Analysis of Contract between Non-Taste Videos Pty Ltd and Overnight Production Specialists - Assignment Example

PART B: QUESTION 3: PROBLEM QUESTION Several issues arise as a result of the contract between Non Taste Videos Pty Ltd (NTV) and Overnight Production Specialists (OPS) and also Don’t Borrow Bank (DBB). These issues includes but are not limited to the issue of jurisdiction , the breach of contract of sale and the necessary provisions under CISG, the autonomy principle, the fraud rule and also the principle of strict compliance. The first issue relates to the Fraud Rule. From the face of the contract between the parties’ forgery and unjust enrichment seems evident. The Fraud Rule results when the beneficiary presents the documents that match the letter of credit but has failed to actually perform the contract (Xiang & Buckley,2002). Fraud is reflected by the fact that OVS has presented documents despite the fact that they have delivered goods of less value and minimal quality. The rule was established that though the documents present to the bank comply with the terms and the set conditions in the letter of credit the payment may be effectively stopped because of fraud unless the presenter is under one of the categories of the so-called protected class (Xiang, 2002). In the case of United City Merchants (Investments) Ltd v Royal Bank of Canada (American Accord)1 the court gave the preconditions that inorder for a party to recover under the Fraud Rule the fraud must be more than just a mere allegation2, the bank must also have independently the information of the fraud without this being the obligation of the bank and finally the court has to take into account the intention of the beneficiary in deciding the matter (Dolan, 2007). It is not very clear from the question from the question if OPS have received the payment from DBB payment. The court may remedy the situation in two main ways, by ordering an injunction against further payment or issue a summary judgement on behalf of the plaintiff who in this case will be NTV. Though letters of credit are extremely essential to guarantee assurance to the seller, they should not be used also as an avenue to unjustly enrich beneficiaries through fraud. In conclusion on this the court should be guided by the words of Edenfield J in the case of Dynamic Corp. of Am. V Citizens & S. National Bank3 that there is much public interest in discouraging fraud than encouraging at all the documentary credit used in the international commerce. NTV should also be forewarned that OPS and DBB are likely to petition the court on the principle of autonomy or independence which seems to rival the Fraud Rule. Under the doctrine of autonomy which forms the firm foundation4 of laws that govern the documentary credit stipulate that the issuing bank obligations as relation to documentary underlying issues and facts is independent from the contract of goods between the seller and the buyer (Todd, 2000). This rule would essentially aid the bank and the OPS and the burden lies squarely on NTV to establish the existence of fraud in the transaction. The independence principle is well set out in the Uniform Customs and Practice for Documentary Credits (UCP) 600 Article 4 and 5 and also the Uniform Commercial Code (UCC) 5-103d. The provision supports the view that the issuer will effect payment of the transaction without looking behind the documentary evidence to determine if there is existence of fraud or not (Gozlan, 2009). From the provision it is clear that the issuer must always honour their obligation of effective payment to the beneficiary irrespective of existing disputes between the parties unless it is established that there is fraud in the transaction.5 The autonomy principle however imposes obligations and duties on all the parties involved in the transaction. The buyer on his part is under an obligation to ensure unequivocal and unambiguous instructions are given to the issuer (Creed, 2001). Failure to carefully take his interest in the drafting the beneficiary may take advantage of the loophole that exist. In the case of Westpack Banking Corporation v South Carolina National Bank6 the court held that the issuer bank are under no obligation to speculate the underlying facts in the documents and should only concern itself with the letter of credit only. Similarly, the seller is under obligation to bring forth documents that comply strictly with the terms and conditions otherwise they would be jeopardizing the payment that is due to them.7 NTV should however note that the independence of the bank’s undertaking in cases involving irrevocable letter of credit is very vita. The courts in such an instance refuse to grant any form of injunction, no person including the buyer can stop the effective payment from the bank is the documents are fully conforming.8 There are two exceptions to the autonomy principle, the fraud exception and the cases of illegality (Dolan, 2007). In case of irrevocable letter of credit the buyer’s recourse is a legal action against the sellers underlying breach of international transaction.9 The third issue that NTV need to take into consideration is the principle of strict compliance. This principle enables the bank to effectively deny the payment to the seller if the documents tendered by the seller do not comply strictly with the conditions and terms that are enshrined in the documentary credit. This principle is embodied under Article 13(a) of the UCP 500 which provides that the banks must reasonably examine the all the documents stipulated by documentary credits and if any of the documents is inconsistent on the face it, it should be rejected forthwith (Bryne, 1995). This principle is essentially intended to cushion the buyer against the fraud of the sellers. Lord Sumner in the case of Equitable Trust Co of New York v Dawson Partners10held that there is no room at all that the documents should almost be the same or documents which just do as well in the circumstances. The general rule should be upheld since the international commerce cannot be carried on properly on the basis of intrinsic insecurity. The case involved sale and purchase of vanilla in Batavia currently known as Jakarta. The issuing bank presented a letter of credit on behalf of the buyer but payment was to be made upon the proper presentation of complete shipping documents. The documents had some discrepancies on the telegraphic code, but that notwithstanding the shipment was carried out plus the payment. The seller had fraudulent and the buyer later learnt that the contracted goods formed less than 1% of the cargo delivered since the rest of the goods were rubbish. The House of Lords held that in the circumstances the bank was not entitled to any reimbursement on behalf of the buyer due to the principle of strict compliance (Jens and Nielsen, 2001). DBB may defend their position of effecting payment to OPS based on this principle to the detriment of NTV who are the buyers of the commodity. It is also important that NTV should know the rules of jurisdiction. It is very clear that both parties hail from different countries with the buyer being based in Australia while the seller’s place of business is in Sri Lanka. It is not clear c from the problem question whether the parties had provided for an arbitration clause or a clause of jurisdiction in case the parties fell into dispute. Various convections have been enacted and adopted to reduce and prevent the dangers of conflict of laws these are; the two Hague Uniform Laws on International Sales11and the Convection on Contracts for International Sale of Goods, 1980 (CISG).12 The court in the case of Mount Albert Borough Council13 held that the proper law of contract will be the law that the court is likely to use while determining the obligations of the parties (Chuah, 2001). In conclusion CISG will be very important in deciding the matters in question. It will establish the place of business and the remedies available to the parties in the international transaction. Based on the above discussion it will be a herculean task for NTV to establish the liability of OPS and DBB. REFERENCES Byrne. J, (1995).Critical Issues in the International and Domestic Harmonisation of Letter of Credit Law and Practice, Commercial Law Annual 389, 421. Chuah, J.C.T. (2001). Law of International Trade. London : Sweet & Maxwell Creed, N, (2001) The Governing Law of Letter of Credit Transactions. 2 The Journal of International Banking Law. Dolan. J, F, (2007) Letters of Credit , A.S.Pratt, 4th Ed. Gozlan, A.Y. (2009), International Letters of Credit: Resolving Conflict of Law Issues, The Hague Jens N. & Nielsen N, (2001) Standby Letters of Credit and the ISP 98: A European Perspective¸ 23 Banking & Finance L. Rev 163. The Uniform Customs and Practice for Documentary Credits 500 and 600. Todd, P, (2000). Bills of Lading and Bankers” Documentary Credits. London: LLP Xiang, G, & Buckley. R,(2002), The Development of the Fraud Rule in Letter of Credit Law: The Journey So Far and the Road Ahead, 23 U. PA. J. INT’L ECON. L. 663. Xiang, G, (2002) The fraud rule in the law of Letters of Credit, The Hague. Read More