Banking and Insurance Law - Essay Example

___________ ____________ ____May 2006 Banking and Insurance Law Uniform Customs and Practices in Documentary Credits (UCPDC) Letters of Credit (LCs) is an instrument of maritime trade which has long been acclaimed as the nerve center of international trade. LCs are not "contracts" or "surety ship obligations" or "negotiable instruments" or an "agency agreements", but separate independent obligations to be interpreted on their own terms and conditions without reference to any other documents. Particularly during the last 50 years or so efforts have been variously made to bring in a great deal of uniformity and standardization in the use of LCs.Major effort in this direction has been the formulation and adoption of the Uniform Customs and Practices for Documentary Credits (UCPDC) .The UCPDC are formulated by the International Chamber of Commerce and they work admirably to standardize the practices in use of documentary credits and a reference to them often helps clarify a lot many issues where disagreement of conflict of interest exists.UCPDC are in fact a laudable instance of the harmonization of law in international trade.UCPDC have been revised over the years and the latest three versions relate to the years 1993(UCPDC 500),1983(UCPDC 411) and 1974(UCPDC 400).The primary structure of documentary credit transactions has been elaborately dealt with in the evolved UCPDC and they cover directly or indirectly various facets of maritime trade through LCs such as the parties vis--vis contracts of LCs; the alternative payments there upon; the relationship between the Applicant of the LC and the Issuing Bank; Applicant's Instructions to the Issuer; pre-application consideration of the parties, Reimbursement/Loan Agreement (between the two); Rights to commission, charges, interest and security (in the documents presented under the LC, the goods and the proceeds); the obligation to insure the subject matter of the underlying contract; the result of the action on the Instructions (which, on acceptance, forms the contract between the two) viz.the issue of a LC (establishing the relationship between the Issuer and the Beneficiary); the amending, cancellation or termination of a LC; performance there under; valid excuses by a beneficiary for non-performance; transfer, assignment and back-to-back LCs; wrongful dishonor and anticipatory repudiation of it etc.UCPDC have technical rounded-up the standardized procedures and definitions on types of credit, teletransmitted and pre-advised credits, standard for examination of documents, discrepant documents and notice, disclaimer on effectiveness of documents, disclaimer on the transmission of messages, Force Majeure, bank-to-bank reimbursement arrangements, ambiguity as to the issuers of documents, unspecified, issuers or contents of documents, issuance date of documents v. credit date, Marine/Ocean Bill of Lading, Non-Negotiable Sea Waybill, Charter Party Bill of Lading, Multimodal Transport Document, Air Transport Document, Road, Rail or Inland Waterway Transport Documents, Courier and Post Receipts, Transport Documents Issued by Freight Forwarders, 'On Deck', 'Shipper's Load and Count', Name of Consignor, Clean Transport Documents, Freight Payable/Prepaid Transport Documents, Insurance Documents, Type of Insurance Cover, Commercial Invoices etc (UCPDC 500, 1993).In fact complete codified instructions on documentary credits can be had only through joint readings of the UCPDC and universal commercial codes (UCC). Despite the support of uniformity and standardization provided by provisions of UCPDC and UCC disputed transactions have grown multifold in maritime trade. Some of these disputes were genuine trade disputes and could be resolved by fulfillment of deficiencies whereas a good number of them were categorized as trade malpractices with the primary objective of defrauding the other part(ies).It is the latter category of documentary credit transactions which forms the focus of this paper and the general leeway given to fraudulent parties by English Courts, after reaching interpretation of various versions of UCPDC, which in turn provided comfort to such money launderers and other documentary fraudsters. The case law support to argument is provided in terms of identifying the sources of law; the real party in interest, joinder and change of parties, issues of jurisdiction and conflict of laws. Nature, limitation and Evidence on Maritime Frauds In order to look at fraud activity in LC transactions it may be educative to get an international historical perspective on conviction in fraud events in general. It is observed that when a full scale conviction of a fraudster has been launched as a criminal offence, either in UK jurisdiction or in some other jurisdiction, one of the possible outcomes may be the obtention of compensation through the adopted criminal process. The accepted offences under U.K. law are theft, obtention of property by deception, and conspiracy to defraud. Historical records and