Letters Of Credit And Fraud Exception

A bank issuing a letter of credit has a near absolute duty to honour a demand for payment under the letter. Notwithstanding, one such exception to this near absolute duty is the fraud exception. The Supreme Court of Canada recognized this exception and set a high bar for it in 1987.

In Bank of Nova Scotia v. Angelica-Whitewear Ltd., 1987 CanLII 78 (SCC), [1987] 1 S.C.R. 59, the Court recognized the fraud exception to an issuing bank's near absolute duty to honour a demand for payment under a letter of credit. Writing for the Court, Le Dain J. carefully sought to balance two competing policy objectives that he described as being in "tension" in the law: the importance to international commerce that banks respect the autonomous character of letters of credit and the importance of suppressing fraud in transactions (p. 72). On the one hand, widening the fraud exception might undermine the reliability of letters of credit; on the other hand, turning a blind eye to fraud