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Revisiting the fraud exception: a critique of United City Merchants v Royal Bank of Canada 40 years on

Published online by Cambridge University Press:  11 July 2019

Katie Richards Open the ORCID record for Katie Richards [Opens in a new window]
Katie Richards*
Affiliation:
Cardiff School of Law and Politics, Cardiff University, Wales
*
*Author email: richardske1@cf.ac.uk
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Abstract

Much has changed in the four decades since United City Merchants v Royal Bank of Canada, in which Lord Diplock established the fraud exception in transactions financed by documentary credit. In particular, the introduction of the UCP 600, case law on nullity documents and amendment to the American fraud exception justify a reconsideration of both the policy arguments underpinning Lord Diplock's rule and the fate of documents known to be forged or null at the time of presentation. Accordingly, two arguments are made in this paper. First, a consideration of the broader exception in the US should prompt a modern Supreme Court to re-examine his Lordship's insistence that a narrow exception was required to preserve the efficiency of the credit mechanism. In addition, it further argues that banks should be entitled to reject known nullities and forgeries as non-complying. This argument would reinstate the doctrine of strict compliance, which was overlooked in United City Merchants, and is based on the clarified definitions in the UCP 600, more recent judicial consideration of nullities and the existence of the ICC's International Maritime Bureau.

Keywords

commercial lawdocumentary creditsfraud exception
Type
Research Article
Information
Legal Studies , Volume 39 , Issue 4 , December 2019 , pp. 656 - 675
Copyright
Copyright © The Society of Legal Scholars 2019 

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Footnotes

†

A version of this paper was first presented at the Society of Legal Scholars Conference (Dublin, 2017) and draws on my doctoral work. As such, thanks are due to my supervisors Professor James Davey and David Glass as well as the conference audience for their insightful questions. Particular thanks are also due to Professor Russell Sandberg, who commented extensively on earlier drafts, the anonymous reviewer for incredibly constructive comments, Dr Rachel Cahill-O'Callaghan for advice and enthusiastic support and writing guru Dr Melanie Smith. Responsibility for any errors lie with the author.

References

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2 Ellinger, EP ‘Fraud in documentary credit transactions’ [1981] JBL 258Google Scholar at 258; Todd, P Maritime Fraud & Piracy (Informa, 2nd edn, 2010)Google Scholar para [3.022].

3 Todd, above n 2, at para [4.058].

4 Ibid, at para [4.003].

5 United Nations Conference on Trade And Development ‘Documentary risk in commodity trade’ (1998) p 1: letters of credit supported trade worth US$100 billion/year and accounted for 60% of commodity sales; Beale, H (ed) Chitty on Contracts (Sweet & Maxwell, 32nd edn, 2015)Google Scholar para [34–446]; Mora, J and Powers, W ‘Global perspectives in the decline of trade finance’ in Chauffour, JP and Malouche, M (eds) Trade Finance during the Great Trade Collapse (The World Bank, 2011) p 128Google Scholar.

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11 United City Merchants (HL), above n 1.

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13 United City Merchants (HL), above n 1, at 7 per Lord Diplock.

14 Goode, above n 9.

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19 Mann, above n 18, at 2516–2517; Katz, above n 18, at 2556.

20 United City Merchants (HL), above n 1.

21 The parties’ contract was governed by International Chamber of Commerce ‘The Uniform Customs and Practice for Documentary Credits’ (1974 Revision, ICC Publication no 300). The current version is the UCP 600: International Chamber of Commerce ‘The Uniform Customs and Practice for Documentary Credits’ (2007 Revision, ICC Publication no 600) (hereafter UCP 600).

22 UCP 600, foreword.

23 UCP 600, foreword.

24 Todd, above n 2, para [4.021].

25 United City Merchants (HL), above n 1, at 6 per Lord Diplock.

26 Chitty, above n 5, para [34–447].

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28 United City Merchants (HL), above n 1, at 6, per Lord Diplock.

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30 Recognised in Beam Technology (MfG) Pte Ltd v Standard Chartered Bank [2002] SGCA 53 at [33]; Lorenzon, F ‘International trade and shipping documents’ in Baatz, Y (ed) Maritime Law (Informa, 4th edn, 2017) p 116Google Scholar.