trends show that very few successful prosecutions materialize in a substantial part owing to jurisdictional problems (Conway, 1990). Looking at this trend, an alternative remedy in civil law might turn out to be more productive if it targets identifying the assets of fraudster and pleads for freezing them. However in both instances the two primary questions of the substantive law remains viz.who is to be made liable and on what grounds There are other matter such as ability to elicit information from the witnesses/defendants, preventing dissipation of created assets and jurisdictional issues. As Ian Huntington writes," Fraud investigations are concerned with the law and litigation as much as with (and arguably more than) the measurement of the financial consequences of fraud; ... It can be seen, therefore, that the fraud investigator needs not only the skills and technique to discover facts which have been deliberately concealed, but also a clear understanding of the legal context in which he must work and the processes which may help or hinder him" (Huntington, 1992).In maritime trade transactions victims of fraud might claim action for breach of contract claiming contractual relationship however the fraudster is essentially out to repudiate this very claim and on his part may claim total fulfillment of the contract.Therefore,in such situations arbitrations will not work and resolution can be offered only by litigation. Similarly in instances of fraudulent insurance claims the only time that is available is the time spent by insurance investigators in verifying the claim otherwise documentary credits are so structured and timed that payments have to be made in short durations. It is observed, that due to this nature of documentary credits, most victims of maritime fraud are able to press litigation only when the fraudster has made good with the money. Cross border maritime transactions afford protection to parties to a contract in the eventuality of bankruptcy, however, no protection is afforded to any party against the fraudulent intentions or acts of other cross border party. Therefore, a victim of a fraud in LC transactions begin with a position of disadvantage in any jurisdiction. This has been often the basis for UK courts to leave alleged fraudsters scot free. In Discount Records Ltd. v. Barclays Bank Ltd. (1975) the plaintiffs had bought a consignment of records and cassettes from a French seller with payment to be made through a confirmed and irrevocable credit. Confirming documents were submitted but by then it had already transpired that seller shipped cartons of goods largely contained rubbish and the bought product was more missing than available in such cartons. As a result most of the order deliveries of the plaintiff were disturbed too. However the plaintiff, buyers, could not stop the confirming bank from paying to seller as per the UCPDC defined terms of credit as buyers, though alleging sellers to be fraudulent, could not prove it so within the short time afforded in the documentary credit terms. The court also held this position. It is apparent that proving a fraud in short time intervals afforded in documentary credit is very arduous. Such a process is normally taken by some external investigation authority who is not a party to the contract. Also any proving claim has to be against the seller and not any of intermediary parties such a freighters, forwarding agents or even loading contractors. The courts in all such cases tend to take a view that LC are more of a trade instruments facilitating cross border payments without posing undue risks to banking systems rather than documents involved in an 'international sale of goods transaction' requiring honoring of the sale terms. As a result of these bankers are separated out from the sale contract and generally involved and held responsible only with the payment leg of the transaction. In this case itself plaintiff might have had a cause of action arising out of contract with the issuing bank however since they had not acted upon it their claim against the bank was weak. This forced them to focus on their claims against the French seller for fraudulent misrepresentations, fraudulent breaches of contract and the tort of deceit. However in such circumstances rules of remoteness do not apply. In Doyle v. Olby (Ironmongers) Ltd. (1969) the Court of Appeal held that the objective of damages in fraud, unlike contract, is compensation of the plaintiff for all the loss he has suffered, i.e., for all the actual damage directly flowing from the fraudulent inducement. However, in most instances of documentary transactions this is a hypothetical solution as the defendant may not have any property worth while in plaintiff jurisdiction to satisfy in damages the claims of the plaintiff. Any way, any money in such property would belong to the defendant alone. Theft does not defeat the tile to property.Therefore; it may be a good policy to save title to some property in maritime trade. With such title it would become possible