**2. Bank's knowledge**

Although the bank's obligation is to honor the credit against presenting confirming documents, yet, it is believed that the bank must dishonor the credit if it learns of fraud prior to honoring the credit.15 In this regard, the fraud exception rule cannot be established if the bank is not aware of the fraud.16 That is to say, the lack of knowledge of the fraud conduct will not prevent the bank from honoring the credit.

In one case [33] the court was against the issuing of an injunction to stop the payment because the bank was not aware of the fraud.17 The fact that there is suspicion of fraud, which the bank is aware of it, will put the bank in a rejection position. Thus, to fall within the ambit of the bank's knowledge, the fraud must come to light before releasing the payment, meaning that the knowledge condition will be fulfilled if the bank is aware of the fraud prior to payment.18 However, if the bank becomes aware of the fraud and honors the credit, they will be liable in front of the applicant.19 This penalty is because the bank can be seen as a participant in the fraudulent act [34]. Therefore, if the bank ignored such conduct and the payment was honored wrongfully, the bank must not recover that payment from the beneficiary.20 In this occasion, the bank must not disregard such knowledge.

However, if the bank was not aware of the fraud while examining the presented documents, but the fraud came to light after payment, and decided to honor the credit, in this occasion the applicant will be under a duty to reimburse the bank [19]. In *Banco Santander SA v Bayfern Ltd* [37] case, the court stated that "If the

<sup>11</sup> [21]; see also [22]; see also [23].

<sup>12</sup> [24], see also [25], see also [26].

<sup>13</sup> See [27] see also [28], see also [29].

<sup>14</sup> See in general [1] where the beneficiary was party to an agreement with the carrier and its brokers to antedated the bill of lading. See also [2–5].

<sup>15</sup> [30]; see also [22]; see also [21]; see also [11], 176; see also [31]; see also [32]; see also [18].

<sup>16</sup> [30]; see also [22]; see also [21]; see also [11], 176; see also [31]; see also [32]; see also [18].

<sup>17</sup> [33], 1153.

<sup>18</sup> See [19].

<sup>19</sup> See [19].

<sup>20</sup> [35], see also [36]

#### *Fraud in Letters of Credit under English Law: Issues and Cases (the Three Dimensions) DOI: http://dx.doi.org/10.5772/intechopen.93555*

bank was not aware of the fraud and agreed to honor the credit, the applicant is still bound to reimburse the bank when the fraud comes to light."<sup>21</sup>

In one case [40], the documents were fraudulent; in particular, the signature was forged. However, the bank honored the credit as it was unaware of the fraud, and the court ruled in favor of the bank.22 Nevertheless, in my opinion, if the bank had rejected the presented documents on the ground of discrepancies and the fraud was discovered later, in this respect bank is already in a safe position.

In any case, the question is "*whether the bank can rely on this defense if it becomes aware of the fraud prior to examining the documents*."23 Although there are no cases in regard to the bank's position if the fraud become to light prior to examination but, in my judgment, the bank must examine the presented documents and decide whether it should honor the credit or not unless fraud comes to light during the examination. This suggestion is based on the good faith duty upon the bank. In *Nareerux Import Co. Ltd v Canadian Imperial Bank of Commerce* [41] case, the court held that the bank is under a duty of good faith to the beneficiary.24 A duty of a good faith is recognized in the American courts where such duty is stipulated in Section 5-109 (a) (2) of the U.C.C which states "the issuer, *acting in good faith*, may honor or dishonor the presentation in any other case."

Despite the fact that this occasion is not clear in the law but, in my judgment, from both the autonomy principle and a good faith principle, the bank is under a duty to honor the credit, regardless of knowing of the fraud prior to examination, only if the presented documents are in compliance.25 Bearing in mind that banks deal with documents and not facts as stipulated in Article 5 of the UCP 600. The said article states that; "Banks deal with documents and not with goods, services or performance to which the documents may relate." Unless the presentation itself indicates a possibility of fraud, the bank must honor the credit if the documents are compliant.<sup>26</sup>

What can be drawn from the proceeding discussion is that "a bank's knowledge of the fraud must emerge from the bank itself and not from any other party."27 If another party e.g. *the applicant*, becomes aware of fraud and through providing a clear evidence of the fraud,28 they must ask for an injunction from the court to stop the payment.

