Letter of Credit Fraud

Fraud is an ambiguous term which has several meanings depending on the circumstances.  Indeed, many “equivalent” words used in other languages do not faithfully translate to fraud.  This article’s title is not simply “Fraud in Letters of Credit”.  The reason is that fraud does not mean the same thing when dealing with letters of credit.  A different and special standard applies. In relation to letters of credit, as well as independent guarantees, the notion of conduct which is sufficient for a court to issue a restraining order to stop the issuer from honouring has always used a qualifier, such as gross fraud, egregious fraud, material fraud, and so forth. 

Many years ago, when I first came across the notion that gross fraud would set aside the bank’s obligation, I struggled with the concept that a lesser fraud would not.  But that is precisely the case.  Courts have been sensitive to this concern and have kept the exception within certain bounds.  In doing so the courts have used a broad spectrum of words to describe the level of fraud necessary to attract relief.  In several cases the nature of the fraud is such that it clearly goes to the heart of the transaction and there is little discussion on this nature and extent of the fraud.  Nevertheless, courts have looked to the standard of the fraud using the following qualifiers. This article will provide case examples from which these expressions were given:

proven, gross, material, established, clearly established, outright, obvious, egregious, clear, of such a character, strong and prima facie, sufficient, sufficiently grave, intentional, active, actual and serious.