International letters of credit:arbitral alternatives to litigating fraud

International letters of credit:arbitral alternatives to litigating fraud

The letter of credit has become an indispensable tool for financing international commercial transactions.


The letter of credit has become an indispensable tool for financing international commercial transactions, with a two-fold increase in use since 1970.(1) Along with its increased use, however, has come a growing volume of litigation, particularly litigation over fraud. Buyers in one country, alleging fraud on the part of sellers in another, have often sought injunctions to prevent issuing banks from honoring payment demands by sellers. Sometimes the buyers are successful

The standards by which courts adjudge a seller’s fraud as sufficient to enjoin payment have varied considerably. Over the past fifty years, courts have considered injunctive relief where the seller’s fraud has “vitiated the transaction,”(4) is “intentional”(5) or “egregious,”(6) or where there is “no conceivable basis”(7) for the demand. As inviting as these concepts may seem to a defrauded buyer who contracts with a bank to issue a letter of credit that benefits a fraudulent seller, very few buyers actually get a permanent injunction. More often, they just buy time. Yet these injunction requests have generated extensive litigation and, in the process, weaken the independence principle, which is widely regarded as foundational to the entire letter of credit system,(8) Moreover, injunctions “are another threat to mercantile viability of a letter of credit. If American trial courts become more injunction happy than they already are . . . it is possible that American letters of credit will be shunned abroad, or less widely accepted, with attendant losses to American issuing banks.”(9)

The independence principle posits that the contract for the sale of goods between buyer and seller is conceptually and actually independent from the letter of credit contract. In the typical letter of credit transaction, the buyer instructs a bank (the issuing bank) in its own country to open a documentary credit for a foreign seller. The issuing bank then instructs a bank in the seller’s country (the correspondent bank) to accept, negotiate, or pay an amount specified on the buyer’s draft to the seller, provided that the seller presents certain shipping and sales documents to the correspondent bank. The correspondent bank then specifies to the seller which documents the seller must deliver (or “present”) before the correspondent bank will accept and pay (or “honor”) the buyer’s draft. After performance by the seller under the contract with the buyer, and after the seller then presents conforming documents to the correspondent bank, the correspondent bank pays the seller. At that point, the actual goods may not be in the hands of the buyer. The correspondent bank’s obligation to pay the seller upon presentation of conforming documents is not conditional on the buyer’s prior receipt of the goods or on the actual quality or quantity of the goods in transit. In essence, the letter of credit arrangement is a documentary sale, not a sale of goods.(10)

Historically, the independence principle(11) was recognized for the predictability and certainty that it offered sellers, who were often reluctant to send goods abroad without payment. Sellers wished some guarantee of prompt payment upon completing their part of the bargain, and the letter of credit arrangement has provided that sellers would be paid upon presentation of a set of documents (bill of lading, commercial invoices and other documents) that conform to requirements of the issuing or correspondent bank. Ordinarily, a buyer will not have direct knowledge of the quantity or quality of goods being shipped by the seller, but occasionally a buyer learns that the seller is about to present fraudulent documents to collect on a letter of credit after deliberately shipping non-conforming or damaged goods. Requests for injunctions directly question the veracity of such documents, and allege that the documents are forged, fraudulent, or that there is some form of fraud that involves the underlying transaction. A court may consider it manifestly unfair that a seller should profit from such fraud, and may agree that equitable principles justify an injunction against bank payment.

This article briefly reviews the purpose of letters of credit, the independence principle, and the increased use of fraud allegations to enjoin payment under letters of credit.(12) We believe that this litigation is seldom useful, and that injunctions based on allegations or proof of fraud have undermined the integrity of the letter of credit system without providing substantial relief to defrauded buyers. Rather than perpetuate the fiction that the UCC provides meaningful equitable injunctive relief, we urge participants in the letter of credit system to use arbitration for relief against fraudulent international traders. Arbitration can provide for attorneys’ fees, compensatory and consequential damages, and can provide internationally enforceable awards pursuant to the Convention on the Recognition and Enforcement of Arbitral Awards.(13) In time, we believe that banks will be less burdened with requests to dishonor conforming documents, courts will be freed from the all-too-often unsuccessful pleas for injunctive relief, participants will not be forced to litigate across international borders, and the independence principle will be largely restored.


In the usual international commercial transaction, financing plays a key role. Historically, sellers trading across national borders found it unsatisfactory to place goods on a carrier (usually an oceangoing vessel) then wait for the buyer to inspect the goods and decide how much (or whether) to pay, and when. In the evolution of the law merchant (or “lex mercatoria”), sellers were able to negotiate guarantees of a particular sort: letters of credit issued by a bank, requested by and chargeable to the account of the distant buyer. If the seller or its agent could produce documents that would show on their face that the seller had met its obligation to the buyer, then the seller — having performed its duty — would be paid.

Certain risks would of course be shifted to the buyer in this way: the goods might be negligently damaged in transit, or might deteriorate through the carriers delay. The seller may have miscounted, or placed the wrong items in transit for the buyer. A few sellers may even have bad motives (just as some buyers may order goods with no intention of paying) and might put damaged or worthless goods in transit for the buyer. The fraud is “perfected” when the seller presents documents from the shipper that seem to establish performance of the seller’s contractual obligations to the buyer.

But while sellers occasionally gain from the independence principle (for example, by getting full payment for a shipment that is partially non-conforming), they more often lose when conforming shipments are not corroborated by a set of documents that strictly conform to the credit’s requirements. Reported cases in which banks have refused payment because of minor variations between the letter of credit document requirements and the proffered documents are far more numerous than cases of alleged fraud. Such “strict compliance” reduces risk to the buyer and to the bank, which would have liability to its client (the buyer/account party) if it were to pay on nonconforming documents and the shipment were to turn out to be nonconforming as well.

The “strict compliance” principle is in some sense a corollary to the independence principle: since the letter of credit is a contract to exchange documents for cash, the documents matter more than what they represent (the independence principle) and the banks will not pay on documents that are not exactly in conformity with the letter of credit requirements (the strict compliance principle).(14) But the two principles conjoin in a most confusing way in cases where an account party seeks injunctive relief to prevent payment on the basis of fraud: the bank is looking at documents which, on their face, strictly comply, and so the bank would seem obligated to pay

To clear up this confusion, it is important to remember that there are at least three separate contracts involved in the typical letter of credit transaction.(15) There is, first of all, the underlying sales contract between the buyer and seller

What is needed is a way to resolve the tensions and conflicts of interest inherent in these overlapping contractual arrangements. An issuing bank presented with strictly complying documents and a customer/account party asking it to dishonor on the basis that the documents are fraudulently obtained is on the horns of a dilemma: the bank is the agent of its customer, the buyer, yet is also bound by its irrevocable promise to pay the seller upon presentation of conforming documents.(17) The Uniform Customs and Practice for Documentary Credits (UCP) seems to recommend an “unqualified liability” approach that holds an issuing or confirming bank must pay when presented with conforming documents. This approach has the benefit of relative simplicity, and of keeping transaction costs down. Yet the UCC(18) and the United Nations Commission on International Trade Law (UNCITRAL)(19) suggest the need for exceptions to this unqualified liability approach.