to recover the property or value of it from whosoever came in its possession. This was illustrated in V/O Rasnoimport v. Guthrie & Co. Ltd. (1966), where some of the cargo was stolen prior to loading but after the signing of the mate's receipts. The loading contractor was unawares of this development and issued bills of lading for the entire cargo. The endorsee, an immediate victim of the fraud, had paid for the full cargo. He successfully sued the loading contractor for breach of warranty of authority. He had the alternative of suing the seller who retained the title to property but in that case the seller would have sued loading contractor and recovered damages from him. However even property cannot be relied upon in all cases. Any meddling with the value or quality of the property may make it doubtful for the court and the title itself may not be clear in the minds of the court. This is particularly so in cases involving frauds. In Manchester Trust v. Furness, Withy & Co. Ltd., The Boston City,(1895) the charterers prevailed upon the master of the ship for a diversion on a full load cargo away from the port of destination to another port; where they allegedly sold the entire cargo to a third party. There was an endorsee party to bill of lading and it was valid owners of the cargo of coal. However it was the owner of the cargo as had originally set sail and not the one which had been diverted, mixed with other coal or even fully dissipated in a third party sale. This endorsee was the direct victim of the fraud and though the title to the property remained; the property was either not amenable to an indistinguishable valuation or even of being located. Thus this property could not be availed of and fraud victims were not vindicated in their action against the fraudster. The same events, or about the similar chain of events took place in a very cited case of Shell International Petroleum Co. v. Gibbs, The Salem, (1983).In this case the charter ship owners stole an entire cargo of crude oil and the buyer in another country could not obtain the property. Even Shell would be incapable of availing the property once it lost its original character subsequent to its mixing with crude oil of any third party ownership. Having been a victim of fraud and given the stance of the Court in this case Shell tried to recover stolen property through its comprehensive marine coverage; however to little avail. Though it is entirely different matter that Shell recovered most of its losses from the buyer, subsequently. In many instances the title to the property cannot be sufficient to protect the victim of the fraud. This was amply proven in the case of Cahn v. Pockett's Bristol Channel Steam Packet Co. Ltd. (1899) where the seller had shipped a cargo load of copper to the insolvent buyer along with a bill of lading and a draft. The buyers did not accept the draft but transferred the bill of lading to a third party buyer who accepted the same in good faith. The third party buyers were plaintiffs and they were seeking protection from the seller. The Court of Appeal held that the plaintiffs had obtained good title to the copper under section 25(2) of the Sale of Goods Act 1893, read in conjunction with section 2 of the Factors Act 1889. The sellers tried to stop the goods in transit; however the plaintiffs were protected from this act under section 47 of the Sale of Goods Act 1893. Thus the legal property of the seller, a victim of fraud, was effectively frustrated by the process taken by the law under Sale of Goods Act 1893 and Factors Act 1889. In another case Lloyds Bank v. Bank of America National Trust and Savings Association (1938), where a bank's title to property as pledge did not prevail against another bank. First bank had released the document to goods to buyer who had pledged them again and after having obtained the payment had vanished. In this instance though the first bank had vitiated title to property but it was allowed to trace the proceeds of the property sale even in mixed accounts as the fraudster was acting in the capacity of its own agent ,which was a fiduciary capacity. Though the third party which had unknowingly taken on the pledge and made the payment was not held accountable. This again reflects the tendency on the part of UK courts to rely process of law and obfuscate both substantive issues as to who is liable and on what grounds to the detriment of the fraud victim. Therefore a preferable course of action would be for the bankers to have the added protection of a trust receipt. As under such an arrangement the bank would be in an improved status of being able to participate in the proceeds of the sale of goods covered in trust receipt apart from maintaining an equitable interest in the ownership of such goods. Moreover due to the inherent trust the bank would be able to trace the proceeds in full equity and it can also proceed against the third parties who with full knowledge receive the trust property or who with full knowledge assist in the breach of trust