Topic: Business Case Study Analysis

Home » Business essays » Topic: Business Case Study Analysis

International business law essay Question 1

Globalization is fast catching up with all sectors of the economy and trade has not been
left behind either. International trade has grown massively with the advent of globalization. To
ensure that all that pertains to the trade goes on well, many countries have joined international
bodies that govern trade. This includes organizations such as the General Agreement on Tariffs
and Trade, GATT, and the World Trade Organization. In order to ensure that all trade between
van countries goes well, there are rules that have been set to help govern all the activities that are
carried out 1 . Without these rules and regulations, transactions would be chaotic and International
Trade would not achieve its objective of ensuring that there is a clear understanding of trade
relations between various countries. However, there are certain unique aspects of some of these
rules and regulations that tend to affect the smooth flow of trade and this is the basis of
discussion in this case.
According to the article by Kerr, ‘It is only in exceptional cases that the courts will
interfere with the machinery of irrevocable obligations assumed by banks. They are the life
blood of international commerce (and) allowed to be honoured, free from interference by the
courts. Otherwise, trust in international commerce could be irreparably damaged’. These are
some of the words that were used by Justice Kerr while issuing his judgment in the case between
Harbottle Limited and The National Westminster Bank 2 . The statement has become a popular
constituent that is used by practitioners in the legal fraternity especially in cases that involve
international businesses 3 . In International business, there are several issues that may occur and,
therefore, jeopardize proper development of transactions. These may be issues to deal with
money, where one party may not fulfil their duty as pertains to the agreement that was made
about the payment. Other fraud cases may arise when the consignment that was ordered is not
the one delivered in terms of quantity or quality.
Kerr says that courts do not have any obligation to interfere with what goes on in
international trade. This is the same case with banks. In case there are any misunderstandings
between the parties involved in trade, it is the rules and regulations that are provided by the
international trade bodies that will be used to decide on the next course of action 4 . The contracts
that are made with regard to the way business will be conducted are as par the rules and
regulations that are set by the international trade bodies such as the World Trade Organization.
These organizations are aware of some of the risks that are involved in International Trade and
set rules that might be followed in case such problems occur. This is because they are the main
governing bodies in International Trade.
Since the International Trade bodies provide the rules, the courts do not consider
International Trade as part of their jurisdiction. Courts can only get involved in matters of
International Trade if there is a case of fraud and the bank was notified. Commitment by banks is
done at different levels and it is only at a certain level that the courts could get involved in an
issue even if the bank was involved in it 5 . All this is in place to ensure that International Trade
runs smoothly and the fraudulent occurrences are dealt with using one procedure that is put in
place by a single body.
Despite the availability of all these rules, there has been an increase in documentary
fraud. This is with respect to the letters of credit that are used as the means of payment by many
people that are involved in International Trade. A letter of credit enables the seller to obtain
payment from a bank within his jurisdiction 6 . In this case, payment is promised on presentation
of certain documents whose content confirms that the goods being delivered to the buyer
conform to the terms and conditions of the underlying sales agreement. The seller needs to
simply comply with the documentary requirements and if everything is fulfilled then payment is
guaranteed. However, there are certain unique cases where courts have to get involved. In such
cases, courts take the mandate to carry out judgment which would obviously interfere with the
stated obligations; therefore, there will be the need for effective probing and weighing of factors
so that the best decision can be made 7 .
This is the scenario that occurred in the case of United Trading Corporation SA and
Murray Clayton Ltd v Allied Arab Bank 8 . The Murray Clayton Ltd was against payment of the
letter of credit that was presented by the United Trading Company citing fraud as the reason
behind this directive. This case was taken to court and it was proved that the mere allegation of
fraud was not sufficient to warrant the Allied Arab Bank not to make the payment that it was
supposed to make as per the transaction between the two companies in question 9 . It was
considered that this was not among the reasons why banks are exempted from making payment.
This can only occur if the beneficiary has misrepresented some facts at the time of presentation
of the documents that were stipulated in the letter of credit.
The ruling should have considered the fact that, the buyer is the one that is always left on
the edge. Even in situations where the bank and the buyer have strong grounds for suspecting
foul play by the seller. The burden is always placed on the party that is alleging foul play and it
is always difficult to discharge this burden in most cases 10 . This is the reason why there is the
need for reforms in the UCP 600 rules to accommodate some of the exceptional cases that arise
when it comes to International Trade especially with respect to the payment 11 . There are many
changes that are arising with regard to the way things are done in the commercial world. This is
