Posted: 14/08/2025
As part of the bicentennial celebration of Thomas Cooper's founding in 1825, Penningtons Manches Cooper is spotlighting a different standout case conducted by the firm across its two centuries of English legal practice for each month of 2025.
This eighth instalment focusses on the House of Lords' decision in United City Merchants v Royal Bank of Canada, The American Accord [1982] 2 Lloyd's Rep 1; the foundational case on the autonomy of documentary credits, the scope of the fraud exception, and the treatment of illegality/exchange control issues.
As WWII drew to a close, US and UK treasury representatives devised a new international monetary system that would facilitate global trade without fear of the currency depreciation or dramatic exchange rate fluctuations of the Great Depression.
Established in July 1944, the Bretton Woods Agreement was an Americanised accord among 44 nations with exchange rate stability as its prime goal. Under a system of fixed exchange rates, the US dollar was pegged to gold at $35 an ounce, and other currencies were pegged to the dollar. The US dollar became the world's reserve currency and was as good as gold.
Under Bretton Woods, post-war reconstruction was sustained by a long stable period of economic growth. Currency trading was largely suppressed and international investment was mostly channelled into foreign infrastructure, such as overseas factories. However, for the system to work, the dollar peg to gold had to be maintained, otherwise speculators might buy gold at $35 an ounce to sell on the open market.
As the Vietnam War endured through the 1960s, more dollars were printed to pay for US government expenditure. In 1971, President Nixon unilaterally devalued the dollar and ended its convertibility to gold, as the US gold supply could no longer support the number of dollars in circulation. After a further 10% devaluation in 1973, Japan and the EEC member countries chose to float their currencies. Bretton Woods was formally ended by the Jamaica Accords of 1976, which came into effect on 1 April 1978.
In October 1975, a British company Glass Fibres and Equipment Ltd agreed to supply Vitrorefuerzos SA of Peru with 11 components, which Vitro could assemble into a glass fibre forming plant. The contract price was to be paid by irrevocable letter of credit subject to the Uniform Customs and Practice terms. However, at Vitro's request, the price was doubled to $662,086 on the professed basis that the balance would be used to purchase further equipment and it would be simpler to open only one credit. The excess $331,043 was to be transferred by Glass Fibres to an account in Miami designated by Vitro.
Vitro instructed Banco Continental SA of Peru to open the letter of credit, which was done on 30 March 1976 with Royal Bank of Canada acting as the confirming bank. Glass Fibres assigned their rights under the credit to United City Merchants.
The documentary credit, as extended, required that the goods be shipped by 15 December 1976. However, the components were only loaded on board the vessel American Accord on 16 December. The bills of lading prepared by a Mr Baker, who was employed by the carrier's agents, EH Mundy (Freight Agencies) Ltd, were dated 15 December and falsely stated that the goods were on board on that date. Correction fluid had been used to overwrite the original date of 16 December.
When the documents were presented under the letter of credit, Royal Bank of Canada rejected them on grounds that the shipment date was incorrect. Vitro had become aware that the American Accord had left England on 17 December, and so had instructed Banco not to pay the credit.
United City Merchants and Glass Fibres commenced proceedings. Royal Bank of Canada, Vitro and Banco sought to defend the claim on the grounds that Mr Baker had committed fraud, and this entitled the bank to reject the documents.
Having considered Mr Baker's evidence, including 'the strangeness of his theory justifying when goods packed in a container can truthfully be said to be shipped or on board a ship', Mr Justice Mocatta determined that Mr Baker had indeed made a fraudulent misrepresentation. However, this fraud was not implemented on behalf of the plaintiffs, as EH Mundy were acting for the carrier, and were remunerated through a commission on freight.
The learned judge observed that a bank may refuse to pay where a documentary fraud is personally committed by a beneficiary, as the law does not permit a right of action to arise out of a claimant's own wrongful act: ex turpi causa non oritur actio. But that finding did not extend to Glass Fibres and United City Merchants, who were not found to have committed any wrong. There was insufficient evidence to show they were complicit or aware of the inaccuracies in the bills. Both plaintiffs had declined to give oral evidence before the court.
