Using the nullity exception to combat the circulation of fraudulent documents in letters of credit transactions

Abstract

In letters of credit transactions when the beneficiary presents apparently conforming documents before the bank, as long as the bank has exercised proper care in making payment it can disregard all disputes arising from the underlying transaction. Moreover, the bank does not have to consider whether the documents presented are as a matter of fact, proper and genuine. The exception to this principle of independence applies in circumstances where there is fraud on the part of the beneficiary. For instance, where the beneficiary has fabricated a document, a bank does not have an obligation to pay the beneficiary regardless of the fact that the documents conform on their face to the requirements of the credit. The fraud exception is a common law exception and it is not covered by the UCP 600. This exception is based on the maxim ex turpi causa non oritur actio. This basically means that a court will not allow its processes to be used to aid a dishonest beneficiary. However, the fraud exception only covers fraud committed by the beneficiary. In circumstances where a third party and not the beneficiary has committed fraud and the documents are a nullity, the fraud exception will not permit a bank to withhold payment against presentment of apparently conforming documents, because the beneficiary is innocent. The study argues that this limitation of the fraud exception gives third parties a free ride. This opens a gap which allows fraudulent third parties to freely get away with fraud, which ultimately gives rise to the circulation of fraudulent documents in letters of credit transactions.

This study seeks to answer the question of how this peculiar position can be rectified by use of the nullity exception. The basis of the exception is that a null document cannot be treated as a conforming document merely because fraud has been committed by a third party. Unlike the fraud exception, it does not focus on the identity of the fraudulent party, rather its main focus is the fact that a bank should not make payment on presentment of null documents because they are invalid.

ii