Answers Question 1 [For the purpose of this assignment, discussion is emphasized on the Article 5 of UCC and the UNCITRAL

Convention.] The concept of fraud as it applies to documentary credits and standby letter of credits allows the issuer of a letter of credit or court to disrupt the payment of a letter of credit when fraud is involved. This rule is the exception to the Independence principle or the doctrine of autonomy which apply to the very concept of the letter of credit. Generally, the purpose of the two are rather different where the documentary credit serves as to ensure the discharge of a payment obligation and the standby letter of credit serves as a security to performance of non-obligation of the contract. For the documentary transaction, in the United States, the Article 5 of the Uniform Commercial Code (UCC) has incorporated wide provisions with regards to the the fraud exception rules which stems from the landmark case of Sztejn. On the other hand, the Uniform and Customs and Practice for Documentary Credits (UCP) is silent in this respect. In the case of Mid America Tire v PTZ trading Ltd Supreme Court of Ohio,2002. 95 Ohio St.3d, 768 N.E.2d 619.In this case, the parties adopted the UCP. As the court of Appeals found that the UCPs provision is silence on the issue of fraud, it should not be construed as preventing relief under the fraud in the transaction doctrine, where under Article 5 of UCC permits it. The appellate court discussed on how the should material fraud be interpreted.The meaning of material fraud in this case means fraud that has vitiated the entire transaction that the legitimate purpose of the independence of the issuers obligation can no longer be served. Therefore, the court in the case found that documentary transaction may be enjoined by a court when the beneficiary commits a fraud so extensive as to vitiate the entire transaction. The court also examined cases of fraud under the former Article 5 UCC which provide exception to the Independence principle where there is fraud in the transaction. Under the UCC Article 5, the issuer may be enjoined from honoring a presentation on the basis of beneficiarys fraudulent activity in the underlying transaction and the court may grant injunctive relief where honor of presentation would facilitate a material fraud by the beneficiary on the applicant. Where the standby letter of credit is concerned, it is either be governed under the International Commerce of Chambers Rules or the under the international treaty, namely :(a) The United Nations Convention on Independent Guarantees and Standby Letter of Credit ; (b) Revised Article 5 of the Uniform Commercial Code ( UCC) ; (c) The Uniform Customs and Practices for Documentary Credit ( UCP 600) ;

(d) (e) (f)

The Uniform Rules for Demand Guarantees (URDG) ; The Uniform Rules for Contract Guarantees (URCG) ; and The International Standby Practices (ISP98).

For the standby letter of credit transaction, the UNCITRAL Convention has wide application on fraud exception rule as the UCC fraud exception rule scope to the documentary credit. The United Nations Convention on Independent Guarantees and Standby Letter of Credit provision on fraud are contained in Article 19 and 20. It stated that they apply when ;i) A document is not genuine or has been falsified ii) No payment is due on the basis asserted iii) The demand has no conceivable basis . The UN convention, thus, defines fraud on these three basis. Paragraph ( 2) of the Article 19 explains the phrase no conceivable basis means, stating : a) The contingency or risk against which the undertaking was designed to secure the beneficiary has undoubtedly not materialized; b) The underlying obligation of the principal/applicant has been declared invalid by a court or arbitral tribunal, unless the undertaking indicates that such contingency falls within the risk to be covered by theundertaking; c) The underlying obligation has undoubtedly been fulfilled to the satisfaction of the beneficiary; d) Fulfilment of the underlying obligation has clearly been prevented by willful misconduct of the beneficiary; or e) In the case of a demand under a counter-guarantee, the beneficiary of the counter-guarantee has made payment in bad faith as guarantor/issuer of the undertaking to which the counter-guarantee relates. In conclusion, the fraud rule in the law governing letters of credit is hard to define and this entirely because of two policy between maintaining the principle of autonomy of documentary credit and the importance of discouraging fraud in the letter of credit transaction.

Question 2 1. Computerland is the buyer in this transaction. There are three transaction involves which concerns the letter of credit, or documentary transaction namely ; (a) The underlying transaction which involves the traditional law of contract between the buyer and the seller. (b) The transaction which involves the buyer and the issuer bank and (c ) The transaction which involves the issuer bank and the seller.

