3.4. The nullity exception
3.4.3. The nullity exception quarrel
As it can be seen above, a clear and sustainable test does not exist at least in determining when a document is null or not.169 In Lord Diplock’s view, the one day difference, between the time stipulated in the documentary letter of credit and the
162 [1906] A.C. 439 at 443 163
[1927] 1 K.B. 826
164 [1984] 1 Lloyd’s Rep. 102
165 Egyptian International Foreign Trade v. Soplex Wholesale Supplies (The Raffaella) [1984] 1
Lloyd’s Rep. 102 at 116
166 Ademun-Odeke. “Double Invoicing in International Trade: The Fraud and Nullity Exceptions in
Letters of Credit-Are the America Accord and the UCP 500 Crooks’ Charters!?” [2006] Denning Law journal 115 at p. 115. See as well: Malek, A & Quest, D. “Jack: Documentary Credits” (Tottel Publishing, 4th ed., Sussex, 2009) at p. 256
167
Hedley, W. & Hedley, R. “Bills of Exchange and Bankers’ Documentary Credits” (LLP Professional Publishing, 4th ed., London, 2001) at p. 104. See as well: Mugasha, A. “The Law of Letters of Credit and Bank Guarantees” (Federation Press, Sydney, 2003) at p. 144
168 Ho, P. ‘Documentary Credit: Null Documents’ [1997], Hong Kong Lawyer, 32 at p. 32. See as well:
Bridge, M. “The International Sale of Goods” (Oxford University Press, 2nd
, ed., Oxford, 2007) at pp. 298-299
169 Enonchong, N. “The Independence Principle of Letters of Credit and Demand Guarantees” (Oxford
University Press, Oxford, 2011) at p. 152; Ellinger P. & Neo, D. “The Law and Practice of Documentary Letters of Credit” (Hart Publishing, Oxford, 2010) at p. 173; Donnelly, K. ‘Nothing for Nothing: A Nullity Exception in Letters of Credit?’ [2008] J.B.L. Vol.4, 316 at p. 317; Chin, L. & Wong, Y. ‘Autonomy – A Nullity Exception at Last?’ [2004] L.M.C.L.Q. 14 at p. 17
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actual shipment day, was insignificant. In his opinion, the non-genuine bill of lading in that case was far from demonstrating nullity and therefore this “would not justify the confirming bank’s refusal to honour the credit in the instant case” as “the realisable value on arrival at Callao could not be in any way affected by its having been loaded on board a ship at Felixstowe on December 16, instead of December 15, 1976”.170
But, how and why did the House of Lords in American Accord reach the conclusion that the bill of lading in that case was not a nullity? If the “realisable value” test Lord Diplock applied is the appropriate one, how did he ensure that the goods’ price would not be affected on its arrival at Callao?171
Letters of credit are utilised purely by parties with tough commercial minds who should be committed to their own words. Thus, if the terms manifested on the face of a documentary credit are construed by courts in a way which does not take into consideration what it means, then the whole purpose of such instruments will be undermined resulting in their being abandoned.172 Following the approach of Lord Diplock’s thinking, one might sympathetically argue that a one day difference between what was stipulated in both the documentary credit and the underlying contract and the actual day of shipment is trivial and therefore entitles the seller to get paid.173 Ironically, by the same token, another seller might argue that a two or three days’ difference is also insignificant entitling him to obtain payment. Accordingly, difficult questions which are not easy to answer arise: where should courts place the boundary between what could be a nullity and what could not? How many days
170 United City Merchants (Investments) Ltd v Royal Bank of Canada (The American Accord) [1983] 1
A.C. 168 at 186
171
Leacock, S. ‘Fraud in the International Transaction: Enjoining Payment of Letters of Credit in International Transactions’ [1984] Vand. J. Transnat’l L. 885 at p. 916. In Leacock’s view the day difference in the United City Merchants case was material and the bank was right to refuse the bill of lading.
172 Bridge, M. ‘Documents and CIF Contracts’ [1998] Amicus Curiae Vol. 3, 4 at p. 6 173
Carr, I. “International Trade Law” (Cavendish Publishing, 3rd ed., 2005) at p. 503; Ventris, M. “Bankers’ Documentary Credits” (Lloyd’s of London Press Limited, 3rd ed., London, 1990) at p. 123
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should a seller be allowed to delay till the document which he presents could be considered as a nullity?
It can be suggested that even a one day difference could result in the document being a nullity.174 For example, concurrently, a buyer of a meat consignment himself could be a seller for the same consignment to a third party. The contract between him and his own buyer stipulates for the 20th of March as the last day to deliver the meat. The buyer in this chain of contracts knows that the shipment needs 15 days till it arrives at his local port and accordingly asks his seller to send the meat on the 5th of March in order to reship it on the 20th to his own buyer. Notwithstanding this fact if the meat is sent on the 6th of March then it will certainly reach the buyer’s port on the 21st of March. As a result, the second buyer would lawfully reject the documents submitted by the first buyer where it states the 21st of March as the shipment date.