by the fraudster., and in addition to being able to trace these in equity, the bank can proceed against third parties who knowingly receive the trust property, or who knowingly assist in the breach of trust by the fraudster. The liability of the knowing receiver or knowing assister, is essentially a private liability and it does not beg on continued retention of the property by the third party. Thus knowing receipt and knowing assistance can, therefore, be critical points of contest even if proceeds are not traceable, and the fraudster has vanished. The Mareva injunction is a kind of interlocutory relief, whose prime objective is to prevent the defendant from removing or relocating his assets out of the jurisdiction, or otherwise dealing with them in any manner, until the legal cause pending against him has been completed. The name Mareva comes from the case of Mareva Compania Naviera S.A. v. International Bulk Carriers S.A (1975).This is granted to applicant after much deliberations and considerations of circumstances governing the case. The requirements of the court were summarized by Rattee J in BCCI (1994) as under: "As has been said again recently by the Court of Appeal, there are three issues on which the court has to be satisfied before granting a Mareva injunction: (i) has the applicant a good arguable case; (ii) has the applicant satisfied the court that there are assets within and, where an extra-territorial order is sought, without the jurisdiction; and (iii) is there a real risk of dissipation or secretion of assets so as to render any judgment which the applicant may obtain nugatory(BCCI,1994) " Thus a victim of the fraud has to go substantial length in satisfying the court on all three counts to obtain Mareva injunction which may be at the heart of recovery for him. As the maritime fraud takes place generally across national borders jurisdictional issues do arise very often.UK law has its core approaches in form of English rules in R.S.C. Order 11, the Brussels Convention on Jurisdiction and the Enforcement of Judgments in Civil and Commercial Matters (as amended). Jurisdictional issues were also made adequately clear in Grupo Torras S.A. v. Sheikh Fahad Mohammed Al Sabah,(1995). An interesting jurisdictional conflict case is presented by Ash v. Corp. of Lloyd's(1992).In this case The plaintiffs were underwriters of Lloyd's. The plaintiffs had letters of credit issued by the defendant banks in favour of the defendant bank Lloyd's. Four of the defendants had offices in Ontario and in England. The remaining three defendants had offices in Ontario but not in England. The letters of credit issued by the defendant CT stated that any dispute arising with respect to the letters of credit was to be submitted to a court in England. The other letters of credit were silent as to jurisdiction. The indemnity contracts pursuant to which the plaintiffs held the letters of credit contained exclusive jurisdiction clauses in favour of Ontario. By their terms, the letters of credit were to be presented for payment in England. The plaintiffs sued in Ontario to rescind the agreements on the grounds that they were void for having been induced by Lloyd's by means of fraud and in contravention of the Securities Act, R.S.O. 1980, c.466. The plaintiffs moved for an interlocutory and permanent injunction to restrain the defendant banks and financial institutions from making payments on the letters of credit. The defendants moved to stay the plaintiffs' action and the plaintiffs' motion on the grounds that England had exclusive jurisdiction over the matter or, alternatively, that England was the convenient forum. Lloyd's brought a motion for an order staying the action on the basis that the contracts had exclusive jurisdiction clauses in favour of England. An order was granted staying both the plaintiffs' motion for an interlocutory and permanent injunction and their action against Lloyd's on the basis that the clauses in the agreements between the plaintiffs and Lloyd's assigned exclusive jurisdiction to English courts. Even the Canadian court's decision on jurisdiction issue did not favor the fraud victim. Work Cited Uniform Customs and Practice for Documentary Credits, (UCP 500). International Chamber of Commerce. (1993 Version) Conway, Barbara. Maritime Fraud. Lloyd's of London Press. (1990). Huntington, Ian. Fraud: Prevention and Detection.Butterworths. (1992). Discount Records Ltd. v. Barclays Bank Ltd. (1975). Doyle v. Olby (Ironmongers) Ltd. (1969). V/O Rasnoimport v. Guthrie & Co. Ltd.(1966). Manchester Trust v. Furness, Withy & Co. Ltd., The Boston City,(1895). Shell International Petroleum Co. v. Gibbs, The Salem, (1983). Cahn v. Pockett's Bristol Channel Steam Packet Co. Ltd.(1899). Lloyds Bank v. Bank of America National Trust and Savings Association(1938). Mareva Compania Naviera S.A. v. International Bulk Carriers S.A(1975). BCCI. 3 All E.R. (1994). Grupo Torras S.A. v. Sheikh Fahad Mohammed Al Sabah,(1995). Ash v. Corp. of Lloyd's(1992). Ontario Court of Appeal Read More