The bank must adhere to the principle of Strict compliance , (which will discussed lengthy on the principle). If the bank did not comply with the stipulation in the letter of credit, the bank is not obligated to make payment, and if the bank pays, the bank cannot claim reimbursement from the buyer, account party. As stated in the case of English , Scottish and Australia Bank Ltd v Bank of South Africa, Bailhache J said It is elementary to say that a person who ships in reliance on a letter of credit must do so in exact compliance with its terms. It is also elementary to say that a bank is not bound or indeed entitled to honour drafts presented to it under a letter of credit unless those drafts with the accompanying documents are in strict accord with the credit as opened. The rationale behind this doctrine of strict compliance is the doctrine functions as a safeguard against the possibility of dishonesty of the seller and some other third party whose services the seller might enlist in the course of performing his obligation under the underlying contract and on the other hand, there is the Principle of Independence that enunciated a letter of credit is independent of the primary contract of sale between the buyer and the seller. However, the buyer should know that there is fraud exception concept in the letter of credit. It started with the dissenting judgment of Justice Cordozo In Maurice OMeara Co. v National Park Bank,239 N.Y. 386, 146 N.E. 636 (1925) stated that a breach of sales contract did not create a breach of the letter of credit contract, as long as the documents in fact conformed. The landmark case in the course of the development of the fraud rule in the law of letters of credit was the case of Sztejn v J. Henry Schroder Banking Corp. 177 Misc. 719, 31 N.Y.S. 2d 631 ( 1941). The computerland can also get an injunctive relief based on the authority putt forth in the case the Sztejns where the court has permitted the buyer to seek an injunction relief against payment against documents under a letter of credit where the buyer alleged, not merely a breach of warranty, but intentional fraud. In following the Sztejn, The computerland can entitled to seek remedy through injunctive relief if ;(1) The buyers bank allegedly knew that the documents were forged or false even though they conformed on their face to the letter of credit. (2) Allegedly, no other than the fraudulent party( seller) had relied upon the letter of credit -.i.e. Sellers bank had paid over no funds to seller,if sellers bank had relied upon the letter of credit, the court would have rejected the application for the injunction. Applying the principle in Sztejn, it is unlikely that the Computerland would be successful in their application for an injunctive relief where Citibank has evidently relied upon the letter of credit.

2. Assuming that the letter of credit transaction is governed by the Revised Uniform Commercial Code ( UCC ). The issue is when an anonymous caller has contacted CIM Bank in Kuala lumpur

and informed them that defective computers were being despatched by S&A to Computerland, could the CIM bank seeking an injunctive relief from a competent jurisdiction to enjoin the letter of credit when it has come to their knowledge that the seller has probably committed fraud in the underlying transaction. Applying the Autonomy Principle, CIM Bank and Citibank must look only to the documents and not to the goods for their security interest, they have a vital interest in the documents and in their continuing autonomy from the underlying transaction should the buyer fail to make payment. Although the CIM bank itself does not warrant the validity of the documents, it is entitled to rely on the implied warranty of the seller that the documents are valid and genuine. However, according to UCC 5-109 (b), clarifies that only material fraud by the beneficiary will justify an injunction against honor. In this instances, the only information that brought to the issuing bank knowledge is information from an anonymous caller which told them of defective product which were despatched by the seller. The assumption that could possibly made by the CIM bank were ; (1) Firstly, was there a breach of contract on the underlying transaction. (2) Secondly, could the breach of contract would amount to the definition of material fraud in the underlying transaction. (3) Were all the documents under the letter of credits were conforming? The fraud rule is embodied in Article 5, Section 5 -109, which reads : (a) If a presentation is made that appears on its face strictly to comply with the terms and conditions of the letter of credit, but a required document is forged or materially fraudulent, or honor of the presentation would facilitate a material fraud by the beneficiary on the issuer or applicant; I. The issuer shall honor the presentation, if honor demanded by : i) A nominated person who has given value in good faith and without notice of forgery or material fraud, ii) A confirmer who has honored its confirmation in good faith, iii) A holder in due course of a draft drawn under the letter of credit which was taken after the acceptance by the issuer or nominated person, or iv) An assignee of the issuers or nominated persons deferred obligation that was taken for value and without notice of forgery or material fraud after the obligation was incurred by the issuer or nominated person, and II. The issuer, acting in good faith, may honor or dishonor the presentation in any other case. The appeal court in the case of Mid- America Tire, Inc v PTZ trading Ltd , Supreme Court of Ohio, 2002 has also examined cases decided under former UCC 5-114. Based on these decisions, the court of appeals recognized that letter of credit honor may be enjoined by a court when the seller has made presentation of forged or fraudulent documents under the letter of credit but the bank cannot extend the enjoinment where the sellers commission of fraud solely in in the underlying sales transaction. Hence, under the Revised UCC, CIM bank may pay under the letter of credit, even the notice of fraud, unless enjoined by a court of competent jurisdiction.

