International Commercial Law and Uniform Commercial Code - Assignment Example

INTERNATIONAL COMMERCIAL LAW REPORT PART A QUESTION ONE International trade law is majorly facilitated by way of documentary credits. The letters of credit fall into two main categories which are; standby letters of credit and commercial letters of credit. The distinction between the two is essentially that a commercial letter of credit will be a principal document in ensuring payment in the international trade. Usually a letter of credit will be prepared by the buyer on behalf of the seller while standby letters of credit assist to finance a third party (Turner, 2004). In international trade two main rules are applicable as regards the documentary credit; the autonomy principle and the fraud rule. Since its very inception the fraud rule was established in order to prevent a seller who has been fraudulent in a transaction from taking advantage of the credit obtained in the transaction. The fraud rule seems to conflict with the autonomy principle1 which seeks to make a delineation between the goods in a transaction and the documents that are involved in the international trade (Dolan, 2007). Fraud rule was first supported in the case of Sztejn v J. Henry Schroder Banking Corporation2 by Judge Shientag. The court held that in the instances where the sellers shows a complete failure of intention to ship the goods coupled with the fact that the draft documents have not been presented the independence principle is waived. Generally the banks have an obligation to observe independence while carrying out their transactions, however as the court rightfully pointed out this should not be extended in so far as to assist a fraudulent seller. The rule is intended to protect and give advantage to the applicant’s inorder to protect their interests from unscrupulous sellers (Xiang, 2002). Under Article 5-109 of the Uniform Commercial Code (UCC) 1995 the fraud rule was enshrined as one of the exception of documentary credit. Through the wise application of the fraud rule then international trade derives its utility and efficacy commercially. The rules purpose is to circumvent the powers given to the issuing bank to honour any credit so long as they are accompanied by the right draft documents.3 The fraud rule results because of the loop holes that result when the beneficiary’s role is to just match the documents and not essentially to prove the actual performance of the transaction.4 Fraud rule may also result when the seller actually presents forged documents (Robert and Allan, 2000). As a result of independence principle the bank does not have the able means of ascertaining whether the documents comply with the actual goods, thereby effecting payment resulting in the seller or the beneficiary of the transaction unjustly enriching themselves. In the case of Discount Records Ltd v Barclays Bank Ltd and Barclays Bank International Ltd5the court did uphold the judgement on behalf of the beneficiary though this was on an allegation of fraud and not a material fraud. The position was to be restated in the case of United City Merchants (Investments) Ltd v Royal Bank of Canada (The American Accord)6 which gave the rule a very narrow scope. Inorder that a beneficiary of rule to succeed the court held that fraud made by way of allegation could not at all be sufficient, the bank has to have the information of the fraud without being an obligation on its part of finding out the fraudsters and finally the intention of the unscrupulous beneficiary should be taken into account by the court (Xiang and Buckley, 2002). I disagree that the Fraud Rule at all impinges on international transactions. Though the letter of credit is seen as the best assurance of the seller in international transaction, there are three main reasons why the rule should be maintained at all costs. The first relate to the public policy of ensuring a reduction in fraud cases. This is reflected by the statement of Edenfield J in the case of Dynamics Corporation v Citizens & National Bank7 where the learned judge held that there is as much public interest in discouraging fraud as encouraging the use of documentary credit in international commerce (Chuah, 2001). Secondly, the Fraud Rule is very important in ensuring the filling of the loopholes that exist in the international commerce through which sellers would unjustly enrich themselves. An application of the rigid rule of the principle of autonomy would essentially produce harsh results thus allowing flexibility since most of the rules paint the conduct of human beings with a broad brush. Finally, the Fraud Rule application gives maintenance to the utility of documentary credit. If fraud cases were allowed in all instances this would undermine the letter of credit.8 The rule should be upheld in all circles since strict application of the rule as in the case of American Accord9has resulted in occasioning injustices to innocent buyers and unjustly enriched the beneficiaries. Upholding of the rule would to the contrary paint a good picture of international trade and transactions. The injustices caused by the narrow scope of the American Accord can be seen in the now relaxed rules of exception (Dolan, 2007). Due to the court having a very high standard of proof, recent cases has held that the evidential requirement would be lowered firstly when the issue of fraud is raised at the pre-trial stage. In the case of Themehelp Ltd v West10 the buyer who the court established had an arguable case at the pre-trial stage was granted an injunction against the beneficiary who had sought