Article

Factual Summary:

A nominated advising bank added its confirmation to an LC without authorization. The silent confirmer had previously brought an unsuccessful action for wrongful dishonor against the issuer which was dismissed.

When the silent confirmer learned that the documents were in fact fraudulent, it discontinued its action against the issuer and brought this action against the beneficiary. The silent confirmer alleged that the beneficiary was liable for the documents. However, the court dismissed the silent confirmer's claim.

Legal Analysis:

1. Forged Documents: The silent confirmer alleged that the beneficiary had knowingly presented forged documents because "the Health Certificate which purported to emanate from the Municipal Corporation of Greater Bombay was in fact not issued by that Corporation ... ." It also claimed that the bill of lading was antedated, stating that it "was dated 22 January 1996, when, in truth, the loading of the cargo commenced only on 4 February 1996 ... ."

The beneficiary at first denied that there were discrepancies in the presentation documents. However, in court, when the beneficiary's agent was questioned, she accepted the claims of the silent confirmer, but stated that there had been no reason to believe that the Health Certificate was forged or that the bill of lading was antedated. The court accepted the beneficiary's proposition that it had innocently presented fraudulent documents with no reason to believe them to be erred, and therefore dismissed with costs the silent confirmer's claim.

2. UCP500 Article 14(a): The silent confirmer argued that they were entitled to recover moneys wrongly paid for forged documents, even though the beneficiary was unaware that the documents were fraudulent.

In rejecting this argument, the court relied on UCP500 Article 14(a). The judge stated, "If the bank is a 'nominated bank' under the UCP500, it is entitled under art 14.a to reimbursement from the party giving it authority to pay. This is provided, of course, that the paying bank has exercised reasonable care in examining the documents to it before paying on them (art. 13.a). Where a paying bank fails to exercise such care it may be unable to claim reimbursement for moneys paid out on the forged documents, but in those cases the bank has only itself to blame. Obviously, the paying bank may also seek to recover the moneys from the perpetrator of the fraud, if he can be identified and located."

In this case however, the silent confirmer was unable to recover because the beneficiary was unaware of any problems within the documents, and because the perpetrators of the fraud were not identified. Therefore, the court found the silent confirmer's case to be beyond the scope of UCP500 Article 14(a), and barred their recovery of the moneys.

Comment:

The result in this case is most troubling. It is based on the proposition that the bank is only entitled to recover from the beneficiary if the beneficiary has knowledge of the fraudulent character of the documents. Because it did not, the silent confirmer is unable to recover its payment from the beneficiary.

This result turns LC practice on its head. The LC undertaking is certainly independent from the underlying transaction and the issuer may not refuse to pay based on disputes related to that transaction. It may, however, refuse to pay if it is able to prove fraud. Similarly, it could properly refuse to pay if it could prove that a required document was fraudulent regardless of whether or not the beneficiary was the source of the fraud. The fraud at issue is whether or not the documents are genuine and not the subjective state of intent of the beneficiary. Unlike the applicant, the issuer undertakes to pay against genuine documents and may refuse documents that are not genuine.

If the issuer innocently pays and forwards documents that are not genuine, the applicant must assume the risk that they are not genuine. Or the issuer can require that the beneficiary return the proceeds. To require the beneficiary to repay funds paid against fraudulent documents does not undermine the finality of the credit any more than granting injunctive relief against payment.

What the court misunderstands is the nature of the issuer's undertaking. It is to pay against genuine documents that comply on their face with the terms and conditions of the credit. It is not necessary, as have some, to posit a warranty of genuineness running from the beneficiary to the issuer (or nominated negotiating bank). With respect to LC law, resort to theories based on the law of bilateral contracts is not usually helpful. The theoretical basis for recovery in such a situation is the expectation of the industry that the beneficiary may not retain the proceeds paid under a LC for documents that are fraudulent.

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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.