Recent Cases
There are many case of fraud relating to documentary credits which provide a warning. An early case in England was Midland Bank v. Seymour. The credit was to cover a shipment of duck feathers. The `goods' actually shipped were goose feathers and rubbish, none of which was of any commercial worth. Seymour the importer sought to make the bank liable on two different grounds; that the details of some of the documents did not contain the full description and that the drafts, although negotiated in Hong Kong within the duration of the credit, did not reach London until after the expiry date. It was decided that there were inconsistencies between the relevant documents, that they did not all have to show all details; also that because the documents had been implicitly ratified after receipt by the buyers, the late arrival in London was not the flaw that it would otherwise have been.
Another leading case, which was decided in New York, is that of Sztejn v. Henry Schroder Banking Corporation. In one sense the decision represents an inroad into the principle that the banker is concerned with documents, not goods. The buyer, who was a buyer of bristles, instructed his banker to open an irrevocable credit against the usual documents. The seller shipped rubbish but the documents complied with the terms of the credit. When the buyer discovered the fraud he succeeded in obtaining an injunction preventing the banker from paying. This exception was reasonable. No legal system would permit a payment enabling the fraudster-the thief-to receive his ill-gotten gains.
Later cases, as we shall see, have concerned the rights of innocent third parties and, of more difficulty, the question of whether there is in fact fraud. In another case some twenty years ago, a master mariner arranged for a letter of credit to be opened in favor of a "dummy" beneficiary to cover a sale of steel rails exported to Italy. He then issued the appropriate bills of lading called for by the documentary credit, negotiated it, and skipped town without having shipped anything. The money was paid to the "dummy" beneficiary, the mariner himself. However, he was soon arrested and his ship sold to cover the loss to the bank.