Banking law

Letters of creditMontrod Limited v (1) Grundkotter Fleischvertreibs GMBH (2) Standard Chartered Bank [2001] UKCA Civ 1954 In this case, the relevant letter of credit was expressed to be subject to the Uniform Customs and Practice for Documentary Credits (International Chamber of Commerce Publications 500).

Standard Chartered Bank was the issuing bank and credit was payable by the issuing bank '45 days sight' on presentation by the seller/beneficiary of various documents, including certificates of inspection issued and signed by the credit applicant.

The purchaser purported to authorise the seller/beneficiary to sign the certificates of inspection on behalf of the credit applicant.

The seller/beneficiary did not know that the purchaser was not entitled to authorise them to sign the certificates of inspection on behalf of the credit applicant.

The seller/beneficiary dispatched the goods to the purchaser and signed inspection certificates, purportedly on behalf of the credit applicant.

The seller/beneficiary duly presented documents under the credit to the issuing bank, which accepted the documents as conforming with the credit.

Prior to payment, the issuing bank was informed that the certificates were not issued by or with the authority of the credit applicant.

The issue for determination in this case was whether a beneficiary of a letter of credit, who was responsible for a bona fide presentation of a false document, was entitled to payment once he became aware of the falsity and/or unauthorised nature of the document that he had presented.

The principle of autonomy of letters of credit is well established in English law.

The principle recognises that it is of the utmost importance that the obligation of a bank to make payment under a letter of credit is independent from any obligations arising out of the underlying sale transaction.

The principle is not absolute.

However, no 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 or the person seeking payment.

It was accepted on appeal that the seller/beneficiary had not been fraudulent.

However, the credit applicant sought to argue that the law ought to be developed to allow an issuing bank to refuse payment if, at the time of presentation, the document presented was a nullity, even though the seller/beneficiary was unaware of this fact at the time of presentation.The Court of Appeal held that there was no general nullity exception to the autonomy principle.

The fraud exception to the autonomy principle was limited to circumstances where the party demanding payment was fraudulent or had knowledge of the fraud at the time of the presentation of documentation.

The principle was not to be extended to circumstances where the document was 'fraudulent in itself, independently of the knowledge and bona fides of the demanding parties'.

However, the court appeared to leave the door open to the possibility that actions of a beneficiary that fell short of fraud, such as recklessness, haste or blameworthy conduct, could in certain circumstances justify a refusal to make payment against conforming documentation.

In rejecting the notion of a general nullity exception, the Court of Appeal has re-emphasised the overall sanctity of the principle of autonomy, subject to the rule that fraud unravels everything.

In so doing, the certainty that is required by the business community in relation to payment obligations under letters of credit has been reaffirmed.

From a bank's perspective, the judgment in this case obviates the need to carry out time-consuming, expensive and possibly inconclusive investigations into the prospective nullity of a document presented to them by a beneficiary.

The judgment also provides beneficiaries with a degree of protection because the creation of a general nullity exception could prejudice a bona fide beneficiary who, having shipped his goods, could find that through no fault of his own his security of payment had been vitiated.

This in turn would 'undermine the system of financing international trade by means of documentary credits'.

Finally, the creation of such a common law exception would run contrary to the intended protection offered to a beneficiary under the UCP 500.

Uncertainty remains as to whether a bank is justified in refusing to make payment against documents complying on their face with the terms of the credit where a beneficiary, whose conduct fell short of fraud, was nevertheless reckless, hasty or blameworthy in the presentation of documents forged by a third party.

On a legal analysis, it was no doubt correct for the Court of Appeal to leave the door open to such a possibility.

From a seller/beneficiary's point of view and from the point of view of issuing banks, it would have been helpful if the Court of Appeal had, even on an obiter basis, ventured an opinion on the answer to this potential problem.

From a practical point of view, the chances of such activity being detected prior to presentation and payment are relatively slim.

A bank has no obligation to investigate the existence of fraud but is only required to consider the evidence of any fraud brought to its attention.

It follows that there is no reason to think that the position would change in relation to the reckless, hasty or blameworthy behaviour of a beneficiary.

However, upon being presented with evidence of such behaviour, a bank would be best advised to seek the declaratory assistance of the court.

By Simon Sugar, barrister, 36 Bedford Row, London