In what follows, we propose amending customary practices for the first and second contracts: the underlying contract between buyer and seller and the letter of credit arrangements between the account party and the issuing bank. We recommend that the parties structure their contracts so that the independence principle is preserved and injunctive relief prohibited, and that they do so by use of arbitration clauses in both contracts. Other modifications to current practice may also be appropriate.


Sztejn and its Progeny

The judicial history of “fraud in the transaction” goes back to the landmark case of Sztejn v. J. Henry Schroder Banking Corporation.(20) Chester Charles Sztejn was a buyer based in the United States who wished to purchase a number of hog bristles from Transea Traders, Ltd., a corporation based in Lucknow, India. To assure payment to Transea, Sztejn applied for an irrevocable letter of credit to be issued by Schroder. Transea placed fifty cases of material on board a steamship and thus acquired a bill of lading and the customary invoices. Chartered Bank at Cawnpore, India, served as correspondent bank, and when Transea delivered to Chartered the documents called for in the credit, Chartered sought payment from Schroder on behalf of Transea.

Transea’s fifty crates were allegedly filled “with cowhair, other worthless material, and rubbish” rather than with hog bristles.(21) Prior to payment being made to Chartered by Schroder, Sztejn applied for declaratory and injunctive relief, asking that the letter of credit and draft be declared void and that an injunction issue to prevent payment of the draft. The Supreme Court of New York County, speaking through Justice Shientag, was faced with a motion by Chartered Bank to dismiss the complaint and all its prayers for relief. As courts routinely do in considering motions to dismiss based on the plaintiffs pleadings, all allegations in the complaint were deemed as true. Thus, the court ruled for purposes of the motion to dismiss as though Transea had committed a deliberate fraud upon Sztejn. As Justice Shientag noted,
it must be assumed that Transea was engaged in a scheme to defraud
the plaintiff and Schwarz, that the merchandise shipped by Transea is
worthless rubbish and that the Chartered Bank is not an innocent
holder of the draft for value but is merely attempting to procure
payment of the draft for Transea’s account.(22)

After reviewing the importance of the independence principle, Justice Shientag noted that the application of that principle “presupposes that the documents accompanying the draft are genuine and conform in terms to the requirements of the letter of credit.”(23) Yet given the procedural posture of the case,
it must be assumed that the seller has intentionally failed to ship any
goods ordered by the buyer. In such a situation, where the seller’s
fraud has been called to the bank’s attention before the drafts and
documents have been presented for payment, the principle of the
independence of the bank’s obligation under the letter of credit should
not be extended to protect the unscrupulous seller.(24)

Much depends on this language. As we shall see, this decision originates the modern-day exception to the independence principle. Considering the case in the light most favorable to the plaintiff, the court rejected the possibility that Chartered stood in any better position than Transea. Further, Transea has not merely committed a breach of warranty, but rather has engaged in “active fraud.”(25) The court then reasoned that
no hardship will be caused . . . where fraud is claimed, where the
merchandise is not merely inferior in quality but consists of worthless
rubbish, where the draft and the accompanying documents are in the
hands of one who stands in the same position as the fraudulent seller
[not in the hands of a bona fide purchaser], where the bank has been
given notice of the fraud before being presented with the drafts and
documents for payment, and where the bank itself does not wish to pay
pending an adjudication of the rights and obligations of the other

Presumably, this lack of “hardship” arises from the fact that only the fraudulent seller is denied access to funds from the credit while the innocent account party/buyer and the issuing bank are protected, and that the confirming bank (Chartered) is only minimally inconvenienced, since it is merely presenting documents as an intermediary between the issuer and the beneficiary.(27)

The independence principle is at risk, however, as the court seemed to realize. The independence principle requires the court to separate the letter of credit arrangement from the underlying contract for hog bristles between the buyer and seller. If there is a dispute between the buyer and seller as to the timeliness, quantity or quality of the goods, the independence principle would require that the credit be paid upon presentation of conforming documents. Yet Justice Shientag concluded that the issuing bank is “vitally interested in assuring itself that there are some goods represented by the documents.”(28) The Sztejn court thus concluded that where a bill of lading appears to conform but is in fact fraudulent, the credit arrangement itself is affected, and the independence principle is thus not seriously compromised.(29)

Yet the Sztejn case raises problematic possibilities in terms of fraud allegations in letters of credit, possibilities which have been realized in subsequent cases. For example, an account party could dishonestly raise allegations of fraud simply to delay payment to a seller/beneficiary,(30) or could honestly believe that a serious breach of warranty represented a case of fraud. Or an issuing bank could conceivably know of actual fraud committed by the seller/beneficiary but honor the draft and documents anyway

The Uniform Commercial Code’s Article 5

By the late 1950s and early 1960s, states began to adopt the UCC, which had been drafted under the auspices of the American Law Institute and the National Conference of Commissioners on Uniform State Laws. Article 5 of the UCC is devoted entirely to letters of credit. The reasoning in Sztejn had been followed in later cases,(34) and Article 5 embraced that reasoning. UCC section 5-114 (now revised in UCC section 5-109)(35) stated that even where the presented documents are forged, fraudulent, or there is “fraud in the transaction,” the issuing bank must honor any demand by a holder in due course. Where the demand is not by a holder in due course, a bank may “in good faith” honor the presentment, or choose to dishonor the presentment. Moreover, a “court of appropriate jurisdiction may enjoin” honoring a presentment of documents which are forged or fraudulent, or where there is fraud in the transaction.