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32 Sanders v Maclean (1883) 11 QBD 327.

33 Ibid, 343 per Bowen LJ.

34 Ibid, 343 per Bowen LJ.

35 United City Merchants (HL), above n 1, at 6 per Lord Diplock.

36 Ibid, at 6 per Lord Diplock.

37 UCP 600, Art 34.

38 Equitable Trust, above n 27, at 52 per Viscount Cave; Todd, P Bills of Lading and Bankers Documentary Credits (Informa, 4th edn, 2007)Google Scholar para [9.6].

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41 Mann, above n 18, at 2505; Moses, M ‘Letters of credit and the insolvent applicant: a recipe for bad faith dishonor’ (2005–2006) 57 Alabama Law Review 31Google Scholar at 47.

42 United City Merchants v Royal Bank of Canada (The American Accord) [1979] 1 Lloyd's Rep 267 at 278 per Mocatta J (hereafter United City Merchants (FI)), 273 per Mocatta J.

43 Ibid.

44 United City Merchants (HL), above n 1, at 6 per Lord Diplock.

45 Ibid.

46 Malek and Quest, above n 8, para [9.2].

47 United City Merchants (HL), above n 1, at 7 per Lord Diplock.

48 Edward Owen Engineering v Barclays Bank International [1979] 1 QB 159 at 169 per Denning LJ.

49 Solo Industries v Canara Bank [2001] 2 Lloyd's Rep 578 at [73] per Mance LJ.

50 United Trading Corporation v Allied Arab Bank Ltd [1985] 2 Lloyd's Rep 554 at 561 per Ackner LJ.

51 Ibid.

52 Alternative Power Solution Ltd v Central Electricity Board [2014] UKPC 31 at [59] per Lord Clarke.

53 Todd, above n 2, para [4.008]; McMeel, G ‘Letters of credit and the fraud exception – the threshold test for injunctive relief’ [2015] LMCLQ 19Google Scholar at 22.

54 The Bhoja Trader, above n 12, at 257 per Donaldson LJ.

55 ICC Banking Commission ‘Latest queries answered by the ICC Banking Commission’ (1997) 3(2) Documentary Credits Insight 6Google Scholar in Davidson, A ‘Fraud, the prime exception to the autonomy principle in letters of credit’ (2003) 8 International Trade & Business Law Annual 23Google Scholar at 26.

56 United City Merchants (HL), above n 1, at 6 per Lord Diplock.

57 United Trading, above n 50, at 561.

58 Sztejn v J Henry Schroder Banking Corp 177 Misc 719 (NY Misc 1941) at 722 per Shientag J.

59 United City Merchants v Royal Bank of Canada (The American Accord) [1981] 1 Lloyd's Rep 604 at 628 per Ackner LJ (hereafter United City Merchants (CA)), 627 per Ackner LJ.

60 UCC §5–114(1)(a) (1962); Dolan, J The Drafting History of UCC Article 5 (Carolina Academic Press, 2016) p 153CrossRefGoogle Scholar.

61 UCC §5–114(1) (1962).

62 United City Merchants (CA), above n 59, at 622–623 per Stephenson LJ.

63 Dolan, above n 60, p 171.

64 UCC §5–109(a)(1).

65 UCC §5–109(a).

66 Gao, X ‘The identity of the fraudulent party under the fraud rule in letters of credit law’ (2001) 24(1) UNSW L Rev 119Google Scholar at 124.

67 Ibid, at 124.

68 See Dolan, J The Law of Letters of Credit Commercial and Standby Credits (AS Pratt & Sons, 4th edn, 2007)Google Scholar para [7–85].

69 Eg Mid-America Tire Inc v PTZ Trading 768 NE 2d 619 (Ohio 2002) cited in Barnes, J and Byrne, J ‘Letters of credit: 2002 cases’ (2002–2003) 58 Bus Law 1605Google Scholar at 1608.

70 NMC Enterprises Inc v Columbia Broadcasting Sys Inc 14 UCC Rep Serv 1427 (Sup Ct NY County 1974).

71 Enonchong, N The Independence Principle of Letters of Credit and Demand Guarantees (Oxford University Press, 2011)Google Scholar paras [5.23]–[5.25]; United City Merchants (HL), above n 1, at 7–8 per Lord Diplock.

