The Judiciarys Law Journal

The Judiciarys Law Journal

The Effect of Fraud on the Rights of Assignee of Proceeds Generated from Letter of Credit in the Iranian Legal System: Review and Analysis of a Judicial Case from Perspective of Comparative Law

Document Type : Research/Original/Regular Article

Author
Mohammad Arian
Assistant Professor, Department of International Trade Law, Faculty of Law, Shahid Beheshti University, Tehran, Iran
10.22106/jlj.2021.127625.3414
Abstract
Fraud as an exception to the principle of independence of documentary credit from the underlying contract is one of the key challenges facing the issuing bank, which in particular has been more the center of attention in deferred payment letter of credits. In case, the proceeds of the credit are assigned to third party by the beneficiary through the discount of the credit and it is later discovered that the beneficiary had committed fraud, so in such a case, this question arises whether in Iranian legal system, the third party assignee shall be immune from the effects of fraud committed by the beneficiary?
In this regard, some believe that according to the general rule that "no one can transfer to another more rights than he has", the assignee of proceeds shall not be immune from the effects of fraud. From a comparative law perspective, there are two profoundly different approaches concerning the impact of fraud on the rights of the assignee of proceeds. According to the first approach accepted in the English legal system, an assignee of proceeds shall not be immune from fraud, even if it is considered as a bona fide holder. However, according to the second approach which is reflected in Section 109 of Article 5 of the US Uniform Commercial Code, the assignee shall be immune from fraud on condition that it is considered as a bona fide holder. In Iranian legal system, although there is no specific law in the field of documentary credits, such a person must be immune from the effects of fraud having regard to the banking practice, case law, and legal doctrine, as this is requisite for maintaining the commercial utility of letter of credit as an important financing mechanism.
Keywords
Letter of Credit
Fraud
Discount
Assignee of Proceeds
Issuing Bank

Subjects

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The Judiciarys Law Journal
Volume 85, Issue 114
Spring 2021
Pages 1-26

  • Receive Date 14 May 2020
  • Revise Date 17 October 2020
  • Accept Date 10 October 2020
  • First Publish Date 07 March 2021
  • Publish Date 22 June 2021