Part of UCC section 5-114 codified the holding in Sztejn, allowing for injunctive relief where there is “fraud in the transaction” unless demand is being made by a holder in due course. “Fraud in the transaction” may or may not be the same as in Sztejn, where the bill of lading was presumed to be fraudulently issued or procured. Based on a narrow reading of Sztejn, the fraud exception would be strictly limited to assumed or proven fraud which is intentional and/or egregious, but many cases in U.S. courts and in Europe have expanded the fraud inquiry and enjoined payment where fraud has been less than egregious.(36) there is general agreement that the defense of “fraud in the transaction” must be based on serious misconduct(37) that was so vitiated the entire transaction that the legitimate purposes of the independence principle would no longer be served.”(38) A draw based on the shipment of mildewed boxing gloves when the underlying contract called for new boxing gloves has qualified as fraud in the transaction.(39) Some courts require egregious fraud(40) while many others posit a test for “active” or “intentional fraud,”(41) while still others apply a “flexible fraud” standard.(42) Oddly, there is also precedent for injunctive relief with no clear analysis of the fraud, thus establishing the least strict and most expansive standard.(43)

Variations to the Uniform Commercial Code

Article 5, like the UCC generally, was drafted to alleviate state jurisdictional differences

Two states, California and Nevada, omit the UCC section 5114(2)(b) language which provides that “courts of appropriate jurisdiction may enjoin such honor.”(49) Nor was this an oversight

U.S. courts not applying California or Nevada law may issue injunctions, but the standards often vary from Sztejn. Thus, California and Nevada courts ignore even egregious fraud as reason to enjoin payment while other U.S. courts go beyond Sztejn to enjoin payment even where the seller’s alleged fraud relates to failures to perform the underlying contract, where the allegations of “fraud” are contested, or the alleged fraud is not egregious.

In short, there is notable lack of unity in approaches to enjoining payment on the basis of fraud. Much will depend on what law is chosen and what forum hears the case. But U.S. law does not stand alone in letters of credit, since much of their use is in international transactions. UCC provisions (incorporating Sztejn) must vie for recognition along with the International Chamber of Commerce’s and United Nations’ standards.

The UCP 500: An International Standard

The International Chamber of Commerce (ICC) published The Uniform Customs and Practice for Documentary Credits (UCP) in 1933 and since that time the ICC has occupied a leadership role in international business through its continued efforts to harmonize the practices of international trade.(52) Banks in more than 145 nations use the UCP, which has been revised in 1951, 1974, 1983, and 1993,(53) and almost all international letters of credit reference the ICC’s UCP.(54) Notably, the UCP does not address the issue of enjoining the honor of fraudulent demands

Article 3 provides that “[c]redits, by their nature, are separate transactions from the sales or other contract(s) on which they may be based and banks are in no way concerned with or bound by such contract(s), even if any reference whatsoever to such contract(s) is included in the credit.”(55) Article 4 states that “In Credit operations all parties concerned deal with documents, and not with goods, services and/or other performances to which the documents may relate.”(56) This provision clearly encompasses standby letters of credit. Articles 9 and 15 further uphold the independence principle by providing that “[a]n irrevocable Credit constitutes a definite undertaking of the Issuing Bank, provided that the stipulated documents are presented to the Nominated Bank or to the Issuing Bank and that the terms and conditions of the Credit are complied with” and that “[b]anks assume no liability or responsibility for the form, sufficiency, accuracy, genuineness, falsification or legal effect of any document(s).”(57)

Another group working for harmonization of letter of credit law is the United Nations Commission on International Trade Law (UNCITRAL). Within UNCITRAL, the ICC presents the views of international banks.(58) UNCITRAL initiated the UN Convention on Independent Guarantees and Stand-by Letters of Credit, which differs from the UCP in that it is public law, not private law

The UN Convention on Independent Guarantees and Stand-by Letters of Credit

UNCITRAL has a long-standing involvement with the International Chamber of Commerce (ICC) on issues relating to documentary credits and guarantees.(59) In 1992 UNCITRAL’s Working Group on International Contract Practices proposed a convention on guaranty letters “to bring the language in line with that commonly used in letter of credit decisional law and to elaborate on the meaning of fraud in this context, i.e., in identifying hidden defects in the presentation that are so serious as to permit the issuer (or a court) to ignore the independence of the undertaking.”(60) The Convention on Independent Guarantees and Stand-by Letters of Credit has been approved by the United Nations General Assembly, and it is likely that the Convention will be cited in fraud cases in U.S. courts, even if not formally considered or ratified by Congress.(61)

The consensus within the Working Group was that a demand was improper if the documents were forged or, if known to the beneficiary, the documents contained false or inaccurate information.(62) The final draft of the Convention on Independent Guarantees and Stand-by Letters of Credit includes three substantive grounds in Article 19 for determining that a demand is improper: the beneficiary knows any document is forged, the beneficiary knows that no payment is due, or the demand has “no conceivable basis.”(63) It seems highly unlikely that the “no conceivable basis” grounds will prove to be much more helpful to banks, potential litigants, and judges than previous formulations such as “egregious fraud” or “fraud in the transaction.”

Recent Revisions to the Uniform Commercial Code

Since Sztejn and the adoption of the Uniform Commercial Code in most U.S. states, questions and problems in letter of credit transactions have olden been viewed through two differing lenses: U.S. bankers and their customers generally use UCP terms and policies, while U.S. lawyers generally use UCC terms, methods, and policies, supplemented by the common law of contracts.(64) Ongoing developments in technology and increased use of letters of credit created a need for conceptual coherence internationally. As Professor Byrne put it in 1993, “an international network of correspondent relationships is not possible without fundamental agreement on essentials.”(65)

Professor Byrne and others began the process of revising Article 5 of the UCC with a view to moving U.S. law closer to international standards.(66) In a memo to an ABA draining committee regarding a revision of Article 5, concluding statements were made that the revision of Article 5 is better than current law for issuers (banks) and warned that an unrevised Article 5 will broaden the gap between the U.S. and our trading partners, producing many unforeseen consequences and an increase in litigation and complexity of agreements.(67) The memo also states that domestic banks’ letter of credit business may be in jeopardy if U.S. courts continue to sympathize with claims of particularly distressed customers or beneficiaries. “Ultimately the costs so suffered would lead to the same consequence, namely, the degradation of the letter of credit as an efficient and inexpensive commercial device.”(68) There was additional fear that “injunction happy” American trial courts could cause U.S. letters of credit to be shunned or less widely accepted.(69)

Recognizing the damage of injunctions to letters of credit, the revision omits the “ambiguous standard of fraud in the transaction.”(70) But it replaces it with a “material fraud” standard, and tightens rather than eliminates the possibility of injunctive relief for fraud.(71) Yet it is difficult to see how replacing “fraud in the transaction” with “material fraud” will signal a bright definitional line to minimize claims of fraud or attempted injunctions to prevent payment. Moreover, as of 1997, there are cases of alleged fraud that will be decided under UCC section 5-112, some that may be decided or informed by UCC section 5-109, and some that will be decided under UNCITRAL’s “no conceivable basis” standard.(72) There is still no clear consensus on standards for enjoining payment for fraud in letter of credit transactions, and we do not expect that the use of “material fraud” (rather than “fraud in the transaction,” “egregious fraud,” or “intentional fraud”) will clear up the confusion. The commentary to revised Article 5 attempts to make it very clear to judges that injunction for fraud is an extraordinary remedy that should not be granted without an absence of viable legal remedies, and should not be granted without a manifest likelihood of success on the merits. Given the tendency of courts to want to “do justice” for a defrauded buyer, such commentary is most welcome, especially since we propose strategies to maximize the availability of viable legal remedies.

