Redescribir

3.2.2.1 Genuine documents: a pre-requisite to the autonomy principle

At the beginning of his judgment, Justice Shientag stressed the significance of the autonomy principle in a way which made Chartered Bank believes that it would succeed in the case.15 Justice Shientag observed that without the autonomy principle the efficiency needed in letters of credit would be undermined. To that effect, he noted that banks should not be obliged to look behind the required documents and that such an approach if allowed would embroil banks in controversies which they are ill equipped to deal with.16 Nevertheless, he found that there is a pre-requisite which a documentary letter of credit beneficiary has to discharge in order to be appropriately covered under the autonomy principle umbrella. In this regard he provided that:

“…Of course, the application of this doctrine [the autonomy principle]

presupposes that the documents accompanying the draft are genuine and conform in terms to the requirements of the letter of credit”.17

He underpinned the latter dictum by citing a statement from Old Colony Trust Co. v.

Lawyers Title and Trust Co18 which reads as follows:

14 _Ibid. 15 _{Ibid at 721} 16

According to Jack QC, in Montrod Limited v. Grundkotter Fleischvertriebs GmbH [2001] C.L.C. 466 at 477: “…a bank is entitled to go behind the appearance and to take account of other information to say that the document is not what it appears to be and to refuse to pay, but if it chooses to go by the appearance alone and to pay, it is entitled to be reimbursed”. See as well: Commercial Banking Co of Sydney Ltd v Jalsard Pty Ltd [1973] AC 279 at 286

17

Sztejn American case v. J. Henry Schroder Banking Corp 177 Misc. 719, 31 N.Y.S.2d 631 (1941) at p. 721 [Emphasis added]

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“…obviously, when the issuer of a letter of credit knows that a document,

although correct in form, is, in point of fact, false or illegal, he cannot be called upon to recognise such a document as complying with the terms of credit…”.19

The last two quotations, where Justice Shientag evaluated the documents’ significance in a documentary credit transaction, are interesting. He found that a bank which knows that a certain document presented by a beneficiary is not genuine, in the sense that it includes a point of fact which is false, although correct in form and facially conforming to the documentary credit terms, has to refuse such a document on the basis of non-conformity with the credit terms. The question of who has perpetrated the falsity, whether the seller or a third party, or how it has been done, whether intentionally or innocently, or how material it is, whether it is trivial or significant, are issues that are of no relevance to the bank. In other words, whether the reason is a forgery, fraudulent misrepresentation or an unauthorised mistake resulting in the document being null, the bank would be justified in its refusal to pay. The bank’s obligation is to pay under genuine conforming documents and nothing other than that.20 Accordingly, it was submitted that a document being false in any respect will be refused by the bank without any further investigations.21 It is noteworthy that establishing any kind of fraud on the seller’s side at this stage is not required to justify the documents’ rejection.22

18 _{Old Colony Trust Co. v. Lawyers Title and Trust Co (1924) 297 F 152} 19

Ibid. at 155 [Emphasis added]. A complying presentation is defined by the UCP 600 in Article 2 as: “a presentation that is in accordance with the terms and conditions of the credit, the applicable provisions of these rules and international standard banking practice”.

20 _{Ellinger P. & Neo, D. “The Law and Practice of Documentary Letters of Credit” (Hart Publishing,}

Oxford, 2010) at p. 173; Bridge, M. “The International Sale of Goods” (Oxford University Press, 2nd

, ed., Oxford, 2007) at pp. 300-301; Arora, A. ‘Fraud and Forgery in Commercial Documentary Credits’ [1983] C.L.B. 9, 271 at p. 272; Arora, A. ‘False and Forged Documents under a Letter of Credit’ [1981] Co. Law Vol. 2(2), 66 at p. 67

21 _{Davis, A. “The Law Relating to Commercial Letters of credit” (The Pitman Press, 3}rd _{ed., London,}

1963) at p. 151

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Justice Shientag illustrated that genuinity of the documents precedes the application of the autonomy principle and that the question of whether the documents are genuine or not has nothing to do with the autonomy principle which separates the documents from the underlying transaction which they represent. Whilst the autonomy principle dictates that a bank should not look into the underlying transaction to determine if a document is truthful or not, the same principle does not deprive a bank of the right to refuse to pay when it knows that a certain document is not a genuine one.23 As can be inferred from the above quotations, genuinity is a pre-requisite for banks to accept the documents. Once the documents presented are seen as genuine and conforming to the documentary letter of credit terms, one can say that the autonomy principle has been activated to protect the beneficiaries.24 Goode has noted the conformity and genuinity pre-requisite and described it as a ‘threshold test’ to activate the autonomy principle. In his words:

“When the seller passed the threshold test by presenting documents which

do in fact conform to the undertaking, he is in a strong position, for it is

well established that the contract is independent of the underlying

transaction.”25

Having illustrated the genuinity point underlined in the Sztejn case, other aspects of the decision which comprise the fraud exception application are the substance of the discussion of the next subsection.

