LETTERS OF CREDIT AND FRAUD: A REVISIONIST VIEW

Abstract

The letter of credit has been used for many years in international trade, but its legal nature and impact are not yet fully understood. This article analyses the specific problem of the effect of fraud on the generally accepted principle of the autonomy of documents that comply with the terms of the credit. The "gross" or "egregious" fraud standard, adopted in the United States in Sztejn v. J. Henry Schroder Banking Corp. and in England in United City Merchants (Investments) Ltd. v . Royal Bank of Canada, is not well founded in precedent, is inconsistent with the contractual nature of the letter of credit, and, in the United States, with modern legislation. A more liberal approach to the effect of fraud on letters of credit would be more compatible with equitable principles available in contract law generally, would more correctly reflect the increasing knowledge and consequent responsibilities of businessmen and their bankers, and would permit the law to respond flexibly to varying circumstances in particular cases. Existing rules applicable to charges of fraud would prevent a flood of litigation. The result of such a shift would not constitute a death-blow to the letter of credit, but permit it to continue as a vital, useful device in international trade.