Lloyd's Maritime and Commercial Law Quarterly
Presenters immune from the fraud rule in the law of letters of credit
Xiang Gao *
This article examines the international experience in respect of the parties who should be immune from the fraud rule in the law governing letters of credit. It establishes that four parties should be immune from the fraud rule: (1) a confirmer that has honoured its confirmation in good faith and in accordance with the terms and conditions of the letter of credit; (2) a nominated person that has given value in accordance with the terms and conditions of the letter of credit and without notice of the fraud; (3) a holder in due course under a negotiation credit; and (4) the transferee of a transferable letter of credit without notice of the fraud committed by the transferor.
1. INTRODUCTION
The fraud rule in the law governing letters of credit is widely recognized in many countries.1
So far the most comprehensive document embodying the fraud rule in the world is s. 5–109 of the revised Art. 5 of the Uniform Commercial Code (UCC)2
in the US, which reads:
* Executive Editor, Guide and Study on China’s Foreign-related Commercial and Maritime Trials,
the Supreme People’s Court of the People’s Republic of China; Fellow, Tim Fisher Centre for Global Trade and Finance, Bond University, Australia. This article comprises part of the research undertaken in the Faculty of Law at the University of New South Wales towards the degree of PhD. The author would like to express his sincere thanks to Mr Ian Cameron of the University of New South Wales and Professor Ross Buckley of Bond University for their thoughtful comments on the earlier drafts of the article. All opinions and responsibilities are mine, however.
1. The leading case recognizing the fraud rule is the US case Sztejn
v. J.Henry Schroder Banking Corp.
(1941) 31 NYS 2d 631. For a UK case recognizing the fraud rule, see United City Merchants
v. Royal Bank of Canada (The American Accord)
[1983] A.C. 168; [1982] 1 Lloyd’s Rep. 1; rvsg [1982] Q.B. 208; [1981] 1 Lloyd’s Rep. 604 (C.A.); rvsg
[1979] 1 Lloyd’s Rep. 267 (Mocatta, J.) and aff’g
[1979] 2 Lloyd’s Rep. 498 (Mocatta, J.). For an Australian case recognizing the fraud rule, see Contronic Distributors Pty Ltd
v. Bank of New South Wales
[1984] 3 N.S.W.L.R. 110. For a Canadian case recognizing the fraud rule, see Bank of Nova Scotia v. Angelica-Whitewear Ltd
(1987) 36 DLR (4th) 161.
2. The UCC is a collection of model statutes drafted and recommended by the National Conference of Commissioners of Uniform State Laws and the American Law Institute for enactment by the legislatures of the States of the United States. It consists of 11 different Articles, each covering a different aspect of commercial law. UCC, Art. 5 is a uniform statutory scheme governing letters of credit. When UCC, Art. 5 was first promulgated, the fraud rule was embodied in s. 5–114(2), reading:
“(2) Unless otherwise agreed when documents appear on their face to comply with the terms of the credit but a required document…is forged or fraudulent or there is fraud in the transaction:
- (a) the issuer must honour the draft or demand for payment if honour is demanded by a negotiating bank or other holder of the draft or demand which has taken the draft or demand under the credit and under circumstances which would make it a holder in due course (Section 3–302) and in an appropriate case would make it a person to whom a document of title has been duly negotiated (Section 7–502) or a bona fide purchaser of certificated security (Section 8–302); and
- (b) in all other cases as against its customer, an issuer acting in good faith may honour the draft or demand for payment despite notification from the customer of fraud, forgery or other defect not apparent on the face of the documents but a court of appropriate jurisdiction may enjoin such honour.”
UCC, Art. 5 was thoroughly revised in 1995. Now the fraud rule is provided in s. 5409. Hereinafter the original UCC, Art. 5 will be referred to as “Prior UCC Art. 5”, and the revised UCC Art. 5 as “Revised UCC Art. 5”.
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