Bank's Role Limited as to Liability for Fraud in Transaction Using Letter of Credit
Description Court held for a bank that issued payment to a seller that engaged in fraud against a buyer. The bank followed proper procedure in reviewing documents and issued payment at the proper time. It has no duty to inspect the good involved or to understand the terms of art in the paperwork that could have triggered knowledge that something was amiss.
Topic Negotiable Instruments/Commercial Paper
Key Words Letter of Credit; Fraud
C A S E   S U M M A R Y
Facts Standard Chartered Bank (SCB) acted as the confirming bank in letter of credit transactions for several banks in Thailand and India. Thornton sold raw cotton to buyers in those countries. He cheated them by shipping inferior cotton. SCB reviewed the documents. All papers appeared to be in order, so payments were made to Thornton. Eventually SCB came to understand that there was fraud involved in the goods being shipped. The invoices from Thornton stated "raw cotton lint" rather than "raw cotton" as they should have. An Indian bank demanded repayment from SCB, which contended that the notice was too late and would not repay the money. The Indian buyer sued SCB, contending that it should have known of the fraud involved.
Decision Judgment for SCB. A letter of credit "is a common payment mechanism in international trade that permits the buyer in a transaction to substitute the financial integrity of a stable credit source (usually a bank) for its own." "SCB was obligated to receive documents from the seller, forward such documents to the buyers' banks on a collection basis, receive payment for the documents from the buyers' banks if and when the buyers accepted and paid for the documents, and in turn pay the seller upon receipt of such funds." Since SCB was informed of the fraud after proper procedure had been followed and it had made payment to Thornton, SCB is not liable. It had no duty to be knowledgeable about the cotton business and the terms of art regarding cotton. Its obligation was limited to receipt of the documents, confirmation that documents appeared to be as listed in the collection order, and transmission of the documents to the buyer's bank.
Citation Thiagarajar Mills, Ltd. v. Thornton, 47 F.Supp.2d 918 (W.D. Tenn., 1999)

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