The American Uniform Commercial Code versus the English Approach - Essay Example

Letters of credit are a pivotal tool that facilitates international trade and commerce. It is simply owing to the instruments like letters of credit that it is possible to allow for the exchange of goods and services in an international context. Without such financial aids, it would have been next to impossible to conduct trade on a global scale. The very relevance of letters of credit is quintessentially based on its autonomy from the transaction that it supports. Any bank that issues a letter of credit simply cannot refuse to honour it and extend the requisite payments, once it is presented with the apt and authentic documents. This also stands to be true in a scenario when the transaction is backed by a letter of credit that does not actually take place. On the one side, the letters of credit extension to the sellers the assurance of a guaranteed payment, while on the other side they safeguard the interests of the buyers by necessitating the presentation of the right documents that to a large extent ensure performance. Such documents may be the like of insurance forms, transportation documents and quality-related certificates.

The Autonomy Principle
The underlying dogma supporting the autonomy principles associated with letters of credit is that the transaction backed by a letter of credit stands to be autonomous of the sales deed formalized by the buyer and the beneficiary. To put it simply, the two essentially contractual arrangements mentioned above are regarded as being independent of each other. In other words, the utility of letters of credit is pragmatically solemnized by the severance of services and documents. It is this principle that is the legal ground on the basis of which banks agree to such transactions.

Fraud Exception
As already mentioned, a letter of credit is the legal and financial instrument, which extends to the beneficiary the security of getting the payment due to one. Yet, this bolstering of security to the beneficiary in a way dilutes the security against risk or loss to the account party. Thus, in the letters of credit, the balance of risk is tilted more in favour of the seller. Though the autonomy principle practically assures the expected commercial results in business transactions, this principle stands to be defective and inequitable when the underlying transaction is vitiated by fraud. Under such circumstances, the autonomy principle gets limited by the fraud exception.

The US Approach
In the United States, in Maurice O’Meara Co v National Park Bank, the court of law simply denied the possibility of invoking a fraud exception. The New York Court of Appeal ruled that that the primary concern of the bank should be pertaining to the veracity of the drafts and the accompanying documents, and not the associate transaction of goods.
Also in New York Life Insurance Co v Hartford National Bank and Trust Co, the court ruled that the inquiry of fraud by a bank needs to be limited to the establishment of the compliance of the documents with the letter of credit. Hence, the Uniform Commercial Code in the US allows the fraud exception only in case of fraud in the complying documents.
Besides as per Article 5-109(a) of the Uniform Commercial Code, even if a seller has committed fraud in the complying documents, the bank is still required to honour a letter of credit in a situation where the claim for payment has been transferred to a third party. The American approach actually safeguards the interests of innocent third parties, by allowing for a waiver of the fraud exception.

The English Approach
In the United Kingdom, in Harbottle v National Westminster Bank, the court stated that a buyer to avail any injunctive dishonour must establish an evident and clearly discernable case of fraud. This viewpoint laid the foundation for deciding on future fraud exceptions pertaining to letters of credit.
In Edward Owen Engineering Ltd v Barclays Bank International Ltd, the court ruled that a bank is not required to honour a credit obligation if the complying documents are forged or the presented request for payment is fraudulent and devoid of any right to payment.
Hence, in the UK, the fraud exception is applicable to both the scenarios that are while the presentation of the forged complying documents and a fraud committed in the contract backed by the letter of credit under consideration, in a scenario when the beneficiary is aware of such a fraud while presenting the complying documents. In a way, the English approach to fraud exception is more broad-based and holistic and is not unwarrantedly tilted in favour of the seller. Read More