading was obtained.

2. Intention of Fraud by Beneficiary: The court determined that the actions of Beneficiary did not constitute fraud. Thus, the fraud exception principle did not apply to this case. The aim of the fraud exception principle is to prevent the Beneficiary/Seller from taking advantage of the consistency on the face between required documents and the LC to defraud Applicant/Buyer. Because the delayed date of shipment was agreed to by Applicant/Buyer, Beneficiary's actions shall not be regarded as fraud. Under the sales contract, Seller had truly and accurately performed its obligations by delivering goods to the Carrier. Thus, Beneficiary neither had fraudulent intent nor engaged in any act of fraud. There was no legal basis for Issuer to refuse payment by alleging application of the fraud exception principle. The LC transaction is independent from the underlying contract therefore Issuer must make its judgment solely on the basis of the required documents. In this case, Issuer shall make the payment under the LC plus interest.

Comment by Jin Saibo: This is one of the rare cases where an issuer is obligated to make payment despite the fact that the bill of lading has been backdated. It clarifies that the backdating of bill of lading does not automatically give an issuer the right to dishonor.

Editor's Comment: Because the Applicant and Beneficiary between themselves cannot alter the issuer's obligation without its consent, it may be asked whether the Issuer undertook to pay against a backdated B/L. The emphasis on "fraud" is mistaken in this situation. The issue is whether a backdated B/ L is fraudulent. If so, the issuer and "intent" makes no undertaking to honor such a document regardless of what was agreed to between applicant and beneficiary.

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* Jin Saibo's email address is jinsaibo@zhonglun.com.

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