72 Malek and Quest, above n 8, para [9.17].

73 Destrée, C and Spanos, C ‘Sensitivity to fraud: demand guarantees & standby letters of credit’ (March 2002) 52(2) Keeping Good Companies 94Google Scholar at 97.

74 American Law Institute ‘[Revised] Article 5. Letters of Credit. Official Comment’ as cited by Xiang, G and Buckley, R ‘A comparative analysis of the standard of fraud required under the fraud rule in letter of credit law’ (2003) 13 Duke J Comp & Int'l L 293Google Scholar at 317.

75 Ibid.

76 Cited in Buckley, R and Gao, X ‘A comparative analysis of the standard of fraud required under the fraud rule in letters of credit law’ (2003) 13 Duke J Comp & Intl L 293Google Scholar at 317.

77 I am grateful to the anonymous reviewer who highlighted this point.

78 Dolan, above n 60, p 171.

79 UCP 600, Art 30b.

80 The Bhoja Trader, above n 12, at 257 per Donaldson LJ.

81 Official Comment, above n 74, p 1.

82 Dolan, above n 60, p xvii.

83 Barnes, J and Byrne, J ‘Letters of credit’ (2014) 69(4) Bus Law 1201Google Scholar at 1203; Barnes, J and Byrne, J ‘Letters of credit’ (2015) 70(4) Bus Law 1219Google Scholar at 1224; Barnes, J and Byrne, J ‘Letters of credit’ (2016) 71(4) Bus Law 1299Google Scholar at 1302.

84 First published as Bailey, H ‘Commercial paper, bank deposits and collections and letters of credit’ (1965) 20 Bus Law 711Google Scholar.

85 United City Merchants (CA), above n 59, at 618 per Stephenson LJ, 628 per Ackner LJ.

86 Ibid.

87 Goode, above n 9, p 231; Bridge, above n 10, p 230.

88 Montrod, above n 7, para [43] per Potter LJ: ‘worthless in the sense that it is not genuine and has no commercial value, whether as security for the goods or otherwise’.

89 Todd, P, ‘Non genuine shipping documents and nullities’ [2008] LMCLQ 547Google Scholar, 562.

90 Montrod, above n 7, para [56] per Potter LJ.

91 Goode, above n 9, p 231.

92 Todd, above n 38, para [9.148].

93 United City Merchants (HL), above n 1, at 7 per Lord Diplock.

94 UCP (1974 Version) Art 7.

95 Ulph, above n 39, at 362.

96 UCP Arts 3a, 9 (1974).

97 Gian Singh v Banque de l'Indochine [1974] 1 WLR 1234.

98 Ibid, at 11 per Lord Diplock

99 It was common ground that, irrespective of the beneficiary's knowledge, the paying bank would be liable in negligence if it paid against documents which it knew, or ought to have known, were fraudulent.

100 Gian Singh, above n 97, at 11 per Lord Diplock.

101 United City Merchants (HL), above n 1, at 7 per Lord Diplock.

102 United City Merchants (HL), above n 1, at 9 per Lord Diplock.

103 UCC §5–114(1) (1962).

104 United City Merchants (HL), above n 1, at 9 per Lord Diplock.

105 Montrod, above n 7.

106 United City Merchants (CA), above n 59.

107 Goode, above n 9.

108 United City Merchants (CA), above n 59, at 628 per Ackner LJ.

109 Ibid, at 620 per Stephenson LJ.

110 Compare: United City Merchants v Royal Bank of Canada [1983] AC 168 at 173–178; United City Merchants v Royal Bank of Canada [1982] QB 208 at 213–215.

111 Goode, above n 9, p 230.

112 Gian Singh, above n 97, at 12 per Lord Diplock.

113 Goode, above n 9, pp 228, 232.

114 McKendrick, E Goode on Commercial Law (Penguin, 4th edn, 2010) p 1106Google Scholar.

115 Ibid, p 1106.

116 Baatz, above n 30, p 121.

117 Goode, above n 9, p 233; Brindle, M and Cox, R Law of Bank Payments (Sweet & Maxwell, 3rd edn, 2004)Google Scholar para [8.087].

