International Trade Finance Law: Fraud - Coursework Example

John Q. Student Professor Doe English 344 11 Nov 2009 International trade finance Law Question 1: Fraud is the major exception to the underlying principle of autonomy in all forms of independent undertakings (letters of credit and independent guarantees). Discuss the nature of the fraud exception, its origins and rationale and the varying approaches taken by different jurisdictions internationally. Include in your answer an explanation of the standard of fraud necessary to found an order restraining fulfillment of the obligation to honor. In order to learn and understand the nature of fraud exception and the origin and rationale behind the various approached it is important to define or substantiate ‘fraud’ in all forms of independent undertakings esp. letters of credit and independent guarantees. As described and defined in the book of ‘International trade and Business Law annual’ – “The classic statement of fraud comes from the case of Dery vs. Peek that fraud exists when it is shown as a false representation has been made (1) knowingly (2) without belief in its truth and (3) recklessly, careless whether it be true or not. Fraud includes equitable fraud. In equity the term ‘fraud’ not only embraces actual fraud but other conduct which falls below the standard demanded in equity. There is no exhaustive definition of equitable fraud although the field covered includes the fields of undue influence and unconscionability.”(Moens. 42). With this statement in the background let us now look at the avenues for fraud and the exceptions to the underlying principle of autonomy in all forms of independent undertakings. The Uni Credit group on Trade and forfeiting review clearly explains the Letter of Credit and the bill of ladding and a whole range of fraudulent opportunity in these instruments. Ever since trade started or the exchange of goods between overseas buyers and sellers took place there have been various instruments for payment and have successfully served during those periods till they emerged to become more effective and reliable. One such instrument for the receipt of payment for the seller is the Letter of credit. This is a letter which authorizes the bank to pay the seller. International trade no doubt places huge importance and relies heavily on the LC. It is simple a letter of instruction that authorizes the bank to pay a party within a certain period of time on the production of some mentioned documents. The letter of credit and the bill of lading are important documents that facilitate international trade across boundaries. It creates the obligation for banks to pay when the consignor produces the documents that are in compliance with the letter of credit and the payment must be made even in case where the banks have been informed of a potential risk of fraud. Most of the time the banks do not want to face the contractual liability in the case of non- payment if the fraud is not proven and hence honor the payment this gives a fraudulent consignor pecuniary advantage and he produces a set of false documents that complement the Letter of credit. There can be a whole range of documents produced for the letter of credit. The issue is that all documents that banks rely on to release the payment to the consignor such as the invoices the bill of lading documents that certify the quantity and the quality of the products, insurance documents etc., can all be easily forged or documents for goods that have never been shipped can be produced to defraud banks and extract payment. This also results in the production of false bills that lead to the risk of payment in the hands of false parties.This element of fraud of false bills and documents exists to the high transferable characteristic of the letter of credit or the bill of ladding. Moen rightly states the fraud exception under the heading ‘Exceptions to the autonomy principle’ “Letters of credit are not immune from the usual principles which can void contracts or have them set aside. The fraudulent conduct, typically by the beneficiary, is an exception to the autonomy principle is well established and recognized by all authorities. In the words of the ICC there is an exception…….. In many jurisdictions namely abuse of rights or fraud the ambit of this exception and the ensuing consequences for the beneficiary, and or the nominated bank may differ from one local jurisdiction to another. It is upto the courts to fairly protect the interests of all bonafide parties concerned. Some authorities refer to the fraud exception as the sole exception. In the context of stopping payment notwithstanding the presentation of documents which on their face are in order, there are a number of issues albeit less significant than the fraud exception. The issues include illegality, insolvency, injunctive relief, government intervention, consumer laws and attachment. Nevertheless, as fraud remains particularly active, indeed rampant in the commercial world.” (O’Donovan. 96) When it comes to the allegation of fraud versus proven fraud, It is not sufficient to merely include and allegation of fraud, Fraud has to be proven and court and several jurisdictions have a wide range of terms for describing proven fraud they are “proven, gross, material, established, clearly established, outright, obvious, egregious, clear of such a character, strong and prima facie, sufficient, sufficiently grave, intentional active, active and serious.” (O’ Donovan .85)Let us look at a few cases in this aspect here the court has expressed different decisions with regards to fraudulent allegations: Case 1: Gillespie vs. Russell. This was case of misrepresentation and Lord President Mc Neil states that the mispresentation must be clearly stated “or set forth in explicit terms. Where in he means that any person or party accused of misrepresentation of facts or statements in the documents cannot go to trial unless and until the nature or what the fraudulent misrepresentation is clearly stated.