3.2.2.2. Fraud as an exception to the autonomy principle

A dispute regarding the genuinity of thedocuments in the Sztejn case cannot be found. The documents were genuine and conforming to the documentary credit terms and both the issuing and the collecting bank were unable to find any evidence of falsity or

23 _{Borrowdale, A. ‘The Autonomy Rule and Fraud Exception in Documentary Credits’ (1982) 99 S.}

African L.J. 136 at pp. 142-143

24 _Ibid. 25

Goode, R. “Abstract payment undertakings” in Cane, P. & Stapleton, J. (eds.) “Essays for Patrick Atiyah” (Oxford, 1991) 209 at p. 233 [Emphasis added]

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non-conformity in the documents. Documents presented to the bank although genuine and conforming in form were fraudulent in their substance as the fraud was existent in the goods. As one commentator noted:

“…it is not a difficult task to fabricate or forge these documents. Particularly with developing technology, every single person can fabricate an identical copy of a shipping document that is commonly used in trade, or they can buy one from related associations and fill it up according to their own wishes”.26

It is also possible that a beneficiary could obtain a document through a conspiracy with its own maker. It is submitted that fraud in the goods renders the documents fraudulent and vice-versa (i.e. a documentary credit stipulates for a bill of lading evidencing the shipment of petrol and the seller, although he has shipped water instead of petrol, submits the stipulated facially confirming bill of lading). Such fraud, related to the goods and consequently rendering the documents fraudulent, is difficult to examine by banks and accordingly they refuse to interfere and stop the payment process unless they are provided with soundly established evidence of the perpetrated fraud in order to justify its refusal when sued by a beneficiary.27 Even if the former were provided with that kind of proof, in practice banks fear getting embroiled with such controversies and consequently advise their customers to obtain a court’s injunction to stop the payment process.28 This can be seen from the facts of the Sztejn case which is an appropriate example of a fraud case.

Justice Shientag noted that, in situations such as the aforementioned, the sacrosanct autonomy principle which the beneficiary obtains even by submitting genuine documents should no longer be preserved to protect such fraudulent deeds. He noted

26 _{Demir-Araz, Y. “International Trade, Maritime Fraud and Documentary Credits” (2002) 4 Int. T.L.R.}

& R. 128 at p. 132

27 _{Sarna, L. “Letters of Credit: The Law and Current Practice” (Carswell Legal Publishers, 2}nd _ed.,

Toronto, 1986) at pp. 184-185

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that there are few exceptions to this rigid principle and that fraud is one of them.29 Whilst he observed the courts’ reluctance to interfere with the machinery of letters of credit and to act upon them in light of the underlying contract which led to their issuance, that did not prevent him from finding that:

“…there is overwhelming approval of the notion that the fraud of the

beneficiary in relation to the documentary evidence and the actual performance of his personal obligation should not go unpunished, or at

least, unnoticed insofar as payment upon the credit is concerned.”30

In considering the facts of the present case, he found for the plaintiffs on the basis of the fraud exception and as a result an injunction was granted.31 As a procedural requirement the allegations were considered as referring to established fraud.32 He, justifying the decision, noted that the case:

“is not…concerning a mere breach of warranty regarding the quality of

the merchandise; on the present motion, it must be assumed that the seller

has intentionally failed to ship any goods ordered by the buyer…the

principle of the independence of the bank’s obligation under the letter of credit should not be extended to protect the unscrupulous seller…No

hardship will be caused by permitting the bank to refuse payment where fraud is claimed, where the merchandise is not merely inferior in quality but consists of worthless rubbish”.33

This statement sets out two key principles in regard to documentary credits law. Firstly, a distinction was made between mere breaches of warranty (such as one regarding the quality of the merchandise) and situations where fraud has been perpetrated deliberately in order to deceive a documentary credit applicant. Indeed, it is true that if courts were allowed to interfere in situations concerning a breach of warranty, the effectiveness of documentary credit would be damaged. However, as

29

Sztejn v. J. Henry Schroder Banking Corp 177 Misc. 719, 31 N.Y.S.2d 631 (1941) at 721

30 _{Ibid. [Emphasis added]}

31 _{One can notice that the issuing bank did not assist the applicant to stop payment, rather, the applicant}

asked for a court injunction.

32 _{The fraud proof standard is considered in detail in chapter 6.} 33

Sztejn v. J. Henry Schroder Banking Corp 177 Misc. 719, 31 N.Y.S.2d 631 (1941) at 722 [Emphasis added]

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Justice Shientag observed “The distinction between a breach of warranty and active fraud on the part of the seller is supported by authority and reason”.34 The court had found, from the case’s particular facts, that the seller had ‘intentionally’ perpetrated the fraud.35 It is noteworthy that such a finding might not usually be available to courts and banks due to the short period between the demand and the payment of the documentary credit. Furthermore, proving a defendant’s intention or state of mind is an extremely difficult task. Consequently, it is submitted that the dictum delivered by Shientag J. regarding fraud is not confined to situations where fraud can be proved to be perpetrated ‘intentionally’; rather, the existence of this piece of evidence in this particular case was a coincidence which made the allegation more compelling. The second key principle is that, as a consequence of fraud, the autonomy principle should not in any way be extended to protect an unscrupulous seller. As has been stated “…while the autonomy principle is paramount, the abstraction of the credit may be diminished by an application of the fraud defence”.36

After illustrating the Sztejn case facts, one can notice the difference between genuinity as a pre-requisite before the autonomy principle is activated and fraud as an exception to obstruct the autonomy principle after it has been activated. Genuinity of the documents is a pre-requisite for payment to occur; however, fraud is an exception to the payment occurrence. In sum, as has been set out by the Sztejn case, fraud and non- genuinity are two different defences to payment in a letter of credit context. Having revealed the difference between genuinity (the pre-requisite) and fraud (the exception) in Sztejn, one might ask: have English courts adopted a similar approach? The

34 _Ibid.

35 _{English courts stipulated for fraud to be intentional in order to apply the fraud exception.} 36

Horowitz, D. “Letters of Credit and Demand Guarantees: Defences to Payment” (Oxford University Press, Oxford, 2010) at p. 18

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following sections will examine the related English authorities in this regard in order to answer this question.