Article

Factual Summary:A German company contracted to sell frozen pork to a Russian buyer. Payment was to be by LC. The letter of credit required presentation of a "[C]ertificate of Inspection issued and signed by the credit applicant at his discretion on the goods quality and quantity in good order before shipment." The LC named Montrod as the Applicant, although Ballaris, rather than Montrod, was the buyer of the goods covered by the LC. Montrod's bank agreed to reimburse Issuer; Montrod agreed to reimburse its bank; and, presumably, Ballaris agreed to reimburse Montrod. Montrod insisted that the LC call for a document that required Montrod's signature as a "locking" device. Unfortunately, the Beneficiary/ Seller, Grundkotter, dealt only with the buyer, Ballaris, who represented that it was authorized to sign the required certificate for the Applicant/Financer, Montrod.

Beneficiary delivered the goods to the buyer, obtained the required documents from the buyer, and, pursuant to the buyer's assurances of authority to do so, had one of Beneficiary's own employees sign Certificates of Inspection for Montrod. All parties agreed that the various sets of documents presented by Beneficiary to the banks (Commerzbank as nominated bank, Standard Chartered as issuing bank, and then Fibi Bank as Applicant's bank) appeared on their face to comply with the terms of the LC. Applicant gave notice that its signatures on the Certificates of Inspection were unauthorized and forged to Beneficiary, but apparently not before the last shipment or presentation of documents, and to its bank and the issuing bank, but apparently not before acceptance of the last set of documents were presented under the LC. The Russian buyer apparently failed to account to Applicant and disappeared.

None of the banks or other parties were ever enjoined against accepting facially complying documents. Applicant's efforts to obtain injunctive relief were made after all sets of documents had been presented to the nominated and issuing banks and were denied on the grounds that the evidence failed to show established fraud by the seller or notice of established fraud to issuing bank. Applicant continued to seek relief on the ground that the banks, including the issuing bank, could and should refuse to pay (either at sight or under an acceptance or deferred payment obligation owing to the beneficiary) against a document that on its face complies but is in fact a "nullity". Alternatively, Applicant argued that a beneficiary who obtains or presents such a document should not be able to insist on payment after it become aware of the documents falsity. The appeal was apparently limited to the "nullity" issue. The appellate court affirmed the trial court's holding that English law did not recognize any such nullity exception.

Legal Analysis:

1. Fraud; Nullity; UCP500: The trial judge's finding of "no fraud" by the Beneficiary/Seller (as distinguished from the buyer) was not appealed. The trial court also found no support for Applicant's argument that "there exists in parallel with the fraud exception a second exception covering documents which are nullities to the knowledge of the bank at the time of payment though beneficiary is innocent of any deception." This topic became the focus of the appeal. The appellate court noted that "in England, the fraud exception is part of the common law and that it is apt to apply despite the fact that UCP 500 makes no reference to, nor makes allowance for, such an exception." The court thus viewed the argument for recognizing a nullity exception as an argument for extending the fraud exception to cover "a document which is itself a nullity for reasons which are not known to the beneficiary or issuing bank at the time of presentation." The appellate opinion essentially rests on the lack of basis in English law or UCP500 for a "nullity" exception to the enforcement of LC obligations. "[N]o English court has yet held an issuing bank entitled to withhold payment under a letter of credit, against documents which on their face conform with the requirements of the credit, save on the ground of fraud of the beneficiary himself, or the person seeking payment."

2. Beneficiary Forgery: The appellate court addressed House of Lords precedent applicable to third party forgery of which the Beneficiary/Seller was ignorant at the time of presentation. "As I understand it, Lord Diplock was of the view that a seller/beneficiary who was ignorant of forgery by a third party of one of the documents presented, or of the fact that the document contained a representation false to the knowledge of the person who created it, should not be in a worse position than someone who has taken a draft drawn under a letter of credit in circumstances which rendered him a holder in due course. While he left open the position in relation to a forged document where the effect of the forgery was to render the document a 'nullity', there is nothing to suggest that he would have recognised any nullity exception as extending to a document which was not forged (i.e., fraudulently produced) but was signed by the creator in honest error as to his authority, nor do I consider that such an exception should be recognised."

3. Duty of Beneficiary to Applicant: Applicant also argued that Beneficiary owed negligence and agency law duties to Applicant with respect to signing Applicant's name to the Certificates of Inspection. These aspects of the case are not addressed here.

Comment:

1. This case would be differently analyzed in the U.S. The UCC, like English law, has long recognized that the "fraud" and "nullity" issues presented in this case are to be judged under applicable statutory and case law on the "fraud exception" and not under the UCP. To put it differently, the UCP states the general rules to which the fraud exception takes exception. However, unlike English law, the UCC treats fraudulent and forged documents as tainted without requiring a beneficiary's active wrongdoing. The UCC approach is to deter, prevent, and undo any benefit accruing to beneficiaries who present forged or fraudulent documents, as well as those who make a drawing that will consummate a fraud on the applicant or a bank, but also to protect nominated banks, holders in due course of accepted time drafts, and similarly situated assignees of deferred payment obligations. The beneficiary itself is not a protected party with respect to the documents it presents.

2. As noted at the outset of official comment 1 to revised UCC Section 5-109, " fraud must be found either in the documents or must have been committed by the beneficiary on the issuer or applicant." Accordingly, while U.S. courts might also have found that the beneficiary's honest belief when signing the Certificates of Inspection would defeat a claim of forged or fraudulent document within the meaning of Section 5-109, the focus would have been on that topic and not on the abstract "fraud" v. "nullity" topic. Under the UCC, beneficiary ignorance of the activities of a freight forwarder, carrier, warehouseman, document preparation company, transferee beneficiary, supplier, or the like is no defense for the 77 2002 LC CASE SUMMARIES beneficiary if those activities taint a required document with fraud or forgery. In this regard, U.S. case law has had less difficulty recognizing fraud claims based on a forged bill of lading or other tainted documents than on beneficiary "fraud in the transaction" or "fraud on the applicant".

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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.