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GAZETTE
JULY/AUGUST 1986
relations between the supplier and the customer;
nor with the question whether the supplier has
performed his contract obligation or not; nor
with the question whether the supplier is in default
or not. The bank must pay according to its
guarantee, on demand, if so stipulated, without
proof or conditions. The only exception is when
there is a clear fraud of which the bank have
notice."
12
The fraud exception
In the above quoted passage Lord Denning M.R. was
referring to what is generally called the fraud exception
which he explained thus:
"[T]he bank ought not to pay under the credit if
it knows that the documents are forged or that the
request for payment is made fraudulently in
circumstances where there is no right to
p a yme n t . ""
This exception is extrapolated from the authorities on
documentary credits and in the latter context it was
recently considered by the House of Lords in
United
City Merchants fInvestments)
Limited and Others -v-
Royal Bank of Canada and Others.^
The relevant facts
were that the seller, an English company, contracted to
sell fibre glass making machinery to the buyer, a
Peruvian company. The terms of the contract involved,
inter alia,
the price being paid by an irrevocable letter of
credit issued by a Peruvian bank. The Peruvian bank in
turn arranged willi the defendant, a bank in England, to
open a confirmed irrevocable letter of credit in favour
of the seller payable in London. A portion of the price
was paid in accordance with the terms of the contract.
The machinery was then shipped on 16th December
1976, but the shipping agent, who was aware that the
letter of credit required shipment no later than 15th
December 1976, falsely and fraudulently, but not as
agent of the seller or of a merchant bank to which it had
assigned the letter of credit, entered the date of
shipment on the bill of lading as 15th December 1976.
When the merchant bank presented the shipping
documents to the defendant's London branch, it
refused to pay because it had discovered that the dale on
the bill of lading was false and that the machinery had
been shipped after the contract date. The seller and the
assignee of the letter of credit brought an action against
the defendant seeking payment of the portion of the
price which was agreed to be paid against the shipping
documents. The trial judge rejected the defendants
defence that it was entitled to reject the documents for
non-conformity with the terms of the credit and fraud.
The Court of Appeal held, with regard to a letter of
credit, that a bank was only obliged to pay on the
presentation of genuine documents in accordance with
the requirements of the letter of credit. It held that
where the documents presented were to the bank's
knowledge false and made fraudulently by the person
who issued them, they were not genuine conforming
documents and the bank was obliged to refuse to pay,
and the fact that the person who presented the
documents had acted in good faith was irrelevant. It
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