In short, the lack of consensus on words of legal art to provide guidance to judges with injunction requests before them should be the occasion for a general re-thinking. Let us recall (1) that the original purpose of a letter of credit arrangement in the international commercial context was to secure for sellers payment on performance, (2) that a few sellers are unscrupulous, (3) that banks would rather not be in the middle of angry customers/account parties and allegedly fraudulent sellers/beneficiaries, and (4) that some account parties are unfairly alleging fraud in the transaction and appealing to equity for injunctions. Recounting these realities suggests at least a partial solution: restoring the independence principle and ensuring that an account party/buyer has adequate legal remedies so that equitable ones are not necessary. We believe that legal remedies that are entirely adequate can be obtained by any party wronged by fraudulent conduct, provided that they contract wisely and use the power of internationally sanctioned arbitral awards. Contracting wisely may include making initial orders in smaller lots until the good faith of the international seller can be assured. Securing performance bonds may also be prudent where the seller’s creditworthiness or good faith is unknown. And if buyers fail to contract prudently, or take the risk of dealing with a known rogue, should equity really come to their rescue?


International commercial arbitration “has become so widespread that it is a primary method for dispute resolution of transnational contracts.”(73) The U.S. Supreme Court has made it abundantly clear that it will respect the contractual choices of parties to arbitrate,(74) and indeed has even forced potential litigants to accept “choices” that they are unaware of at the time of contracting(75) or had little economic power to avoid. The Court has noted that the essential function of the Federal Arbitration Act(76) is to enforce the contractual intent of the parties. Both the United Nations and the Task Force on the UCC Revision recognize that all parties to a commercial transaction are empowered to select an applicable law for the contract, and to select an appropriate forum for dispute resolution.(77) Moreover, the UN Convention on Recognition and Enforcement of Foreign Arbitral Awards (The New York Convention) provides for virtually automatic enforcement of arbitral agreements and awards in the countries most active in international commerce.(78)

In short, there are no legal or contractual barriers to increased use of international commercial arbitration in letter of credit disputes. In fact, the existence of arbitral remedies and parties’ ability to choose both the forum and applicable law are factors indicating a very different international legal environment from the one confronting Sztejn and the New York courts in 1941. At that time, before the adoption of the New York Convention, a defrauded buyer would have to bring a lawsuit for damages in the home country of the fraudulent seller. Moreover, the likelihood of consequential or punitive damages would be minimal

A Hypothetical Problem of Egregious Fraud (And its Solution)

Let us place a case like Sztejn in the current legal environment. Suppose that a Charles Stern (a resident of New York City) contracts with PanAsia Traders out of Singapore for a large quantity of pigskin, and PanAsia Traders wishes to secure payment through a letter of credit. Stern arranges a letter of credit through his bank, the Bowery-Beethoven Bank (BBB) and its vice president for international financing, Lucy Brown. A credit for sixty thousand dollars is established naming PanAsia Traders as beneficiary. PanAsia “performs,” but bribes a carrier to issue bills of lading that conform to the credit’s requirements, even though a mixture of horsehide, oxhide, and hog droppings are sent rather than pigskin. Somehow, Stern learns of the fraud but is unable to convince Lucy Brown to dishonor PanAsia’s presentment. So Stern goes to court and seeks an injunction

Thus far, nothing is notably different from Sztejn. Suppose, however, that Stern and PanAsia have a clause in their contract that requires all disputes arising from their transaction to be arbitrated in Geneva or London under rules of the International Chamber of Commerce, and that the UCP applies. Suppose also that the arbitration specifies that if a seller’s demand under a letter of credit arranged to finance the underlying contract has no conceivable basis, or involves egregious, willful, or intentional fraud, then an arbitrator may award attorneys’ fees, compensatory and consequential damages. The clause could also provide that if the case involves conduct that the arbitrator finds particularly outrageous, punitive damages may be awarded, limited to twice the compensatory and consequential damages.

Note that this proposal may seem to conflict with the Revised UCC Article 5, which states that parties should not recover consequential damages (and, by extension, should not recover punitive damages).(79) But Revised UCC Article 5 primarily contemplates various lawsuits against banks, whether they involve allegations from beneficiaries that the issuing or confirming banks failed to pay when they should have paid, or allegations from account parties that the issuing banks paid when they should not have. Our proposal does not conflict because it involves only the parties to the underlying transaction — the buyer and the seller.

But any arbitration agreement between buyer and seller would not prevent a buyer/account party from seeking an injunction against a bank. So let us hypothesize that BBB, in establishing a credit at Stem’s request in favor of PanAsia, included the following clause in their contract with Stern as account party: “Account party agrees that in no event will it seek to enjoin payment under the letter of credit where the bank receives documents that conform to the credit’s requirements. Account party agrees that any legal claims or equitable actions arising from the seller/beneficiary’s alleged fraud, the quality, lack of quality, or non-existence of goods or services provided by the seller will be pursued directly against the seller, whether by arbitration or litigation.”(80) Such a provision would lower the costs of letters of credit, at a time when increasing costs have become a concern. Such a provision would also disabuse account parties of the notion — largely incorrect — that judicial equitable relief provides a likely cure for fraudulent activity by a seller/beneficiary.(81) Legally, such a provision would justify a court’s immediate dismissal of an account party’s claim for injunctive relief.

Moreover, these two proposals taken together do not require the establishment of any special forum, nor do they overwhelm the expertise of arbitrators, since the questions posed neither are technical nor require specialized knowledge. The issues raised in any buyer-seller arbitration would be of the common law variety, dealing with types of fraud. While it is true that judges might ordinarily have a better grasp of these issues, there are unavoidable difficulties in defining the kind of fraud that is “material,” “egregious,” or that “vitiates the transaction.” Judicial struggling is already evident in the inconsistencies found in cases that have considered injunctive relief for various allegations of fraud.

Notice also that the proposed provision states clearly the parties’ intent: that neither buyer nor seller will seek injunctive relief, that any action based on breach of warranty or fraud will be handled by arbitration, that the UN Convention on Independent Guarantees and Stand-by Letters of Credit will be the operative choice of law, and that the location of arbitration will not be too inconvenient to the account party or buyer. In this way, the seller can bargain for the convenience of the letter of credit, and will invariably receive payment upon supplying conforming documents. However, the buyer will have the advantage of ready resort to an arbitral tribunal if it suspects fraud, and the tribunal can award both compensatory and consequential damages, an award which will be enforceable by reason of the New York Convention in most nations.

