Documentary Credits and Independent Guarantees: A Critique of the ‘Fraud Exception’ Position in English and Jordanian Law.

Abstract

Underpinning the law on documentary credits and independent guarantees is a legal principle of autonomy which dictates that these financial instruments should, as a matter of law, be treated separately from a trader’s contractual agreement. However, despite this, fraudulent behaviour may still occur when these financial and legal instruments are used in practice. In response, a fraud exception to the autonomy principle has been recognised by many national and international courts in an attempt to mitigate the effects of fraudulent trade practices. The application of this exception within the English courts is, however, problematic owing to the narrowness of its construction and application. Additionally, the paucity of alternate legal instruments for regulating fraudulent trade practices means that Jordanian courts are not in any better position than their English counterparts, leaving traders confused as to their legal position when a fraud dispute arises. Given the large financial value of fraudulent transactions and the risks involved, the use of these legal instruments has declined as has the banks’ investment in this area creating a problem for legal policy makers.
The aim of this dissertation is to, first, critically examine the fraud exception under English and Jordanian law by exploring the problems associated with the application of the fraud exception; and, second, to propose legal reforms which would alleviate both the legal and practical problems associated with the fraud exception as it stands currently. The thesis is that, whilst the autonomy principle plays a vital role in international trade, the courts should facilitate the fraud exception application and recognise other exceptions, such as the non-genuinity and the underlying contract exception, where the former exception would be unable to prevent fraud occurrence. The approach is based upon a critical evaluation of Anglo-American and Jordanian case law, supplemented by secondary sources and a qualitative examination of the Jordanian approach to the fraud exception based upon interviews with Jordanian judges. The dissertation concludes that an effective legal approach to fraudulent transactions using documentary credits and independent guarantees must be founded upon objective rather than subjective principles and that the courts’ use of injunctions should be different in cases involving holders in due course from those not involving such parties. These findings will impact upon legal policy debates within both English common law and international trade law more generally and the examination of the Jordanian position is instructive in that it is the first such study of its kind.