to enforce a credit guarantee (Creed, 2001). Secondly the evidential requirement is lowered when the bank is party to the fraud.11 Thirdly the requirement will also be low when the beneficiary seeks to make a summary judgement against a bank that is suspicious of his misrepresentation. Finally the evidential burden will be lowered in the case where the bank with a probability of success establishes that the transaction was fraudulent, thus summary judgement can’t be entered (Xiang, 2002). One of the difficulties of enforcing the Fraud Rule relates to the banks notice and knowledge. The big question is whether the banks should be held liable for effecting payment to beneficiaries? The position on this issue is not candid and well established by the precedent. In the case of Gian Singh & Co. Ltd v Banque de l’lndochine12 in this case the bank had effectively paid money to a beneficiary on the basis of a forged document. The plaintiff didn’t succeed on appeal since the court was of the view that the bank was not at all aware of the presence of a forgery. A dissenting case is illustrated in Banque Saudi Fransi v Lear Siegler Services Inc13 where the court allowed the bank to have a summary judgement imbursement against the beneficiary though the money had been obtained as a result of fraud perpetrated by him (Dolan, 2007). The second difficult relates to the well established principle of autonomy. Justice Kerr in the case of R.D Harbottle (Merchantile) Ltd v National Westminister Bank Ltd14 has described a documentary credit to be the life blood of every international transaction. At the foundation of the international commerce is the principle that there is a great wall of separation between the documents used in the transaction and the actual contract between the seller and the buyer, this also extends to the applicant bank and the issuer bank. This is echoed in the case of SL Jones & Co v Bond15 where the court held that a letter of credit is independent and separate from the contract of the seller and his bank. The case of Power Curber International Ltd v National Bank of Kuwait16 held that at all material circumstances the bank should honour all its obligations under the letter of credit. It should not all be involved in the squabbles between the seller and the buyer as relates the contract in question ( Harfield, 2001). The principle of independence is clearly enshrined in Article 3 of the UCP 500 which provides that by their very nature the letters of credit are very different from the transaction of the seller and buyer and their banks.17 The court has held in the case of Westpack Banking Corporation v South Carolina National Bank18 that it is not one of the bank’s functions to interrogate or speculate any underlying fact in issue in the draft documents. To prevent the consequences of unscrupulous sellers buyers need to give unambiguous instructions to the issuer of the letter of credit, and should be drafted in such a way that prevent the effective payment to the seller unless he performs all the necessary obligations that he ought to perform (Robert and Alan, 2000). In regard to the Fraud rule all the parties concerned should ensure the compliance of principle of strict compliance. This is provided for under Article 13 of UCP 500 which provides that the banks must ensure they take reasonable care to accurately cross check that the information on the letters of credit complies with the terms and conditions of the credit (Xiang, 2002). This is essentially in limiting the liability of the parties especially the buyer.19 PART B QUESTION 3. The problem question presents various issues that No Taste Videos Pty Ltd (NTV) should be acquainted with before proceeding to take any step against the Overseas Production Specialist (OPS). The first relate to the issue of the principle of strict compliance. This comes about since Don’t Borrow Bank (DBB) made sure that the documents were in strict compliance with the irrevocable letter of credit. Essentially the law related to the documentary credit is founded on the cornerstone of two main principles; the principle of independence or autonomy and that one of strict compliance. The principle of strict compliance allows the bank to refuse effective payment to the seller if the documents that he tenders are not in compliance with the letter of credit terms and conditions. This harsh rule could be traced to the decision of Lord Sumner in the case of Equitable Trust Co of New York v Dawson Partners20 that in the international transactions where banks seek to be indemnified there is no room that the transaction documents should be almost the same or which are just as well since business transaction would not properly operate under the premise of uncertainity (Folsom et al, 2002). This is echoed in the provision of Article 13 of UCP 500 which provides that the banks should reject any document that does not on the face reflect on the instruction, terms and conditions of the letter of credit.21 This rule should be applied rigidly and literally by the banks and though in some circumstances the discrepancy in the tendered documents may not affect the quality or the value of the goods involved in the transaction, the banks are under an obligation to reject them anyway22 unless the contrary is so directed (Turner, 2004). In this scenario NTV should realise that though the principle of strict compliance is intended to protect a buyer like him, the bank will benefit from the rule since it has already effected the payment. An illustration of a case law to illustrate the application of principle of strict compliance