Question 3 1. The issue is whether Metro was justified in effecting the letter of credit on the September 25, when Metro found that there was no discrepancy in the word LCD. Article 13(a) of the UCP 500 provides that banks must examine all presentation documents to determine whether they conform, ex facie, to the requirement of the credit. The UCP implicitly prescribed the standard of a reasonably knowledgeable and diligent bank document checker. The CIMBA should also observe Article 16 of the UCP 600 and must make sure that Art. 16 is invoked against every letter of credit transaction to provide for opportunity to increase revenue where possible. This Article 16 prescribed the steps banks must follow in the light of discrepant documents. The issuing bank ( CIMBA ) at its discretion was entitled to approach the buyer to seek written waiver of the discrepancies. The issue in the word ICD is best illustrated with the case of Hanil Bank v PT Bank Negara Indonesia,2000 WL 254007. In that case a buyer instructed an issuing bank to open a letter of credit in favour of Sun Jun Electronis Co. Ltd. But the issuing bank advised the beneficiary of the opening of the credit for Sun Jin Electronis Co.,Ltd. The court held that the beneficiary who negotiated the credit for possible errors, but failed to do so.In this regards, the court pointed out that the word Jun and Jin in Korea would not be recognized and the defect document could occasion difficulties for the buyer in clearing the goods from the customs department due to local regulatory enactment regarding clients claiming to be entitled to clear the merchandise. In Voest-Alpine Trading USA Corp v Bank Of China, United States District Court, S.D. Texas, Houston Division 167 S.Supp.2d 940 (2000),the court of opinion that the whole of document must relate to the same transaction, that is to say, that each should bear a relation with the others on its face. Therefore, the court in that case found that misspelling of the destination is not a basis for dishonor of the letter of credit where the rest of the document has demonstrated linkage to the transaction on its face. Article 16 (f) stated that if an issuing bank ( CIMBA) or a confirming bank (Metro) fails to act in accordance with the provisions of this Article, it shall be precluded from claiming that the documents do not constitute a complying presentation. By virtue of Article 16(g), when CIMBA bank refuses to honor or Metro Bank refuses to honour or negotiate and has given notice to that effect in accordance with this Article, it shall be entitled to claim a refund, with interest, of any reimbursement made. In this situation, Metro Bank was right to refuse the refund request made by the CIMBA when they consider the document was in order. The second issue is based on the facts above that CIMBA received a telex from Metro that the credit has been used and that CIM Banks account had been charged. However, it is noted that on October 3, CIMBA received the documents from Metro and it was on the October 3, CIMBA telex Metro concerning the discrepancy between the letter of credit and the document.

The UCP 500 Article 13(b) provides that ; The Issuing Bank, the Confirming Bank, if any, or a Nominated Bank acting on their behalf, shall each have a reasonable time, not to exceed seven banking days following the day of receipt of the documents, to examine the documents and determine whether to take up or refuse the documents and to inform the party from which it received the documents accordingly. Evidently, both the issuing and the confirming bank had observed the specific Article. 2. Article 36 of the UCP 600 provides for a force majeure clause. It is stated that ; a bank assumes no liability or responsibility for the consequences arising out of the interruption of its business by Acts of God, riots, civil commotions, insurrections, wars, acts of terrorism, or by any strikes or lockouts or any other causes beyond its control. A bank will not, upon resumption of its business, honors or negotiate under a credit that expired during such interruption of its business. Apparently, the stocks for export to Emporia could fall under interruption of the business by Acts of God, whereby the mineral was ban imposed by China due to its rare-earth mineral.