Topics: Independence Principle; Fraud; Structured Transactions

Note: Bank Awal (Issuing Bank) issued a US$40 million commercial LC at the request of its parent company, Al Gosaibi Trading and Services Co. (Applicant), payable to Bunge, S.A. (Beneficiary) for the shipment of maize and soybeans from Brazil to Spain. ADIB (Confirming Bank) added its confirmation to the LC for a fee of US$500,000. Fortis Bank (Negotiating Bank) negotiated drafts and paid Beneficiary upon the presentation of documents, which were "acceptable" "as presented" notwithstanding "any and all discrepancies" including typing mistakes and late presentation.

The LC stated that Confirming Bank would reimburse Negotiating Bank 360 days after negotiation of the drafts of "credit complying documents," which Negotiating Bank was to forward directly to Issuing Bank. When Confirming Bank refused to reimburse Negotiating Bank as agreed,

Negotiating Bank sued Confirming Bank in New York state court, requesting the attachment of Confirming Bank's funds located in New York Banks. Negotiating Bank moved for summary judgment, but the court stayed its decision pending discovery. After arduous discovery proceedings, Negotiating Bank renewed its motion for summary judgment, which the New York Supreme Court, Schweitzer, J., granted, ordering Confirming Bank to reimburse Negotiating Bank US$40 million plus 9% statutory interest dated from the day of default.

Confirming Bank had raised the defense of LC fraud, alleging that Negotiating Bank knew or should have known that the entire LC arrangement was a structured transaction designed to provide financing to Applicant, and that no underlying sale of goods existed. Confirming Bank had also moved to compel negotiating bank to release the purported "creditcomplying" documents it had examined and forwarded to Issuing Bank. The judge denied this motion.

The Judge stated that the independence principle protects Negotiating Bank absent a clear showing of fraud in the transaction. Not only was the evidence of fraud weak, other evidence indicated that Confirming Bank was fully aware that the transaction was structured before it added its confirmation. In any case, the use of a Letter of Credit that is structured as a trade financing may be unusual or novel, but is not fraudulent particularly when the parties are aware of the fact.



The views expressed in this Case Summary are those of the Institute of International Banking Law and Practice and not necessarily those of ICC or the other partners in DC-PRO.