Most importantly, the "bank's knowledge" must emerge from the presented documents and not from any external source.29 That is to say, the knowledge must be particularly from the apparent data. This is justified because a bank deals only with documents (article 5) and, more importantly, by virtue of the autonomy principle (article 4). Moreover, besides the bank's knowledge, it should be noticed that the awareness of the fraud must be while the examination process and prior to the payment decision.

The rationalization for this condition is twofold. Firstly, this payment method aims to secure the bank and not the parties,30 hence, any dispute regarding the underlying transaction will not effect in the bank's involvement in litigation.

<sup>21</sup> [37]; see also [38], see also [39]; see also [24].

<sup>22</sup> [40], 1238.

<sup>23</sup> See [19].

<sup>24</sup> For general discussion see [42]; see also [43]; see also [44].

<sup>25</sup> See [19].

<sup>26</sup> See [19].

<sup>27</sup> See [19].

<sup>28</sup> See [19], which will be explained in Section 2.

<sup>29</sup> See [19].

<sup>30</sup> See [19].

#### **Figure 4.**

*Bank's status in regard to fraud during examination process.*

Secondly, where the seller in such transaction is untraceable, the only available remedy for the bank will be the buyer. Therefore, the insisting on the bank's knowledge condition can be seen as a "withdraw" option from fraud litigation.31

While this approach, from my own perspective, no doubt will ensure the ultimate aim of letters of credit in international transactions and will secure the bank, nonetheless, it will harm the applicant. As stated above, it is not an easy task to gain an injunction under English courts in a case where the applicant becomes aware of the fraud. In addition, it is unclear how the court will prove that the bank is aware if there is fraud in the presented documents.32 Most importantly, another obstacle arises in regard to the implementation of the strict standard required, by asking "*whether the same strict standard will be required by both the applicant and the party who notified the fraud*." The answer is not clear here (**Figure 4**).

### **3. Clear evidence**

A mere allegation of fraud will not be sufficient for courts in England to dishonor the credit.33 That is to say, once the fraud is established by strong evidence, an injunction from the court will be forthcoming.34 In one case [27], although the shipment was with a wrong quantity of ordered records delivered, yet the court did not consider such conduct as a fraud and refused to apply the exception.35 Despite the claimant providing the court with an inspection certificate, the court stated that there was no strong evidence of fraud in this occasion.36 That is to say, the presented evidence was not considered sufficient enough to convince the court, who refused

<sup>31</sup> See [19].

<sup>32</sup> See [19].

<sup>33</sup> [19].

<sup>34</sup> [45], see also [24]; see also [18].

<sup>35</sup> [27], 446; only 275 of the 8625 records ordered were delivered.

<sup>36</sup> [27], 446, 447.

*Fraud in Letters of Credit under English Law: Issues and Cases (the Three Dimensions) DOI: http://dx.doi.org/10.5772/intechopen.93555*

to issue the injunction.37 However, in my judgment, the dispute in the said case falls within breach of contract scope and not fraud, where the dispute matter concerned the quantity. Therefore, in my judgment, the court's judgment of not issuing an injunction was correct.

Similarly, in another case, although the presented documents were forged, the court instead refused to issue an injunction [46]. The court justified its judgment by stating that the claimant failed to provide clear evidence.38 Nonetheless, few English cases issued injunctions39 including *Themehelp Ltd v West* [48] and *Kvaerner John Brown Ltd v Midland Bank plc* [49].