James Byrne, who has been extraordinarily active in revising UCC Article 5, has said that arbitration has “never really been very successful or widely used with respect to letter of credit disputes.”(82) His reasons, though, involve the specialized nature of resolving interbank disputes. “There you get beyond the banking community, I think one of the difficulties involved has been that you still have the problem of educating the arbitrator and the lawyers involved, and by the time you do that, you might as well work your way through the court system.”(83) While Mr. Byrne has already forgotten more than we are likely to learn in our lifetimes, his point relates to interbank disputes on the more technical aspects of letters of credit. The broader issues of fraud, breaches of warranty, or non-existent goods or services allegedly provided could surely be handled by arbitration. Indeed, some would argue that more technical aspects of letter of credit litigation might be better suited to the specialized skills of specific arbitrators than randomly assigned judges.

Remedies and Institutions

In the realm of international commercial arbitration, no institution is more prominent than the International Chamber of Commerce. The ICC historically has taken a leading role in developing rules for banking and international trade finance, and has promoted several revisions of the UCP. Isabella Chung noted in 1996 that the ICC is home to the ICC International Court of Arbitration and receives over 200 requests a year for resolution of letter of credit disputes.(84) Not all such requests involve claims of fraud, of course, but it suggests that parties may wish to refer disputes over the underlying contractual obligations to an experienced arbitral tribunal like the ICC’s International Court of Arbitration.

If necessary, an arbitrator or arbitral panel could assess consequential or even punitive damages(85) where sellers or beneficiaries made demands that had no conceivable basis, involved intentional, willful, or egregious fraud or “fraud in the transaction.” Fraudulent conduct has traditionally brought forth claims for punitive damages, and could do so in the context of letters of credit. For public policy reasons, some nations might not enforce punitive damage awards, whether by arbitral award or judgment, but the enforcement of consequential damage awards and attorneys’ fees would face few hurdles, especially where the parties’ agreement empowers arbitral determination of those amounts.

Finally, it could be objected that the conduct giving rise to the fraud is not so much the deliberate failure to provide goods called for by the first contract, but the demand on an issuing or confirming bank using false, forged, or fraudulent documents. Thus, the argument might run, the arbitrator would not be empowered to determine damages for the seller’s actions which were separate from the underlying contract

But this argument is unconvincing. Starting with Justice Shientag, courts have felt empowered to make exception to the independence principle where fraudulent activity preceded the presentation of seemingly conforming documents. In effect, any court issuing an injunction against honor of conforming documents is bound to consider both the documents and the underlying activities of the seller. It would be ironic if arbitrators were limited to considering only activities of the seller that preceded the fraudulent demand. Moreover, courts have consistently upheld broadly worded grants of arbitrators’ power


In summary, we suggest that when parties contemplate a letter of credit for financing an international sale of goods or services they should include an arbitration provision in the underlying contract. The provision could specify that where a seller’s demand under a letter of credit has no conceivable basis, or involves material, egregious, willful, or intentional fraud, an arbitrator may award attorneys’ fees, compensatory and consequential damages. The clause could also provide that if the case involves conduct that the arbitrator finds particularly outrageous, punitive damages may be awarded, limited to twice the compensatory and consequential damages.

In 1941, when Sztejn was decided, a buyer/account party was at a considerable disadvantage in obtaining convenient remedies for fraudulent action by a seller/beneficiary in a distant country. But the legal environment has changed, and there is no reason why account parties, issuing banks, and beneficiaries cannot institute a system where allegations of fraud are handled not in courts through preliminary injunctions but before arbitrators or arbitral tribunals. If there is indeed fraud — if, for example, the shipments contain rubbish or other worthless materials — the distance between buyer and seller can be bridged by the expedient of an arbitration agreement where an arbitrator in a neutral country has power to award damages which are entirely adequate to compensate a defrauded buyer.

Admittedly, there will always be sad, compelling cases where remedies at law, whether through arbitration or litigation, are illusory

Finally, we recommend not only that parties to international letter of credit arrangements specify arbitration over alleged fraud and breach of warranty, but also that legislatures amend Article 5 of the UCC to omit the possibility of injunctions for fraud, as California and Nevada have done. U.S. judges, in considering requests for injunction, would then note that the authorization of injunctive relief provided in UCC section 5-114(2) (and more recently in UCC section 5-109) had been effectively repealed. Such an amendment would further global harmonization of commercial law by making UCC Article 5 more consistent with the UCP and international banking practices. The law on letters of credit in international trade would again become more predictable and efficient, yet would also provide reasonable remedies for defrauded participants.

(1) Letters of credit have become the “quintessential international instrument,” James E. Byrne, The Task Force on the Study of the UCC Article 5 (Letters of Credit), 45 Bus. Law. 1521, 1538 (1990), enjoying an “unprecedented expansion” in the U.S., id. at 1531. Risks associated with international letters of credit are widely reported in the business sector. See generally Kenneth G. Anspach, Avoiding Liability for Letters-of-Credit, Bank Mag., Sept.-Oct. 1988, at 19

(2) See infra note 81 (surveying reported cases where injunctions have been requested and noting the relative infrequency of injunctive relief). See also William D. Hawkland & Tom L. Holland, UCC Series [sections] 5-101, 165, 171 (Clark, Boardman, Callaghan eds. 1996)

(3) Former UCC section 5-114(2) established that a court could enjoin an issuing bank’s honor of documents presented for payment under a letter of credit. As Robert Rendell has noted, “[t]he fraud doctrine as embodied in UCC section 5-114(2) is one of the most important provisions in article 5.” Robert S. Rendell, Fraud and Injunctive Relief, 56 Brook. L. Rev. 111, 117 (1990). As we note below, UCC section 5-114 allows banks to dishonor fraudulent or forged documents, or to dishonor where there is “fraud in the transaction.” See infra text accompanying notes 34-43. Revised UCC section 5-109, replacing UCC section 5-114, requires that an enjoining court find “material fraud.” This article focuses on the situation where the bank is taken to court and an injunction against honor is requested despite the presentation of conforming documents.

(4) See, e.g., Roman Ceramics Corp. v. Peoples Nat’l Bank, 517 F. Supp. 526 (M.D. Pa. 1981) (seller’s actions amounted to such fraud as to “vitiate the entire transaction”). See also Stringer Constr. Co. v. American Ins. Co., 430 N.E.2d 1 (Ill. 1981) (stressing that “fraud in the factum” or “fraud in the formation of the underlying contract” must be shown before injunctive relief will be justified). See also cases in Michael A. DiSabatino, Annotation, What Constitutes Fraud or Forgery Justifying Refusal to Honor, or Injunction Against Honoring, Letters of Credit Under UCC [sections] 5-114(1)(2), 25 A.L.R.4th 239 (1983) (collecting and analyzing state and federal cases where injunctions against letter of credit payment have been sought on the grounds of fraud or forgery).