118 Schwartz, A and Scott, R Commercial Transactions Principles and Policies (The Foundation Press, 1982) pp 21Google Scholar, 918; Kronman, A ‘Mistake, disclosure, information, and the law of contracts’ (1978) 7 Journal of Legal Studies 1CrossRefGoogle Scholar at 4.

119 United City Merchants (HL), above n 1, at 7 per Lord Diplock.

120 Standard Chartered Bank v Pakistan National Shipping Corp (No 2) [2000] 1 Lloyd's Rep 218 at 221 per Cresswell J.

121 ICC Commercial Crime Services ‘Trade finance documents authentication’, https://www.icc-ccs.org/icc/imb/services/due-diligence/trade-finance-documents-authentication (last accessed 21 June 2019).

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123 UCP 600, foreword.

124 UCP 600, Art 7a, Art 8a, Art 15a.

125 UCP 600, Art 16a.

126 UCP 600, Art 14a

127 UCP 600, Art 34.

128 Gian Singh, above n 97, at 11 per Lord Diplock.

129 UCP 600, Art 2.

130 ICC, International Standard Banking Practice 681 (2007 Revision, ICC Publication no 681), [25].

131 UCP 600, Art 30a.

132 UCP 600, Art 30b.

133 United City Merchants (HL), above n 1, at 9 per Lord Diplock.

134 Montrod, above n 7.

135 Ibid, [56] per Potter LJ.

136 Ibid, at [58] per Potter LJ.

137 Horowitz, above n 6, para [3.21].

138 Montrod, above n 7, para [58] per Potter LJ.

139 Ibid, at [59] per Potter LJ.

140 Beam Technology, above n 30.

141 Ibid, [33] per Chao Hick Tin JA, Tan Lee Meng J.

142 Montrod, above n 7, para [58] per Potter LJ.

143 Beam Technology, above n 30, para [36] per Chao Hick Tin JA, Tan Lee Meng J.

144 ICC, above n 121.

145 Ren, J ‘A nullity exception in letter of credit law?’ [2015] JBL 1Google Scholar at 9.

146 United City Merchants (HL), above n 1, at 7 per Lord Diplock.

147 Barnes and Byrne (2016), above n 83, at 1302; Barnes and Byrne (2015), above n 83, at 1224.

148 Task Force on the Study of UCC Article 5 (Letters of Credit) ‘An examination of UCC Article 5 (letters of credit)’ (1989–1990) 45 Bus Law 1521 at 1612, 1615.

149 Sztejn, above n 58.

150 Task Force, above n 148, at 1538.

151 Barnes, J and Byrne, J ‘Letters of credit’ (2005) 61 Bus Law 1591Google Scholar at 1596: ‘US courts applying US law are uniquely advantaged in having a comprehensive codification of the letter of credit fraud exception’.

152 Themehelp Ltd v West [1996] QB 84 at 98–99 per Waite LJ.

153 United City Merchants (HL), above n 1, at 7 per Lord Diplock.

154 Montrod, above n 7, at para [56] per Potter LJ.

155 UCP 600, Arts 7a, 8a.

156 UCP 600, Arts 14, 34.

157 See examples at nn 159–162. For the contrary view see Malek and Quest, above n 8, p 258; Ren, above n 145, at 19.

158 Hooley, R ‘Fraud and letters of credit: Is there a nullity exception?’ [2002] CLJ 279Google Scholar at 280; Neo, D ‘A nullity exception in letter of credit transactions?’ [2004] Sing JLS 46Google Scholar at 60; Horowitz, above n 6, paras [3.10], [3.21].

159 McKendrick, above n 114, p 1106.

160 Goode, above n 9, p 231; McKendrick, above n 114, pp 1104, 1106.

161 Bridge, above n 10, p 213; Chin, LY and Wong, YK ‘Autonomy – a nullity exception at last?’ [2004] LMCLQ 14Google Scholar at 18.

162 Goode, above n 9, p 231.

163 UCP 600, Art 16b.

164 Mann, above n 18, at 2502.

165 Ibid, at 2503–2505.

166 Ibid, at 2514.

167 Katz, above n 18, at 2565, 2567.

168 Mann, above n 18, at 2514.

169 UCP 600, Art 16b.

170 The author intends to undertake empirical work to determine how the credit functions in the twenty-first century.