The Scope of the Fraud Exception in Letter of Credit Law

Abstract

The cardinal principle in letter of credit law is that the issuing bank must pay the beneficiary if the beneficiary presents documents that facially comply with the letter of credit’s requirements. A well-established exception to that principle of atutonomy is that the beneficiary is not entitled to payment if there is fraud. In 1982 the House of Lords held, in a decision controversial and subject to debate ever since, that the exception is limited to beneficiary fraud only and excludes third party fraud. My article argues that the fraud exception should include third party fraud. In doing so, it provides a new, simple yet effective perspective from which the law and the debate should be looked at and can be moved foward. The new perspective is: public policy against fraud underlies the (fraud) exception; the exception is made not because of any legal wrong or fault committed by the beneficiary, but because of public policy concerns against fraud; therefore, it should not matter who commits the fraud.