(5) See, e.g., Takeo Co. v. Mead Paper, 611 N.Y.S.2d 543 (1994) (“active-intentional fraud” in underlying transaction)

(6) DiSabatino, supra note 4, at 247-48.

(7) This test is proposed in Article 19 of UNCITRAL’s Convention on Independent Guarantees and Stand-by Credits. See infra text accompanying notes 59-63.

(8) See, e.g., International Chamber of Commerce, Uniform Customs and Practice for Documentary Credits 3 (ICC Publication No. 500, 1993) [hereinafter UCP]. “Credits, by their nature, are separate transactions from the sales or other contract(s) on which they may be based and banks are in no way concerned with or bound by such contract(s), even if any reference whatsoever to such contract(s) is included in the Credit.” Id. at 11. As James Byrne comments, “The very character of this instrument derives from its abstraction from the underlying contract, and the proposition that the parties to that underlying contract ought to sort out the disputes as between themselves.” James Byrne et al., Disputes Involving Letters of Credit, 7 World Arb. & Mediation Rep. 185, 187 (1996).

(9) Memorandum from James J. White on the comparison of Revised UCC Art. 5 with existing UCC Art. 5 to the Drafting Committee of Revised UCC Art. 5 (May 4, 1993) (on file with authors).

(10) See UCC [sections] 5-103(1)(b).

(11) A bank’s obligation to honor a letter of credit is independent of the sales contract. See Rockwell Int’l Sys., Inc. v. Citibank, 719 F.2d 583, 588 (2d Cir. 1983)

(12) We should note at the outset that this article does not discuss the problem of fraud in stand-by letters of credit. In a stand-by letter of credit, it is the seller that arranges a credit through an issuing bank to the seller’s customer as beneficiary. If the customer/buyer is not satisfied with the seller’s performance, the customer may present a certified statement to the issuing bank and receive compensating funds under the stand-by credit. Many reported cases have involved U.S. companies establishing stand-by credits for client governments in India and the Middle East

Several law review articles have discussed stand-by letters of credit where foreign governments attempt to benefit themselves under questionable circumstances. See, e.g., Note, `Fraud in the Transaction’: Enjoining Letters of Credit During the Iranian Revolution, 93 Harv. L. Rev. 992 (1980).

Generally, injunctive relief will be appropriate only where the court has jurisdiction and there is irreparable injury. The irreparable injury test is often met if the account party has no alternative legal remedy. That is often the case in stand-by credits issued to nations as beneficiaries. See Byrne et al., supra note 8, at 186. It is apparent that the problem of foreign sovereign immunity makes it more difficult for the U.S. seller of goods or services to recover on a foreign sovereign’s bad faith draw on a stand-by credit. But if a U.S. seller were to include an arbitration clause and a specific waiver of the defense of sovereign immunity, many nations would recognize the validity of the arbitral award. See U.S. Foreign Sovereign Immunities Act of 1976, 28 U.S.C. [sections] 1605(a)(1) (1994). Thus, where there were arbitral alternatives to a court injunction with viable remedies, the court would rarely find irreparable injury and issue an injunction.

(13) See generally Christian Buhring-Uhle, Arbitration and Mediation in International Business 75-78 (1996). The New York Convention was enacted as statutory law in the United States. See Convention on the Recognition and Enforcement of Foreign Arbitral Awards, 9 U.S.C. [subsections] 201-208 (1994).

(14) The documents must strictly conform to the terms of the letter of credit. See Dynamics, 356 F. Supp. at 995-97.

(15) A fourth contractual relationship occurs when the corresponding bank becomes a confirming bank. See Stephen J. Leacock, Fraud in the International Transaction: Enjoining Payment of Letters of Credit in International Transactions, 17 Vand. J. Transnat’l L. 885 (1984).

In fact, the sole advisory role for the correspondent bank is seldom used.

The seller is usually able to negotiate a term into the underlying
sales contract whereby the letter of credit arrangement requires
the correspondent bank also to be the confirming bank. A confirming
bank undertakes the same obligations to the seller as does the issuing
bank: to be primarily obligated to pay the seller in exchange for
the documents specified under the letter of credit.

Id. at 890.

(16) Dynamics, 356 F. Supp. at 995.

(17) Id. at 900.

(18) See infra text accompanying notes 34-43.

(19) See infra text accompanying notes 59-63.

(20) Sztejn v. J. Henry Schroder Banking Corp., 31 N.Y.S.2d 631 (1941).

(21) Id. at 633.

(22) Id. By implication, if Chartered had been a holder in due course, or had paid Transea in good faith as a confirming bank, it would not “merely” be an agent on Transea’s behalf. See infra note 27.

(23) Sztejn, 31 N.Y.S.2d at 634.

(24) Id.

(25) Subsequent cases, considering similar circumstances, have also used phrases such as “active fraud,” “intentional fraud,” “egregious fraud,” “willful fraud,” and “fraud which vitiates the entire transaction.” See infra text accompanying notes 34-43.

(26) Sztejn, 31 N.Y.S.2d at 635.

(27) Id. As the court noted, under the allegations of the complaint, Chartered Bank “is not a holder in due course but is a mere agent for the seller charged with fraud.” Id. If Chartered had been a correspondent bank, on the other hand, it would have paid Transea on the fraudulent documents and if the New York injunction were to become permanent, Chartered would have some “hardship,” though such harm could be most easily remedied by a party in Chartered’s position relative to Transea

(28) Id. Whether in fact the bank had a “vital interest” is debatable. It may depend on how good a client the account party is. As long as the bank can avoid a lawsuit for wrongful honor or wrongful dishonor, it may have no vital interests at stake other than preserving the predictable practice of paying against conforming documents, regardless of any fraud in procuring them. In short, the “vital interest” of most banks is the strict maintenance of the independence principle.

(29) John F. Dolan, The Law of Letters of Credit 7-34 (2d ed. 1991). As Dolan notes, “It is entirely consistent with the independence principle to say that a beneficiary who practices fraud on the account party by virtue of conduct in the credit transaction is not entitled to payment under the credit.” Id.

(30) See James G. Barnes, Defining Good Faith Letter of Credit Practices, 28 Loy. L.A.L. Rev. 101, 106 (1994).

(31) Id. at 104.

(32) 25 A.L.R.4th at 247-48.

