Factual Summary: To pay for a shipment of steel, two LCs were issued by two different banks. The first LC was issued for US$ 1,200,000, and the second LC was issued for $157,000,000. Documents for both LCs were presented, and the nominated bank paid the beneficiary.

When the documents were forwarded to the first and second issuers, they rejected the documents, however, alleging that they were not in compliance with the terms of the LCs. The nominated bank commenced an action in the Commercial Court against the first and second issuers for wrongful dishonor and against the applicant because of allegations that the applicant had caused the dishonor of the LCs. The nominated bank contended that the dishonor of the documents was for "spurious" discrepancies and perhaps the result of applicant's desire to renege on the contract due to a price drop in the steel market. However, following expert testimony that the certificate of origin was discrepant, the nominated bank chose to discontinue the action against issuers and settled with applicant whereby applicant would take delivery the goods at a discount price.

The nominated bank then sued the beneficiary for the deficiency on a theory of deceit, claiming damages of approximately $500,000, which was the difference between moneys paid under the LCs and the nominated bank's recovery made from applicant in the settlement and approximately UK£162,000 paid in legal fees from the first action against the issuers and applicant.

Legal Analysis:

1. Fraud: Fraud does not require proof of dishonesty. Instead, the requirements necessary to prove fraud are the state of mind and knowledge of the person making the false statement, reliance upon those statements, and damages resulting from those statements. In this case, the only question was whether the perpetrator's state of mind at the time when the false statement was made was deceitful.

The certificates of origin were a "photocopy of the white originals [and] unstamped, undated and unissued certificates." The beneficiary's employee testified that the letters of credit called for a "nonnegotiable" document and any "copy document, whether signed or not" would constitute a "nonnegotiable" document. The beneficiary further contended that there "were other people who subscribed to the same view of what non-negotiable meant", and that it was usual practice to supply "unstamped and unsigned copies". In rejecting the beneficiary's argument, the court inferred from the testimony of the beneficiary's employee that the original Russian certificates of origin had not arrived at the time the documents were sent, for which the documents sent were discrepant.

The court found that the beneficiary's employee was fully aware that the "Beneficiary's Certificate" contained a false statement, for which the beneficiary was liable for deceit.


The result is proper. The rationale is troublesome. The only question is whether the documents are those indicated in the LC. If not, the motive or culpability of the beneficiary is irrelevant. The issuer's undertaking is only to pay against genuine documents. The negotiating bank's purchase was similar. It does not, as between itself and the beneficiary, assume the risk of non-genuine documents.



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.