## Facts

- A Peruvian buyer contracted to purchase a glass-fibre manufacturing plant from an English seller; payment was arranged through a confirmed irrevocable documentary letter of credit issued by a Peruvian bank and confirmed by the Royal Bank of Canada (RBC).
- Part of the price was paid; the dispute concerned the remaining balance under the credit.
- The credit required shipment by 15 December 1976, but shipment actually occurred on 16 December.
- A shipping agent, without the seller’s knowledge, fraudulently altered the bill of lading to show a shipment date of 15 December so the documents would appear to comply with the credit.
- RBC refused to honor the credit after discovering the back-dating, even though the beneficiaries were not involved in the falsification.
- Separately, the seller and buyer had a collateral arrangement to over-invoice and remit the surplus abroad in a way that violated Peruvian exchange-control rules.
- The trial court treated the credit claim as unenforceable based on the exchange-control illegality; the court of appeal upheld RBC’s refusal; the beneficiaries appealed.

## Issues

1. Whether a confirming bank may refuse payment under a documentary credit when a presented document contains a material misrepresentation caused by a third party, where the beneficiary is innocent.
2. Whether an otherwise valid letter-of-credit obligation is unenforceable because a related collateral arrangement violates foreign exchange-control law recognized by the forum through the IMF Agreement.

## Decision

- The House of Lords allowed the appeal and ordered RBC to pay under the confirmed credit.
- The fraud exception to the autonomy of documentary credits did not apply because the beneficiaries did not commit or know of the fraud.
- The collateral exchange-control illegality did not render the letter of credit unenforceable because the credit obligation was independent and was not itself an “exchange contract” covered by the IMF-based unenforceability rule.

## Legal Principles

- A confirmed irrevocable documentary credit is autonomous from the underlying sale and related arrangements; banks deal with documents, not the goods.
- A bank must honor a credit when documents appear on their face to comply, subject to limited exceptions.
- The fraud exception permits dishonor only when the beneficiary knowingly presents fraudulent documents (or is otherwise implicated in the fraud); third-party fraud, without beneficiary knowledge, does not defeat the beneficiary’s right to payment.
- Foreign exchange-control illegality in a collateral transaction does not bar enforcement of an independent letter-of-credit obligation unless the obligation sued upon is itself an “exchange contract” within the relevant IMF-based rule.

## Conclusion

The House of Lords held that the confirming bank was required to honor the letter of credit because the beneficiaries were innocent of the document falsification and because the separate illegal exchange-control arrangement did not vitiate the independent credit obligation.


United City Merchs. (Invs.) Ltd. v. Royal Bank of Can., [1982] 2 All E.R. 720 (H.L. 1982)