(33) The principles of Sztejn have even crossed the Atlantic and were recognized in such English cases as Harbottle Ltd. v. National Westminster Bank, 3 W.L.R. 752 (Q.B. 1977)

(34) See Merchants Corp. of Am. v. Chase Manhattan Bank, 5 UCC Rep. Serv. 196 (N.Y. Sup. Ct. 1968)

(35) As of September 1997, the recent revision to Article 5 of the UCC has been formally adopted by over half of the United States. As yet, there are few reported cases construing the “material fraud” standard of UCC section 5-109 (the operative section on injunctive relief for fraud), and our analysis assumes that litigants will be just as likely to seek injunctions for fraud, and that some judges will grant injunctions using the “material fraud” standard. See infra notes 64-71 and accompanying text.

(36) The broadened fraud exception has invited a significant volume of litigation, some resulting in injunctive relief. Unfortunately, this litigation involves the international banking community in disputes concerning underlying transactions contrary to the policy of the independence doctrine. See, e.g., Roman Ceramics Corp. v. Peoples Nat’l Bank, 517 F. Supp. 526 (M.D. Pa. 1981)

However, most cases result in denial of injunctive relief for “fraud in the transaction.” See Hawkland & Holland, supra note 2. Eliminating injunctive relief against fraudulent sellers would clearly deter this kind of litigation. We suggest that in the current international legal environment, other remedies are entirely adequate. See infra text accompanying notes 73-84.

(37) Byrne, supra note 1, at 1613.

(38) Intraworld Indus. v. Girard Trust Bank, 336 A. 2d 316, 324 (Pa. 1975).

(39) United Bank Ltd. v. Cambridge Sporting Goods Corp., 360 N.E.2d 943 (N.Y. 1976).

(40) Roman, 714 F.2d at 1207

(41) KMW Int’l v. Chase Manhattan Bank, N.A., 606 F.2d 10 (2d Cir. 1979)

(42) While many cases apply the “flexible fraud” standard to what is actually egregious fraud, there has also been application of this standard where there has been “a breach of the beneficiary’s implied covenant of good faith and fair dealing.” Trans Meridian Trading, Inc. v. Empressa Nacional de Commercialization de Insumos, 829 F.2d 949 (9th Cir. 1987).

(43) Utica MDt. Ins. Co. v. Walker, 725 S.W.2d 24 (Ky. 1987). The Task Force analysis of this case states that it is unclear whether the court bases its injunction on a lack of strict compliance or on a fraudulent act. There is no mention of fraud as such. Byrne, supra note 1, at 1614.

(44) N.Y. UCC LAW [sections] 5-102 (McKinney 1964)

(45) The UCP represents an ongoing effort by the International Chamber of Commerce to make it easier for companies in different countries to trade with each other. It is, in essence, “private law” aimed at self-regulation by business. See Jean-Charles Rouher, Introduction to International Chamber of Commerce, Uniform Customs And Practice For Documentary Credits (ICC Publication No. 500 1993). See also text accompanying notes 51-57.

Most international letters of credit specify that the UCP governs the parties’ contractual obligations. As noted in Alaska Textile Co. v. Chase Manhattan Bank, N.A., 982 F.2d 813, 816-17 (2d Cir. 1992), “The UCP is not legislation or a treaty, but a compilation of internationally accepted commercial practices, which may be incorporated into the private law of a contract.” Thus, the relationship between the UCP and the UCC has generated questions and issues.

(46) As a major financial center, New York generates a considerable amount of letter of credit case law.

(47) New York has a statutory provision that seems to rule out Article 5 of the UCC where parties choose the UCP as governing law. But even New York courts have applied the UCC, since the UCP is silent on fraud and injunctions. See Bank of Cochin, Ltd. v. Manufacturers Hanover Trust Co., 612 F. Supp. 1533 (S.D.N.Y. 1985), aff’d, 808 F.2d 207 (2d Cir. 1986)

(48) International Chamber of Commerce, Uniform Customs And Practice For Documentary Credits 3 (ICC Publication No. 500 1993). “Credits, by their nature, are separate transactions from the sales or other contract[s] on which they may be based and banks are in no way concerned with or bound by such contract[s], even if any reference whatsoever to such contract[s] is included in the credit.” Id. at 11.

(49) Cal. Com. Code [sections] 5-114(2)(b) (West 1964)

(50) Cal. Com. Code [sections] 5-114 cmt., as cited in Mitsui Mfrs. Bank v. Texas Com. Bank-Fort Worth, 206 Cal. Rptr. 218, 222 (Ct. App. 1984).

(51) Byrne, supra note 1, at 1618.

(52) Charles Del Busto, Icc Guide To Documentary Credit Operations 3 (1994).

(53) More Case Studies on Documentary Credits 9 (Fan Dekker ed. 1991).

(54) See Byrne et al., supra note 8, at 189 (according to Isabella Chung, “99 percent of all letters of credit issued have placed the ICC squarely at the center of questions we’ve all asked ourselves today”).

(55) Del Busto, supra note 52, at 104.

(56) Del Busto, supra note 52, at 104.

(57) Del Busto, supra note 52, at 104, 106.

(58) Del Busto, supra note 52, at 104, 106.

(59) Eric E. Bergsten, A New Regime for International Independent Guarantees and Stand-by Letters of Credit: The UNCITRAL Draft Convention on Guaranty Letters, 27 INT’L LAW. 859, 860 (1993). Professor Bergsten was Secretary of UNCITRAL from 1985 to 1991.

(60) UNCITRAL, Independent Guarantees And Stand-By Letters of Credit, 18th Sess. at 17, U.N. Doc. A/CN. 9/WG II/WP.76 (1992).

(61) Byrne et al., supra note 8, at 187.

(62) Byrne et al., supra note 8, at 187.

(63) Byrne et al., supra note 8 at 171.

(64) James G. Barnes & James E. Byrne, Revision of UCC Article 5, 50 Bus. LAW. 1449, 1450 (1995).

(65) James E. Byrne, 1992 in Perspective: An Overview of Developments in the Letter of Credit Field, in Government Information Services, Letter of Credit Update 7 (February 1993).

(66) The revision of UCC Article 5 began in late 1990 by a Drafting Committee of the National Conference of Commissioners on Uniform State Laws. The revisions are now complete, and have been formally adopted by over half the states. There is reason to believe that they will eventually be adopted in all states

(67) A.B.A. Sec. Bus. L., Letter of Credit Law Revision: UCC, UCP And UNCITRAL 85 (1993).

(68) Id.

(69) Memorandum from James J. White on the Comparison of Revised UCC Art. 5 with existing UCC Art. 5 to the Drafting Committee of Revised UCC Art. 5 (May 4, 1993) (on file with authors).

