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This paper addresses the issues relating to fraud and/or forgery in the system of financing international trade by documentary credits. Fraud or forgery in international letter of credit transactions has been admitted as a cause of injunction. A consideration of what constitutes factors of fraud or forgery is significant, but, in fact,it may be some difficult to determine what constitutes a fraud. The fraud exception itself is not governed by the UCP, but it has been recognised that exception of independent principle would be applied in fraud. It is widely accepted that the UCP is to be supplemented by domestic rules. Currently, the recognition a fraud exception has been interpreted extremely narrow and restricted, namely, it is recognised fraud in the documents by or with the knowledge of the beneficiary. As a result, banks are obliged to pay out on documents despite the fraud or forgery because the beneficiary is innocent. It is telling that the fraud exception seldom successfully invoked in practice, because the standard of proof necessary to show fraud is high; a mere allegation of fraud is insufficient. The court is willing to limit any inroads into the independence principles, and have accordingly interpreted the fraud exception restrictively. Additionally, where a forgery perpetrated by the third party, the documents are presented by an innocent beneficiary, the bank is not entitled to withhold payment even thought there is fraud. Accordingly, in this case,where the documents tendered are fraudulent, the applicant will ultimately be obliged to reimburse the issuing bank and therefore bear the loss resulting from acceptance of such documents. A fraud exception is necessary to discourage the fraud that has become prevalent in international trade, and to maintain the trust that is the foundation of international commercial transactions.