Initially, in the *Themehelp* case, the clear evidence presented was the fact that the beneficiary, deliberately and recklessly, failed to inform the applicant of the falling-off of future demand from the defendant [50]. The applicant argued that the beneficiary were aware of by the date of the contract.40 In this regard, the court held that "The failure to provide the contracted goods in the future was strong established evidence that the beneficiary was aware that it would cause dishonest demand for payment under the credit."41 "On appeal, the court held that '*the December correspondence showed that the sellers knew that the loss was possible and that this loss could have a very damaging effect on the appellant defendants future prospects'. The court continued 'there was evidence that these forecasts had been sent to the appellant defendants and no explanation where received"* [51]. Therefore, this evidence was quite sufficient to entitle the court to issue the injunction.42

In contrast, the subject matter of the contract in *Kvaerner John Brown Ltd (KJB) v Midland Bank plc* [49] case was a standby letter of credit. KJB; the plaintiff, failed to fulfil his obligation and, as a result, *Polyprima* issued a notice, wrongfully, demanding the payment under the credit due to such failure [52]. In this respect, the court held that:

"*In the wholly exceptional case where a demand under a performance bond or standby credit purports to certify that a written notice has been given as required by the underlying agreement when it plainly has not been given, the court will, in the exercise of its discretion, grant an injunction to restrain the beneficiary from maintaining the demand accompanied by what is in fact a false certificate. To grant an injunction in such a case is not inconsistent with the general principles set out above. It is, in my view, clearly arguable in the present case that the only realistic inference is that the demand was made fraudulently and it is, in my view, further arguable that it is, in the circumstances, dishonest to maintain the demand*."43 That is to say, issuing the required notice was fraudulent as it was issued wrongly and contrary to a nominated clause in their agreement.44 Therefore, the court was correct in issuing the injunction.

So far, under the English law the majority of the cases refused to issue an injunction to stop the payment because of the absence of clear evidence provided by the applicant.45 It is believed that English courts require a high standard of proof of fraud; therefore, this excessive requirement will justify the court rejection for issuing the injunction.46 That is to say, this condition under the English courts

<sup>40</sup> [50], 99.

<sup>37</sup> [27], 447, 448.

<sup>38</sup> [46] at 177.

<sup>39</sup> [24], see also [47].

<sup>41</sup> See [19].

<sup>42</sup> See [19].

<sup>43</sup> [52], 450.

<sup>44</sup> See [19].

<sup>45</sup> See [19].

<sup>46</sup> [53]; see also [24], see also [54].

with respect to proof of fraud makes it impossible for the courts to apply the fraud exception rule and a hard ship for the alleged party [55]. Therefore, due to the "high standard of proof" required, it is difficult to bring an action against the banks in England.47 However, in my judgment, requiring a high standard is justified. This rigid approach by English courts is important to affirm on the autonomy principle in letters of credit. Further, to ensure that "the claim is not frivolous or vexatious."<sup>48</sup> Moreover, issuing an injunction will affect on the banking system integrity [57].

However, it should be noted that none of the English courts specified what type of evidence was required or what would be considered as a convincing evidence for the courts to apply the fraud exception rule.49 It is argued that "the standard of proof in England depends on the stage of the proceedings." In this regard, the proof standard was settled merely on the basis of intentional, rather than material fraud.50 However, in proceedings, a mere allegation is not sufficient to estop a bank from honoring a credit [58]. Instead, it is necessary to establish clearly that the bad intention beneficiary is not honest and that the bank is aware of fraud [59]. In this regard, "the evidence must be clear, both as to the fact of fraud and as to the bank's knowledge."51 In contrast, the standard of fraud embraced by the United States courts is more logical. The American courts focuses on the demand for payment, meaning that if such demand has absolutely no basis in fact or the conduct of the beneficiary has vitiated the entire transaction, in this regard, an injunction will be granted.52

