Legal basis for the fraud exception in letters of credit under English Law
| DOI | https://doi.org/10.1108/JFC-01-2020-0004 |
| Published date | 04 March 2020 |
| Date | 04 March 2020 |
| Pages | 594-600 |
| Subject Matter | Accounting & Finance,Financial risk/company failure,Financial crime |
| Author | Zaid Aladwan |
Legal basis for the fraud
exception in letters of credit under
English Law
Zaid Aladwan
Law School, University of Sussex, Falmer, UK
Abstract
Purpose –This paper aims to analyse the status of the bank’s knowledgeand the hardship related to the
clear evidencerequirement with regard to establish the fraud exception rule in Englishcourts.
Design/methodology/approach –Traditionalanalysis method and criticallegal thinking.
Findings –To trigger such an exception in England, two conditions, bank’s knowledge and clear evidence, must
be met to establish the fraud rule, which will be applied only if it appears in documents. The bank’s knowledge
condition, the awareness of the fraud that the bank should have before the payment, is material to determine
whether if the fraud rule will triggerin most of the English cases. However, if the bank is not aware of the fraud,
they must honour the credit if the documents are compliant, meaning the paying bank is protected if the documents
against which it made payment are tainted with fraud, even if it is not aware of the fraud. Moreover, it is not a
bank’s responsibility to investigate allegations of fraud. Nonetheless, there are some reservatio ns regarding the
bank’s knowledge and clear evidence conditions, as explained above. In short, such an approach does not lead to
fairness and justice for the applicant.
Originality/value –English courts focus more on evidence of the fraud rather than making unnecessary
distinctions pertinent to the fraud exception scope. The absence of such evidence will not trigger the exception
rule. Conversely, injunctions are not easily granted in England where the requirement for heavy evidence and
proof of the bank’s knowledge will be obstacles. That is to say, banks are more protected in England simply
because the courts want to uphold the integrity of the banking system when affirming the autonomy principle. In
a case where the applicant becomes aware of the fraud, there is no other option for the applicant except to ask for
an injunction from the court, which is not easy to gain under English courts. In addition, it is unclear how the court
will prove that the bank is aware if there is fraud in the presented documents. In addition, the question arises as to
whether the same strict standard will be required by both the applicant and the party who notified the fraud.
Keywords Bank knowledge, Clear evidence, English law, Fraud exception rule, Letters of credit
Paper type Viewpoint
1. Introduction
It is clear in the law that a bank’s obligation is to honour the credit against confirming
documents. Nonetheless, in the case of fraud, there are times when the bank might be
obliged to dishonour the credit based on its own decision[1]. That is to say, if the bank is
aware of existing fraud, it is under a duty to refuse presentation. Conversely, in connection
with the fraud exception rule in English law, the claimant must gain an injunction, which
will force the bank to postpone payment under the credit until the end of the hearings
(Burrows, 2015, para 6.122; Bridge, 2017, para 24-027, Mugasha, 2003). To gain such an
injunction, the claimant must provide clear evidenceof fraud[2]. Based on these points, this
section will focus on a bank’sknowledge and clear evidence.
1.1 Bank’s knowledge
Despite the fact that a bank’s obligation is to pay against confirming documents, it is
believed that the bank must dishonour the credit if it learns of fraud prior to honouringthe
JFC
30,2
594
Journalof Financial Crime
Vol.30 No. 2, 2023
pp. 594-600
© Emerald Publishing Limited
1359-0790
DOI 10.1108/JFC-01-2020-0004
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