Vanderbilt Journal of Transnational Law

First Page



The Sztejn principles present to issuing banks a perplexing dilemma in international letter of credit transactions. Issuing banks that have received notice of fraud in the underlying transaction may yet be presented with documents that apparently conform to the letter of credit requirements by a seller who is not a holder in due course. If the bank refuses payment and a court determines that the fraud was not sufficiently egregious, the bank will be liable for breach of contract between the bank and the seller. But if the bank relies on the doctrine of separation and pays the draft, and a court later determines that the fraud was egregious, the bank could be faced with liability to the buyer and a virtually worthless right of recovery from the fraudulent seller. Under Sztejn, therefore, a bank may be forced to investigate any allegations of fraud in order to avoid liability arising from a breach of contract. To require issuing banks to conduct an investigation of all allegations of fraud in letter of credit transactions will place an undue burden on banks that will probably hamper international trade by increasing the cost of credit. The potential risk is that every allegation of fraud could either delay payment because of the investigation demands or lead to litigation that may significantly diminish a seller's certainty of payment. As a consequence, a very important consideration in international letter of credit transactions would be the real possibility of being forced to litigate in a foreign arena.