with regard to the ever revolutionary technology and the desire by people to embrace it. There is
an increase in the use of electronic services and this is fast being incorporated in the business
world. The documents that are to be used have to be scanned and sent via the electronic media.
This way, they somehow cease to be original and the bank would have to accept them due to the
changes that are there in the market 12 . Since it is a document that appears to have been
reproduced from the original, it is deemed original but these are some of the scenarios during
which banks revoke the payment of a transaction basing the lack of payment on the grounds of
lack of proper document simply because they were not the original documents 13 .
With such occurrences in place, there is the need for incorporating technology to the UCP
rules so that all the parties that are involved in the payment of transaction can do so comfortably
without the need to have to travel miles away just to get some documents in place 14 .
There are numerous cases, some of which may not be mentioned in this discussion which
involved exceptional cases. Under these circumstances, the courts were forced to block some of
the obligations that were meant to be performed by banks. One unique issue in almost all these
cases is that the judgment was issued based on the validity and dependability of factors
surrounding the case and was considered to be exceptional 15 . Therefore, this emphasizes the fact
that courts only get to interfere with machinery of irrevocable obligation assumed by banks in
cases that are usually extreme. The judges are most of the time forced to make their decisions
based solely on the exceptionality that is presented.
The other case is the case involving Harbottle v Westminster Bank in 1978 16 . This is the
case from which the statement under evaluation was derived. In this case, the English Plaintiffs
entered into a contract of sale with buyers from Egypt. The contracts made the provision that the
plaintiffs were to issue a guarantee confirmed by a bank. This guarantee covered five percent of
the purchase price in favour of the buyers. According to the plaintiff, the buyer’s demand of this
guarantee was not justified. Consequently, while issuing his judgment Judge Kerr mentioned that
it is only in exceptional cases that the courts were allowed to interfere with the responsibilities of
the banks especially in matters concerning international trade specifically the issuance of the
letter of credit.
One exceptional case involved Edward Owen Engineering and the Barclays Bank 17 .
Lord Denning, in his judgment made reference to the Sztejn case making it clear that the
judgment showed exceptionality. In the Sztejn v J. Henry Schroder Banking Corporation case,
the court granted the buyer an injunction restraining the bank from honouring the draft drawn by
the seller on the letter of credit. The seller had filled 50 cases with rubbish instead of the goods
purchased in the terms of payment. This conduct on the part of the beneficiary is fraudulent, at
the hearing, the beneficiary did not consent to the fact that the goods delivered were not the same
as those ordered. Therefore, it was only the allegation of the buyer that could enable the court to
prevent payment of the goods 18 . A bank is not supposed to pay the letter of credit if it aware of
the fact that some of the documents that were being presented were forged 19 . The right to pay is
revoked if there are other fraudulent cases that surround the payment of the transaction. In this
case, Lord Justice Brown made a comment concerning the fraud exception by outlining the
following facts. “……..that exception is that where the documents under the letters of credit are
presented by the beneficiary himself and the bank realizes that the documents are forged or
fraudulent, the bank is entitled to refuse payment”
In addition to that, Lord Justice Geoffrey Lane also made a comment in line with the
aspect of fraud exception indicating that, “The only circumstance which would justify the bank
not to comply with the demand is this, if it is clear and obvious to the banks that the buyer had
been guilty of fraud.” Furthermore, in the case between United City Merchants and Royal Bank
of Canada in (1982) in which the documents which were presented to the confirming bank were
said to have a misstatement, Lord Diplock described the autonomous nature of the letters of
credit. He indicated that the goods become irrelevant to the seller’s right to payment from the
bank in clearly outlined circumstances 20 . He stated that “to this general statement of principal as
to the contractual obligations of the confirming bank and the seller, there is one established
exception, that is, where the seller for the purpose of drawing on the credit fraudulently presents to the confirming bank documents that contain, expressly or by implication, material representations of facts that to his knowledge are untrue.”
In conclusion, it can be noted that the judgments in which the banks usual responsibilities
get interfered with must always be based on straight and strong grounds. It is true that the
machinery of irrevocable obligations assumed by banks comprise the lifeblood of international
commerce. It is also true that these obligations ought never to be compromised at all times.
However, based on the evidence which can be drawn from the cases described above, some
parties tend to take too much advantage of these obligations hence take part in fraudulent
business activities 21 . In order to ensure that the trust in international commerce is kept alive at
all times, there are unique situations which do call for the interception and interference by the
courts. This therefore brings out the importance of the inclusion of the concept of fraud
exception while handling cases involving international business transactions which could have
been triggered by the presence of fraudulence.

Related Post