I. Structure of LC

4 Contracts, all autonomous:

1. Applicant (Buyer) - Issuing Bank: Application agreement
2. Issuing Bank - Beneficiary (Seller): LC itself - irrevocable under Art 2 UCP 600
3. Issuing Bank - Advising/Confirming Bank
4. Beneficiary - Advising Bank

Principle: Art 4 & 5 UCP 600 - Credits v Contracts, Documents v Goods

Bank deals in documents, not goods, services or performance. Even if goods are rubbish, if documents comply, bank must pay.

II. Types of Documentary Credit Disputes

1. Discrepancy Disputes - Strict Compliance

Art 14 UCP 600: Standard for examination - International Standard Banking Practice. Data in documents must not conflict.

Types:

• Late shipment, late presentation (Art 14(c) - 21 days)
• Quantity tolerance - Art 30
• Description of goods not matching LC verbatim - Art 14(d)
• Inconsistent Bill of Lading, Invoice, Insurance
• Non-documentary conditions - Art 14(h)

Bank must give single notice of refusal within 5 banking days stating all discrepancies - Art 16. If fails, precluded from claiming discrepancies.

Case: Bank Melli Iran v Barclays Bank DCO (1951) - If documents on their face comply, bank must pay irrespective of buyer's claim that goods defective.

2. Autonomy Principle Disputes

Core Rule: LC independent of underlying sale contract. Buyer cannot stop payment because goods defective, breach of warranty.

Hamzeh Malas & Sons v British Imex Industries (1958): Jenkins LJ - "An elaborate commercial system has been built on principle that obligations under credit are not affected by disputes between parties to sale." Reinforced autonomy.

Equitable Trust Co v Dawson Partners (1927): Bank liable if pays against non-complying documents - must be strict.

3. Fraud Exception - The Only Major Exception

Autonomy gives way to fraud. But threshold very high.

Foundational: Sztejn v J Henry Schroder Banking Corp (1941) NY Supreme Court
Facts: Seller contracted to ship bristles, shipped cow hair and rubbish. Buyer sought injunction to stop bank payment.
Held: "Principle of independence should not be extended to protect unscrupulous seller." Where seller intentionally fails to ship any goods, fraud exception applies. Distinction between mere breach of warranty vs active fraud.

English Standard:

Edward Owen Engineering v Barclays Bank (1978): Lord Denning - "Bank ought not to pay if it knows documents are forged or request for payment is made fraudulently in circumstances where there is no right to payment."

Bolivinter Oil SA v Chase Manhattan Bank (1984): Fraud must be clearly established, must be beneficiary's fraud, and bank must have knowledge. Mere allegation insufficient.

United City Merchants v Royal Bank of Canada (1982) House of Lords: Even if documents forged by third party, but beneficiary innocent, bank must pay. Fraud must be by beneficiary.

Three Elements Test now used globally:

1. Clear fraud by beneficiary
2. Bank has knowledge before payment
3. Fraud goes to root - no right to payment

4. Illegality, Nullity, Unconscionable Conduct

• LC for illegal purpose - not enforceable
• Mahonia Ltd v JP Morgan Chase (2003): LC to disguise illegal loan - court refused enforcement.

5. Injunction Disputes - When Can Buyer Stop Bank?

Courts extremely reluctant.

India Rule - Supreme Court in U.P. Cooperative Federation Ltd v Singh Consultants & Engineers (1988) 1 SCC 174:

Commitment of bank under irrevocable LC or bank guarantee cannot be interfered with except in case of fraud or irretrievable injustice. Fraud must be egregious, must vitiate entire transaction. Irretrievable injustice - where if injunction not granted, no possible recovery - e.g., beneficiary in foreign country with no assets.

Reaffirmed in:

• Svenska Handelsbanken v Indian Charge Chrome (1994) 1 SCC 502: Only fraud of egregious nature. Mere breach of contract not fraud.
• Federal Bank v V.M. Jog Engineering (2001) 1 SCC 663: Test of irretrievable injustice is very high - must prove beneficiary would be unable to repay even if buyer wins in main suit. Not enough that buyer may lose money.
• Himadri Chemicals Industries Ltd v Coal Tar Refining Co (2007) 8 SCC 110: Reaffirmed two exceptions only.

Standard for Interim Injunction:

• Prima facie egregious fraud
• Balance of convenience irretrievable injustice
• Bank is party - must show bank had knowledge

III. Documentary Credit Disputes - Practical Categories

A. Wrongful Dishonour by Bank
If bank wrongly rejects complying documents, beneficiary can sue issuing bank for face value + damages.

Case: Seaconsar Far East Ltd v Bank Markazi (1998): Confirming bank wrongly rejected, liable.

B. Wrongful Honour - Bank Pays Against Discrepant Documents
Applicant can sue issuing bank for breach of mandate.

C. Negligence in Examination
Bank must examine with reasonable care - Art 14(a). If negligent, liable.

D. Sanctions / Force Majeure - Art 36 UCP 600
Geopolitics - e.g., Iran sanctions. Bank not liable for interruption by sanctions, but must attempt.

Recent debate: Can sanctions clause override autonomy? ICC Opinion TA 884.

IV. Indian Specific Compliance

1. FEMA + UCP: RBI FED Master Direction - AD banks can issue LC subject to UCP 600
2. Stamp duty: LC not stampable, but guarantee may be
3. Limitation: 3 years from date of wrongful dishonour
4. Jurisdiction: LC independent - suits can be filed where bank branch payable

Checklist to Avoid Disputes:

For Applicant:

• Avoid vague terms - "first class", "prompt shipment"
• Specify exact document wording
• Include tolerance, Incoterms 2020

For Beneficiary:

• Check LC within 5 days - ask amendment if impossible
• Strict compliance - mirror LC description in invoice
• Present within 21 days of BL date and within expiry

For Bank:

• Give Art 16 refusal notice listing ALL discrepancies within 5 banking days
• Never go beyond documents to goods
• If fraud alleged, demand strong evidence, not mere allegation