When Documents Fail: Discrepancy and Possible Fraud

Intro

Every now and then, a case comes along that reminds us how easily three separate worlds—documents, goods, and fraud—can become entangled in letter of credit practice.

At first glance, this looks like a fraud case. In truth, the confirming bank’s difficulty began much earlier, with something far more basic: a non-complying presentation.

Let’s walk through it carefully.

Question

Dear Mr. Old Man,

I have some questions relating to the following scenario:

A beneficiary sells 1,000 crystal decanters for £25,000 under a sales contract on FOB Rijeka, Croatia terms. The contract requires a lead content above 33% and a certificate of quality.

The purchaser opens a letter of credit (LC) subject to UCP 600, requiring presentation of a certificate of quality.

The goods are shipped one day later than stipulated in the sales contract. One of the four crates (crate 4) appears dented.

The confirming bank honours the presentation against documents including a clean bill of lading, commercial invoice, and a copy of the contract—but no certificate of quality.

The invoice states four crates of 250 decanters each, with 33% lead content.

On shipment, the buyer’s agent discovers:

• Crate 4: 50% conforming, 50% broken
• Crate 3: filled with broken crystal fragments
• Crates 1 and 2: conforming

The purchaser instructs the issuing bank to stop payment.

I have advised the parties as follows (please confirm if correct):

1. The confirming bank should not have paid due to non-compliance and may not be reimbursed.
2. The purchaser can reject the goods.
3. The confirming bank may sue the beneficiary for fraud.
4. The bill of lading should perhaps have been claused due to the apparent damage to crate 4. If the carrier issued a clean bill of lading despite visible damage, could the carrier be liable? If so, to whom, and on what basis?

What is your view?

I find this very difficult, and would greatly appreciate your guidance.

Best regards,
H.T.

______

Answer

Dear H.T.,

You are right to find this difficult. The facts pull in different directions—but the solution becomes clearer once we separate the issues and follow the sequence properly.

1. The confirming bank’s decision to honour

On the facts provided, the presentation is clearly non-complying.

The LC expressly requires a certificate of quality, which is not presented. That alone is sufficient for refusal.

In such circumstances, the confirming bank:

• Should not honour or negotiate; and
• If it does, it acts at its own risk

Accordingly, the confirming bank is not entitled to reimbursement from the issuing bank if the issuing bank rejects the documents.

It is worth noting that the problem here is not primarily fraud. The difficulty arises earlier and more simply: the documents did not comply.

2. The purchaser’s position and the goods

Under UCP 600 Articles 4 and 5, banks deal with documents, not goods. If the presentation were complying, the issuing bank would have to honour, regardless of the condition of the goods.

However, this case turns on a different point: the presentation is discrepant.

As a result:

• The issuing bank is entitled to reject the documents and refuse reimbursement;
• The applicant (purchaser) is not obliged to reimburse the issuing bank; and
• The applicant may therefore refuse to take up the documents

Without taking up the documents—particularly the bill of lading—the purchaser may be unable or unwilling to take delivery of the goods.

Separately, under the sales contract, the purchaser clearly has grounds to reject the goods due to serious non-conformity and apparent bad faith.

3. Recovery by the confirming bank in case of fraud

If the confirming bank has already honoured, its recourse shifts away from UCP and into applicable law.

Where fraud is established, the confirming bank may seek recovery of the funds from the beneficiary under applicable law, especially where reimbursement has been prevented by a court injunction.

Two points should be kept in mind:

• Fraud must be proven, and this is a matter for the courts
• The extent of recovery (full amount or partial) will depend on how the court assesses the transaction and the loss

UCP 600 does not provide the answer here—it merely steps aside.

4. The clean bill of lading and possible carrier liability

A bill of lading should not be issued as “clean” if it records apparent damage to goods or packaging.

If damage was visible at loading and the carrier nevertheless issued a clean bill of lading, the carrier may face liability.

That said, caution is needed:

• The carrier is concerned with apparent external condition, not internal contents
• A dented crate does not automatically require clausing
• Any suggestion of collusion between shipper and carrier would again fall under fraud, requiring proof

Final reflection

At first glance, this looks like fraud. On closer inspection, what can actually be established is something simpler—and sufficient to decide the case: the documents do not comply.

In documentary credit practice, it is often wiser to prove a discrepancy than to allege fraud.

Best regards,
Mr. Old Man