East-West Debt july 2004 news, Emerging Market update : FRAUD IN THIRD
PARTY TRANSPORT
DOCUMENTS
from an L/C Beneficiary’s
Perspective
FRAUD IN THIRD
PARTY TRANSPORT
DOCUMENTS
from an L/C Beneficiary’s
Perspective
1. Introduction
This paper contributes to the
ongoing discussion as to
whether an innocent beneficiary
under a letter of credit (L/C)
should be protected against
fraud in a bill of lading (B/L). An
example.
2. Summary of facts
A trader of steel products
concluded a CFR Contract of
Sale with another trader for the
delivery of steel products.
Payment by irrevocable L/C
payable 90 days after B/L date.
Upon loading in the ship, the
Master made remarks about the
condition of the cargo.
3. Usages in the steel trade
Out of fear for cargo claims,
it regularly occurs in the steel
trade remarks are inserted in the
B/L in order to enforce a letter
of indemnity (LOI) in exchange
for a “clean” B/L. The ship
owner then believes to be covered
against cargo claims put
forward by the receiver in the
port of discharge.
4. Ship arrest
The charterer provided the
ship owner with the LOI, despite
the master’s remarks. In the
port of discharge, the end user
having a clean B/L in his hands
arrested the ship in the port of
La Coruña for cargo damages.
The ship owner demanded
under the LOI security is put up
in release of the ship. The
charterer refused, arguing it was
determined by surveyors the
cargo was in acceptable condition
and that the ship arrest
was inspired by a falling steel
market. Subsequently, the ship
owner decided to issue a second
B/L, now including Master’s
remarks.
5. Stop Payment Court
Orders
The end user started criminal
proceedings in combination
with a civil case, asking for a
stop payment court order and
succeeded. On top of things, the
ship owner applied for the
judicial sale of the goods. In
addition, the ship owner
demanded compensation for
being detained for months and
exercised a lien (right of retention)
on the goods. The steel
products were meanwhile stored
in the open air at the quay and
subject to the elements.
6. Issues of interest
(1)
When is a third party
document considered a “fraud”?
(2) Should a seller innocent
of (alleged) B/L fraud be protected
based on the principles of
strict compliance and autonomy
of the L/C?
The Question of Fraud
Was the B/L indeed a forged
document and fraud involved?
Initially it seemed so, because
the master signed for a “clean”
B/L, whereas cargo damages
have been observed. The
master may have been in doubt
of the sound condition, or his
remarks were intentionally
made to protect himself against
cargo claims. The High Court of
Singapore recently dealt with an
(fictitious) airway bill issued by a
phantom company. The court
made a distinction between a
false document (misrepresenting
goods loaded) and a
fictitious document. It would
seems justified to protect the
innocent beneficiary from
becoming the victim of a false
(transport) bill, whilst it may be
asked too much from a bank to
pay out against a fictitious B/L.
Innocent Beneficiary
The Dutch Supreme Court
recently attributed fraud to a
carrier whereby his local agent
had committed fraud with a B/L.
The carrier had to reimburse the
B/L holder for the shortage of
35 containers. This ruling was
based on the overriding
principle in maritime law and in
the interest of international
trade, a third party B/L holder
must be able to trust the
correctness of a B/L and be
protected if it is not. Why not
apply this argument to fraud
with L/C’s? It is also in the
interest of international trade
that the beneficiary should rely
on the credit and not be a
victim of fraud in third party
documents. The duped cargo
receiver is protected by his right
to hold the carrier to the content
of the B/L and can take
recourse on the ship.
[
Peter van der Velden
Attorney-at-Law (specialized in
international trade law)
Tel. +31703110711
pvandervelden@ ujlaw.nl ]
 FRAUD IN THIRD PARTY TRANSPORT DOCUMENT
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