One might argue that even if the second buyer in such a chain of contracts refused the goods, the first buyer could sell it to any other person. In fact, such a suggestion is true as the buyer could sell the goods and he might make more profit. However, there is a possibility that he will sustain a large loss also. The buyer imported the meat on the assumption that there is another buyer who is ready to get the consignment directly and for a profit. The former did not import without being sure that there was a buyer standing by. Yet to say that he is still in a good position to sell the goods for the same price or even more is erroneous as the goods might perish before the buyer could find someone to buy the meat. Moreover, he might face a falling unstable
174 Low, H.Y. ‘Confusion and Difficulties Surrounding the Fraud Rule in Letters of Credit: An English
Perspective’ [2011] Int. J.L.M. 17(6), 462 at p. 467; Arora, A. ‘Fraud and Forgery in Commercial Documentary Credits’ [1983] C.L.B. 9, 271 at p. 276
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market resulting in a large loss.175 There is also the possibility that a day’s difference might cause many other days of stoppage in various ports due to different holidays, strikes or any other unforeseen events. Furthermore, as the bank’s counsel argued in the American Accord:
“There is also the matter of insurance. If a buyer purchases on an f.o.b. contract, the buyer will himself insure and the buyer will have to declare the date of shipment and the nature of the goods. The date may be critical if the market is very volatile. The fact that the false date is very close to the true date may nevertheless in the circumstances have considerable financial implications.”176
A day’s difference would result in the goods’ being out of the insured period of time. Accordingly, a buyer who insures for the envisaged 15 days of shipment might be unable to obtain any compensation from his insurance company should the ship carrying his goods have an accident or sink on the 16th day which is out of the insured period. This begs the question: who would compensate the buyer in such circumstances?
As has been noted in the American Accord case: “The nullity test put forward by the appellants is not sustainable.”177
That is to say, in deciding whether a certain document is null or not, many factors should be considered such as the underlying contracts, the parties’ intentions and the nature of the goods. As seen above, the nullity concept is not yet fully developed by English courts. What is meant by nullity will differ from one judge to another judge and from one court to another. Since many
175 Low, H.Y. ‘Confusion and Difficulties Surrounding the Fraud Rule in Letters of Credit: An English
Perspective’ [2011] Int. J.L.M. 17(6), 462 at p. 467
176 United City Merchants (Investments) Ltd v Royal Bank of Canada (The American Accord) [1983] 1
A.C. 168 at 174
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of these judges are not letters of credit specialists, one can expect flawed doubtful decisions where certainty is of vital importance.178
Where courts are confused in determining when a certain document is a nullity, the following pertinent questions may arise: what are the banks’ obligations in this respect? How could a bank that is poorly equipped to investigate external facts establish whether a certain document is a nullity or not?179 How could it assess an applicant’s allegation that a bill of lading is null and void in the light of the aforementioned “goes to its essence” or the “realisable value” tests which English courts failed to settle on? As one commentator puts it:
“…the banker is not concerned as to whether the documents stipulated by the buyer serve any useful commercial purpose or as to why the customer called for tender of a document or a particular description or as to the legal effect of the document or vis a vis the applicant. It forms no part of the bank’s function, when considering whether to pay against the documents presented to it, to speculate about the underlying facts. Neither should the bank question the usefulness or sufficiency of the documents.”180
It is suggested that, if recognised, such an exception would result in more inconsistencies to banks further to those associated with the fraud exception such as that which necessitates establishing who perpetrated fraud in order to apply it.181 Indeed, to insert consistency and efficiency in a letter of credit context, applying the non-genuinity test is recommended whether a document is null, fraudulent or not.182
178 Montrod Limited v. Grundkotter Fleischvertriebs GmbH, Standard Chartered Bank [2001] C.L.C.
466 at 477
179 It has been said that “it is not for the bank to reason why”. Per Donaldson M.R. in Banque de
I’Indochine et de Suez SA v JH Rayner (Mincing Lane) Ltd [1983] Q.B. 711 at 729
180 Ademun-Odeke. “Double Invoicing in International Trade: The Fraud and Nullity Exceptions in
Letters of Credit-Are the America Accord and the UCP 500 Crooks’ Charters!?” [2006] Denning Law journal 115 at p. 121
181 Todd, P. “Bills of Lading and Bankers’ Documentary Credits” (Informa Law, 4th ed., London, 2007)
at pp. 271-272; Sifri, J. “Standby Letters of Credit: A Comprehensive Guide” (Palgrave Macmillan, New York, 2008) at p. 197
182
Mugasha, A. “The Law of Letters of Credit and Bank Guarantees” (Federation Press, Sydney, 2003) at p. 146
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Otherwise, the English approach will provide a theoretical illusion rather than practical solutions.