is the case of J.H.Rayner & Co Ltd v Hambros Bank Ltd23 the case involved a Danish buyer who bought some groundnuts from the English seller. The letter of credit was drawn showing Coromandel groundnuts while the bill of lading was drawn having the particulars of machine shelled groundnuts. The defendant bank rejected the documents and failed to honour the payment since the bill of lading and the invoice failed to illustrate the word ‘Coromandel’ though in commercial practice there was no difference. The Court of Appeal rightly held that the defendant were right in refusing the payment since the bank is not under any obligation to take notice or have any knowledge concerning the commercial practice of the groundnuts. However not all discrepancies give rise to the effective application of the principle of strict compliance. In the case of Chailease Finance Corporation v Credit Agricole Indosuez24 the court held that the discrepancies of the delivery dates was not of so much use and application as to reject the documents as cross checked with the documentary credit (Smitthoff, 2000). The second issue that comes to the fore relates to the jurisdiction. It is quite clear the parties come from different jurisdiction Australia and Sri Lanka. What is not obvious from the question though is if the parties had provided for an arbitration clause in case of a dispute arising in the transaction. Due to the conflict of laws in both countries the international convections will be very useful in determining the question of jurisdiction and choice of laws. The most important of them all will be the Convection on Contracts for International Sale of Goods, 1980(CISG), the two Hague Uniform Laws on International Sales and the Rome Convection on the Law applicable to contractual obligations of 1980 (Chuah, 2001). Since both parties seems not to have provided their choice of law then the court will determine what will be the proper law of the contract.25 In such a scenario where the parties have not expressly provided for the choice of law the court will imply from the contract. For example if the parties agree that a particular country laws will determine a dispute then the implication will be that they wish that the county laws be applicable.26 The court will also consider the system of law to which the transaction has its closest and real connection. An example is the case of Offshore International SA v Banco Central SA27where a Spanish company had been contracted to drill oil in Panama. A payment of $3 Million was to be paid to the contractors through a correspondent Bank in New York. The issuing Bank was in Spain. When the conflict ensued the court held that New York law was to apply since it had the closest and most real connection to the transaction.28 The third issue that NTV should take note of is the issue of irrevocable letter of credit. This essentially attracts the application of the principle of independence (Creed, 2001). An irrevocable letter of credit constitute a given undertaking by the issuing bank to pay for the documents provided the appropriate documents that matches the terms and conditions are tendered. Article 6 UCP 500 provides that all the issuing banks have an obligation to state whether the letter of credit is revocable or irrevocable. There is a strong presumption where a letter of credit is not specified to assume that it is of irrevocable nature.29The nature of international commerce is the use of irrevocable letter of credit that may be confirmed or confirmed (Murray, Halloway & Timson, 2007). The use of irrevocable letter of credit further complicates the case for NTV recovering their money from OPS. The effect of the irrevocable letter of credit is that a seller may recover the price from the buyer if the confirming bank fails to pay him. This is illustrated in the case of E.D & F. Man Ltd v Nigerian Sweets & Confectionery Co. Ltd30 where the Nigerian buyer prepared an irrevocable documentary credit for the purchase of some crystal sugar. The buyer partially owned the issuing bank and the payment was to be effective within a period of three months. The buyer received the goods and effected the payment, however before the seller would receive the amount the issuing bank became insolvent. The court held that the buyer would be liable and pay again the purchase price to the seller.31 The above illustrate that the burden of disproving the effective payment by DBB bank will be a great one. Irrevocable letters of credit have been held to be the life blood of international commerce.32 The fourth issue relates to the fraud exception.33 It is not in issue that the seller has been fraudulent. The Fraud Rule would be used to successfully aid the innocent NTV in this problem. REFERENCES Chuah, J.C. (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. Folsom, R.H, Gordon, W & Spanogle jr. ( 2002). International Business Transactions ,5th ed., West Group. Henry H,( 2001). Enjoining Letter of Credit Transactions. 95 Business L J p. 596 at 602 Murray, C., Halloway, D. & Timson, D. (2007). Schmitthoff’s Export Trade – The Law and Practice of International Trade. London: Sweet & Maxwell Robert, W. & Alan, W. (2000), The Liability of Banks in Documentary Credit Transactions Under English Law, 13 J. Int’l Banking L. 387. Turner, S.P (2004) New Rules for Standby Letters of Credit: The International Standby Practices, 14 Banking & Fin. L. Rev. 457, 463. Xiang G, (2002), The fraud rule in the law of Letters of Credit The Hague, p. 26-27. 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. 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