Although the justification for a high standard of evidence for fraud required by the courts is, sometimes, to affirm on the autonomy principle and secure the parties [18], yet this is not always the case. In my judgment, granting an injunction in order to postpone the demand for payment under an alternative method of payment; for instance; performance bond, demand guarantee, or standby letter of credit, apparently, is not a difficult task in England compared to such a demand under a "commercial" letter of credit. Generally speaking, the right of payment under these three instruments; e.g. performance bond, demand guarantee or standby letter of credit is based on the applicant failing to fulfil the required obligations under them.53 In contrast, under a commercial letter of credit the right of payment is legitimate once the beneficiary has fulfilled their obligation [68]. Therefore, in my judgment, proving that the demand for payment by the beneficiary in a fraudulent way under commercial letters of credit is not an easy task.

This difficulty emerged due to a two involved context in such contract, namely; goods and documents. Apart from the fact that presenting documents is a compulsory requirement in the other three instruments mentioned above. Consequently, in my judgment, sometimes requiring clear evidence might not be possible with regard to a commercial letter of credit, especially when the fraud rule in England is restricted only to fraud in documents.54 Therefore, it is difficult to see how the applicant can prove that the beneficiary is not honest. Bearing in mind that the applicant will be under a duty to prove the fraud conduct within a short period of five banking days and depending on the face of the documents alone. Therefore, in my judgment, it is not clear that the requirement for clear evidence will be fulfilled through providing, for example, a formal document indicating that there is no ves-

<sup>47</sup> See [19].

<sup>48</sup> [56], see also [25].

<sup>49</sup> See [19].

<sup>50</sup> See [18].

<sup>51</sup> see [60], see also [61]; see also [62].

<sup>52</sup> [63], see also [64].

<sup>53</sup> See in general [2, 50, 52]; see also [65, 66], see also [67].

<sup>54</sup> See [69]; see also [70].

#### *Fraud in Letters of Credit under English Law: Issues and Cases (the Three Dimensions) DOI: http://dx.doi.org/10.5772/intechopen.93555*

sel existing with the name (ZZZ). It is doubtful that such a document would prove that the beneficiary has no right for payment under the credit. Assume that the applicant provides an evidence that the documents are forged due to the fact that a beneficiary is no longer trading for (Y) reason; for instance, a *liquidation*, thus, will not be able to provide the required goods, the question arises here as to whether this evidence could be used to postpone payment. In my judgment, "the court should ask for 'sufficient' or 'convenient' evidence instead of 'clear' evidence in order to issue the injunction. This convenient evidence is subject to the case's facts."<sup>55</sup>

Bearing in mind that banks are not experts in such transactions nor required to go beyond the documents, and by referring to the first condition; the bank's knowledge, it does not make any sense that the court is more convinced with the banker's evidence and consider it as sufficient to prove that they are aware of the fraud while, in contrast, the applicant's evidence is not.56 The applicant is the main party in such transactions and they have more expertise in the status of the transaction than the banks. Therefore, the applicant's knowledge should be vital in this occasion.

In my opinion, the party who claimed the existence of the fraud must provide the court with a monetary fee that will be held by the court until the end of the trail57 besides with this monetary fee, the alleged party must provide a "sufficient" or "convenient" evidence.58 From a purely civil law point of view, "[T]hese fees can be imposed as compensation if the allegation is found to be invalid, which will guarantee the other parties' interest. If the allegation was legitimate, the fees are released back to the owner. Otherwise, it will be given to the beneficiary – the defendant – as compensation for postponing their right of payment due to the false allegations".59

In conclusion, English courts focus more on evidence of the fraud rather than making unnecessary distinctions pertinent to the fraud exception. As seen from the proceeding discussion, injunctions are not easily granted in England where the requirement for a clear evidence and proof of the bank's knowledge will be obstacles. Therefore, the absence of clear evidence will not trigger the fraud exception rule. In short, banks in England are more protected due to the fact that courts want to uphold the integrity of the banking system and maintain the autonomy principle.
