## Facts

- An issuing bank issued a deferred-payment (usance) letter of credit in favor of a beneficiary, payable 180 days after the bills of lading date upon presentation of complying documents.
- The issuing bank requested a second bank to add confirmation; the second bank confirmed the credit.
- The beneficiary presented documents that appeared conforming on their face; the confirming bank accepted them and thereby incurred its own deferred payment undertaking to the beneficiary.
- Before maturity, the confirming bank paid the beneficiary early at a discounted amount and, in exchange, received an assignment of the beneficiary’s rights under the credit.
- Before the maturity date, the issuing bank notified the confirming bank that the beneficiary’s quality/quantity certificates were fraudulent; for preliminary issues, the fraud and the confirming bank’s pre-maturity knowledge were assumed.
- At maturity, the confirming bank sought reimbursement from the issuing bank for the undiscounted amount; the issuing bank refused.
- The court tried preliminary issues limited to the reimbursement dispute between the confirming bank and the issuing bank on the assumed facts.

## Issues

1. Whether a confirming bank that discounted its deferred payment undertaking may obtain reimbursement from the issuing bank when beneficiary fraud is discovered before maturity.
2. Whether an assignment of the beneficiary’s rights under the credit to the confirming bank gives the confirming bank enforceable rights against the issuing bank despite the beneficiary’s fraud.
3. Under UCP 500, whether the issuing bank’s reimbursement duty to a confirming bank extends to discounted advances when no non-fraudulent beneficiary would be entitled to payment at maturity.
4. Whether alleged trade custom or market practice shifts the fraud risk to the issuing bank in a discounted deferred-payment credit.

## Decision

- The court held the loss from the beneficiary’s fraud fell on the confirming bank, not the issuing bank, on the assumed facts.
- The confirming bank was not entitled to reimbursement from the issuing bank for the amount paid under the discounting arrangement.
- The assignment did not improve the confirming bank’s position because it could take no better right than the fraudulent beneficiary had.
- UCP 500 did not require reimbursement where, due to fraud discovered before maturity, the beneficiary would not have been entitled to payment at maturity.
- Evidence of alleged custom or practice did not displace the legal effect of fraud, assignment principles, or the applicable UCP provisions.

## Legal Principles

- A beneficiary who procures or presents under a documentary credit by fraud is not entitled to payment where the fraud is established and known before payment becomes due.
- A confirming bank that discounts its own deferred payment undertaking assumes the risk that the beneficiary’s entitlement may be defeated by fraud discovered before maturity, absent a clear agreement shifting that risk.
- An assignee of rights under a letter of credit generally acquires no greater rights than the assignor; assignment cannot cure the beneficiary’s lack of entitlement caused by fraud.
- Under UCP 500, an issuing bank’s reimbursement obligation to a confirming bank arises only in respect of a valid obligation to pay under the credit (i.e., payment due to a beneficiary not barred by fraud), not as a general guarantee of the confirming bank’s pre-maturity financing.

## Conclusion

The court allocated pre-maturity fraud risk to the confirming bank when it chose to discount a deferred-payment credit: because the beneficiary’s fraud defeated entitlement at maturity, the confirming bank (including as assignee) could not compel reimbursement from the issuing bank under UCP 500 or market practice.


Banco Santander S.A. v. Bayfern Ltd., [1999] EWHC 284 (Comm) (Eng.)