(70) Id. at 84.

(71) James J. White, Trade Without Tears, or Around Letters of Credit in 17 Sections, UCC Bulletin at 108 (John C. Clark, et al., eds., December 1995). “Section 5-109 makes it marginally more difficult for an applicant to get an injunction than would have been true under the old law. To get an injunction, the applicant must show not merely fraud but `material fraud.'” Id.

(72) This includes cases of fraud in stand-by letters of credit. See supra note 12.

(73) Margaret Pedrick Sullivan, The Scope of Modern Arbitral Awards, 62 Tul. L. Rev. 1113, 1122 (1988).

(74) See Jean R. Sternlight, Panacea or Corporate Tool?: Debunking the Supreme Court’s Preference for Binding Arbitration, 74 Wash U. L.Q. 637 (1996). “In case after case since the Moses H. Cone decision in 1983, the Supreme Court has reiterated that arbitration should be preferred over litigation.” Id. at 711. We accept (even applaud) Sternlight’s critique of the Court’s uncritical acceptance of arbitration in all instances and contexts. Our proposals fit well within the kinds of arbitration that she would find both fair and useful, since they involve knowing and voluntary acceptance of arbitration by parties who are generally bargaining at arms-length.

(75) See, e.g., Carnival Cruise Lines, Inc. v. Shute, 499 U.S. 585 (1991), in which Washington State residents were sent a form passage contract (ticket) with a forum selection clause in “fine print” after making non-refundable payment through a local travel agent. The forum selection clause required them to litigate any dispute with the cruise line in Florida. Although the clause was non-negotiable, the Shutes had to litigate their tort claim in Florida. The Supreme Court majority found the clause reasonable, since it eliminated doubt as to where any dispute would be heard, reduced litigation exposure to the cruise line and, hence, presumably reduced costs to all cruise line customers as well.

(76) Federal Arbitration Act of 1925, Ch. 213, 43 Stat. 883, 883-86 (1925) (current version at 9 U.S.C. [sections] 1-14 (1994)).

(77) While most versions of the Uniform Commercial Code Article 5 do not specifically refer to choice of forum or choice of law provisions, courts have generally given parties leave to choose state law appropriate to the relationship between the parties. In the revised Article 5, section 5-116(a) makes it clear that liabilities of issuers and others are governed “by the law of the jurisdiction chosen by an agreement. . . or by a provision in the person’s letter of credit, confirmation or undertaking. The jurisdiction whose law is chosen need not bear any relation to the transaction.” Section 5-116(e) states that “the forum for settling disputes” may be chosen by the parties in the same manner as subsection (a).

Article 24 of the UNCITRAL Convention states that the parties may designate “a court or the courts of a specified State to settle disputes that have arisen or may arise in relation to the guaranty letter, or stipulate that such dispute may be settled by arbitration.”

(78) 9 U.S.C. [subsections] 201-208 (1976). “The goal of the Convention, and the principal purpose underlying it, was to encourage the recognition and enforcement of commercial arbitration agreements in international contracts and to unify the standards by which agreements to arbitrate awards are enforced.” Imperial Ethiopian Gov’t v. Baruch-Foster Corp., 535 F.2d 334, 335 (5th Cir. 1976). The Convention was initiated by the ICC and as of October 1, 1995, 105 nations had ratified it. Buhring-Uhle, supra note 13, at 75.

(79) UCC [sections] 5-111 (1995). The Official Comment to this section notes:

Consequential damages for breach of obligations under this article
are excluded in the belief that these damages can best be avoided by
the beneficiary or applicant and out of the fear that imposing
consequential damages on issuers would raise the cost of the
letter of credit to a level that might render it uneconomic.
A fortiori punitive and exemplary damages are excluded,
however, this section does not bar recovery of consequential
or even punitive damages for breach of statutory or common
law duties arising outside of this article.

Thus, if the buyer and seller are from nations that have ratified the New York Convention and their underlying contract is not governed by Article 5, they are free to empower the arbitrator(s) to award consequential or punitive damages in resolving the underlying dispute.

(80) The UCP does contain a general ICC recommended arbitration clause but cautions that mere reference to the UCP does not assure resort to such arbitration. Parties should specifically include ICC arbitration in their contract which may read as follows: “All disputes arising in connection with the present contract shall be finally settled under the Rules of Conciliation and Arbitration of the International Chamber of Commerce by one or more arbitrators appointed in accordance with the said Rules.” International Chamber of Commerce, Uniform Customs and Practice for Documentary Credits 3 (ICC Publication No. 500, 1993).

(81) For a review of digested cases, see Hawkland & Holland, supra note 2. In an overwhelming majority of these cases, either relief is refused or only temporary injunctions are granted. Out of twenty-four cases, eighteen (or seventy-five percent) resulted in denial of any equitable relief. The remaining six were temporary injunctions: North Am. Foreign Trading Corp. v. General Elecs., Ltd., 413 N.Y.S.2d 700 (App. Div. 1979)

Viewed in the aggregate, the cases that succeed at obtaining injunctive relief are few indeed, and even if justice is served in these few cases, there are far more numerous cases where the buyer has no inkling of fraud. Both the former UCC section 5-114(2) and the current UCC section 5-109 make clear that the norm is for banks to honor conforming documents, and where banks do so in good faith there is no liability. For the vast majority of buyers that would not have reliable evidence of fraud before presentment, the UCC does not authorize injunctive relief.

(82) James Byrne et al., Disputes Involving Letters of Credit, 7 World Arb. & Mediation Rep. 185, 190 (1966).

(83) Id.

(84) Id. at 189. In 1996, Isabella Chung was serving as Manager for Legal Affairs at the U.S. Council for International Business, the American affiliate of the ICC.

(85) In Mastrobuono v. Shearson/Lehman Hutton, 514 U.S. 52 (1995), the Supreme Court held that an arbitrator could award punitive damages against a securities broker for fraudulent conduct. The parties’ brokerage contract contained an arbitration clause but no mention of punitive damages, and New York law (which governed as the parties’ choice of law) disallowed the enforcement of an arbitral punitive damage award as contrary to New York public policy. Nonetheless, the Supreme Court found that the Federal Arbitration Act governed, and that the parties’ choice of law did not clearly remove the arbitrator’s power to award punitive damages.

MARK S. BLODGETT, Associate Professor of Business Law, Frank Sawyer School of Management, Suffolk University.

DONALD O. MAYER, Associate Professor of Management, School of Business Administration, Oakland University. The authors wish to express their gratitude to Kathleen Pratt, Suffolk University, for her assistance in the preparation of this article. The authors also wish to thank Professor James Byrne and Professor John Dolan for their timely and helpful comments.