(Moens 40) Case 2: Shedden vs. Patrick. The case presided by Lord Fullerton states that it is not enough to state that the fraud has been committed but also state in what has the fraud been committed to quote his actual words, “It is not enough for a party founding on reduction on the head of fraud to state that fraud has been committed ………. The party must state in what the fraud consists, and what the acts are from which the existence of fraud are to be inferred.” (Moens. 39)As we are examining the case of fraud exceptions across different jurisdictions let us look at a case where the Ontario high court gave some clear distinction on the exceptions to fraud. This was the case of Rosen vs Pullen. Fraud exception should apply except in the case when: 1. Where the pleadings or the proceedings by the plaintiff are based on facts, just mere allegation of fraud does not give the conforming bank the right of non – payment on the letter of credit. Rather in this case the letter of credit is irrevocable. 2. The plaintiff must prove the nature of fraud under the headings ‘established fraud’, ‘clear fraud’, ‘a strong prima facie case of fraud’ to revoke the letter of credit 3. It must come to the knowledge of the bank before the payment is made. If the payment is made by the bank based on the irrevocable letter of credit, without knowledge of the fraud, then the bank is protected from action. 4. and finally as stated by Moen’s the time of the knowledge of fraud. “it does not matter at what stage before the bank has made payment, that the bank is out in knowledge of the fraud; the was a case where the bank was told of the fraud after it received telex demand for payment, but before it actually made payment.” (Carr& Peter 292) The American Business law journal states the arbitral alternatives to litigating fraud. The letters of credit have increasing importance in overseas trade and buyers from one country who allege fraud on the sellers of another country seek injunctions from the issuing bank to suspend payment to the seller. However this relief under the UCC or the Uniform section code states that alleged fraud indeed has numerous reasons and the buyer seeking injunction must prove that the alleged fraud by the seller has viated the transaction, is intentional or egregious, or where there is a no conceivable basis.(Mayor) There are very few sellers who get this relief and this is basically to buy time. If American courts continue to provide injunctive relief the LC’s of America may become less welcome across the world. It breaks the principle of independence giving an upper hand to the buyer and increasing the lock of capital or revenue loss for the seller. Moreover, it defeats the very purpose of the instrument the transferability and liquidity. In the book of Lender liability the exception of fraud and that of the lender liability are clearly explained where it quotes: “There are few exceptions to the autonomy principle to the effect that contractual disputes between the borrower and the beneficiary do not affect the lender’s strict obligation to comply with its undertaking in an unconditional performance bond, a stand by letter of credit or a bank guarantee. The main exception to the autonomy principle arises where the beneficiary is guilty of fraud, to the clear knowledge of the lender” (O’Donovan. 75) The above paragraph sums it up for us. International jurisdiction must ensure that fraud exceptions are treated in coherence with the above mentioned. This will enable in the control of fraud and enhance and serve the principle of autonomy. Question 3: Explain the nature, operation, advantages and drawbacks of the use bills of exchange in international trade. Include in your answer a critique and comparison of the two main international systems of bills of exchange. According to Investor words, “A bill of exchange is an unconditional order issued by a person or business which directs the recipient to pay a fixed sum of money to a third party at a fixed date. The future date may be fixed or negotiable. A bill of exchange must be in writing, signed and dated.” Nature of a bill of exchange. A bill of exchange has three parties to it. The drawer, the drawee, and the payee. The person who gives the order to pay or makes the bill is called the drawer, the person who is directed to pay is called the drawee, and the person to whom the payment is made is called the payee. The drawer or the payee who is in possession of the bill must present the bill to the drawee for acceptance. For example a cheque of the Wells Fargo issued by Ralf to Ted is a bill of exchange, where Ralf is the drawer, Ted the payee and the bank the drawee. Bills of exchange are negotiable instruments such as cheques or promissory notes. A bill of exchange is transferable from one person to another. The bill of exchange possesses the following characteristics. First, the transferability, on delivery and the rights that goes along with this effect of transfer. Meaning the transferee can affect it in his own name. Secondly the transferee takes it in good faith or value; he is free of any defects of title of the transferor. In the book of International trade law ‘ The laws relating to the bills of exchange in the English law is to be found in the Bills of exchange act 1882 (hereinafter BEA) Section 3(1) defines a bill of exchange as an unconditional order in writing addressed by one person to another, signed by the person giving it, requiring the person to whom it is addressed to pay on demand or at a fixed or determinable future time a sum certain in money to or to the order of a specified person, or bearer.’ (Carr & Peter. 225) The following is an example of the operation of bill of exchange extracted from the book of International trade law. This is a case which will detail the typical operation of a bill of exchange. The two parties involved in this are Smokey Spray’s Ltd and Benedict Noble. “Smokey Sprays (S) has sold sprayers worth $1000 to Benedict Noble (N) S drawer will draw a bill of exchange B drawee. It will be drawn in favor of a payee to whom the money is payable. It is not necessary that the payee is a third party. It could for instance be drawn in favor of the drawer or the bearer. As to when money is payable will depend on the terms of the bill, where it is payable on demand or at sight. (Known as sight bills) money is payable on presentation. Where money is payable at a fixed or a determinable time in the future (known as time bills) the buyer gets credit until the due date. The seller for his part, will be able to realize money for his selling, the bill of exchange at a discount. A time bill will be sent to the drawer for acceptance, who if willing will enter the words accepted and sign on it. On acceptance the drawee will become the acceptor. It is not necessary that the bill is accepted by the drawee prior to negotiation. (That is transfer by delivery)” (Carr & Peter. 227) Advantages of the bills of exchange in International trade: 1. It helps to grant credit in Trade in a legally valid format by permitting payments on future dates which have been agreed upon at the time of making the bill. 2. It is a letter providing formal evidence for the seller to demand payment from the buyer. 3. Grants access to finance for the seller by allowing them to transfer debts to other banks or financiers by the mere endorsement of the bill to the financier or the bank. 4. It allows the banker or financier to retain a valid legal claim. Most of the time, the banks or financial institutions retain a stronger and an inevitable legal claim on the bill. 5. The seller acquires greater security over the payment and can use this bill as a bill of guarantee with the bank and this can be done by endorsing or signing on the bill. 6. In the event of any problem the seller is allowed legal access , It is the legality of the bill for all the parties involved in the transaction. A bill of exchange is no doubt proved to be an instrument that is negotiable and one which is globally legally valid, securing the interests of both the buyer and seller and the banks in between. The Allied Irish Banks describe or list the advantages of the Bills of exchange in very simple terms as under: “A bill of exchange can either be payable immediately or at some future date. If a Bill is payable immediately, it is usually issued payable at sight. The term "at sight" means that a buyer should pay once they have sighted the Bill that is once the demand for payment has been made. If a Bill is payable at some future date, it must facilitate the calculation of the actual due date. For example Bills of Exchange may be drawn payable at 60 days sight, at 60 days from Bill of Lading Date etc.” Draw backs of the bills of exchange: The first and fore most issue with the Bills of exchange is that of Demurrage if the stock arrives at the port before the clearing of the documents the exporter must ensure that all documents from the forwarding agent are obtained within 24 hours of time or he must make arrangement with the bank to take delivery of the goods. Article 6 of the Uniform rule of collection states: “In the event of goods being dispatched direct to the address of the bank. Or consigned to a bank for delivery, to a drawee against payment or acceptance, or upon other terms without prior agreement on the part of that bank the bank has no obligation to take delivery of the goods, which remain at the risk and responsibility of the party dispatching the goods.” (Bass. 157) Shipments by rail road and air: The primary objective of the seller is to deliver goods faster, by road , rail or air and complete security is not available as the documents of title are not passed on to the bank. Therefore the question of security arises. Element of fraud and forgery: As bills of exchange are documents that can be easily forged. The high element of transferability can many times put the goods in the hands of a false party. Similarly documents that accompany the Letter of credit or the bill of ladding can be forged or false and can even lead to goods not being shipped. International systems of bill of exchange : The most important documents used in International trade are clearly the Letter of Credit and Bill of ladding. Both documents known for their independence and transferability of nature does pose huge risks in terms of forgery and frauds besides these frauds and exception to frauds although under the UCC come under different jurisdictions depending upon the country of shipment or where the issuing bank is. Most importantly the growing advancements in technology and the distance between banks across the globe also pose a threat to these documents becoming non existent. The Electronic fund transfer system and contractual agreements made by buyers and sellers across the world reduces the risk and uncertainty that can arise in the payment being made to the seller as in the case of a Bill of Exchange. Although cheques and promissory notes are still held in high regard and treated as good as literal currency favoring the drawee, the time and cumbersome formality for all parties involved in the transaction make them opt for a fund transfer by way of a standing instruction to the bank. Although these bills have served as an instrument of credit and that of guarantee and one that can be discounted against the period of credit they are being quickly replaced by the fast movement of cash between the buyer and seller. However, they still remain as vital documents to many traders across the world. Works Cited Moens, Gabriel, International Trade & Business Law, Australia, Cavendish Publishing 2003. Print. O’ Donovan, James. Lender Liability, London, Sweet & Maxwell. 2005. Print Stone, Peter &Carr, Indira , International Trade Law, Great Britain, Cavendish Publishing 2005. Print. Bass. R.M.V. Credit Management, United Kingdom, Stanley Thornes, 2005. Print. Letters of Credit a whole range of fraudulent opportunity. Volume 6 Iss 4 January 24 2003, UniCredit group. 08 November 2009 Mayor, Donald O. International Letters of Credit: arbitral alternatives to litigating fraud. 22 March 1998. AllBusiness.com 08 November 2009. Bill of Exchange . Investor words. 08 November 2009 The function of Bill of exchange in International trade. 2009 AIB Trade finance. 08 November 2009. Henson, Walter. What are bills of Exchange . October 2006. E-zine Articles 08 November 2009. Kapoor N.D, Elements of Mercantile law. India . Sultan Chand & sons. Print. Read More