Rather, the documents they presented apparently conformed with the requirements of the credit, which was an independent contract operating autonomously from the underlying contract of sale. Mr Justice Mocatta acknowledged that this is furthermore recognised by art 8(a) of the applicable UCP terms, which states that '[i]n documentary credit operations all parties concerned deal in documents and not in goods.'
Thomas Cooper & Stibbard acted for Banco. Perhaps sensing the way the wind was blowing, Banco obtained leave during the trial to amend its defence to allege that the sale contract was illegal because, through artificially doubling the price, the agreement was enabling the transfer of funds out of Peru. That country's exchange control regulations provided that 'it is prohibited for individuals or corporations in Peru … to maintain or establish deposits in a foreign currency … abroad' and made it 'an offence of fraud against the State' to over-value imports and obligations payable in foreign currency.
Banco alleged that the contract was therefore unenforceable under English law by reason of part I, art. 8, s. 2(b) of the Bretton Woods Agreement Order in Council 1946, which stipulated:
'Exchange contracts which involve the currency of any member and which are contrary to the exchange control regulations of that member maintained or imposed consistently with this Agreement shall be unenforceable in the territories of any member.'
Following a further trial specifically dealing with this defence, Mr Justice Mocatta held that the effect of the contract would have been:
'…the receipt … of a large number of US dollars which Vitro, through Banco, would have had to repay over a period of five years by selling Peruvian soles for dollars. In these very unusual circumstances I think the sale contract between the plaintiffs and Vitro can be described as constituting an exchange contract by being a monetary transaction in disguise ….'
The documentary credit was therefore equally unenforceable, as the judge would not allow it to be used as a means of avoiding the Bretton Woods order. Banco had successfully defended the claim.
A unanimous Court of Appeal, comprising Lord Justice Stephenson, Lord Justice Ackner and Lord Justice Griffiths, agreed with the overall outcome, albeit for different reasons.
The court acknowledged that an elaborate commercial system has built up on the footing that confirmed irrevocable documentary credits are 'the lifeblood of international commerce' and operate 'collateral to the underlying rights and obligations between the merchants'.
However, that was not the only consideration. This letter of credit was 'part and parcel of a scheme to defeat the Peruvian exchange control regulations', as the underlying purchase contained 'terms which betray the wolf of an unenforceable exchange contract in the sheep's clothing of an enforceable sale contract'.
A balance had to be struck: 'International trade requires the enforcement of letters of credit but international comity requires the enforcement of the Bretton Woods Agreement.' The court decided to treat as unenforceable only the portion of the documentary credit that did not correspond with a genuine payment for machinery and freight.
The defendants regardless succeeded in full, as the court found that the fraudulently completed bill of lading did not conform with the requirements of the documentary credit. If the bill of lading tendered under the credit had been forged by a third party, then it would have been a nullity. The court took the view that the bank would not have been obliged to take up a worthless forgery that gave it no security, and there were no grounds for treating differently a genuine bill of lading that was fraudulently completed by a third party.
Lord Diplock gave the judgment of the House of Lords, with whom the other law lords agreed.
The Court of Appeal had decided the Bretton Woods point correctly:
'The question whether and to what extent a contract is unenforceable under the Bretton Woods Order in Council 1946 because it is a monetary transaction in disguise is not a question of construction of the contract, but a question of the substance of the transaction to which enforcement of the contract will give effect.'
But it was Mr Justice Mocatta who had correctly determined the fraud issue. The commercial purpose of confirmed irrevocable documentary credits is 'to give to the seller an assured right to be paid before he parts with control of the goods that does not permit of any dispute with the buyer about the performance of the contract of sale'. The suggestion that banks could reject apparently conforming documents that contained inaccuracies would itself be rejected, as it would 'destroy the autonomy of the letter of credit, which is its raison d'être'.
There was no reason to draw a distinction between documents that inadvertently contained inaccuracies and documents where the same inaccuracy had been inserted by a third party with intention to deceive if, in either case, the beneficiary was unaware. The bill of lading in question was a valid receipt, document of title, and a transferable contract of carriage. It was not a nullity, so that question did not arise.
The Court of Appeal has since addressed the nullity question in Montrod Ltd v Grundkotter Fleischvertriebs GmbH [2001] EWCA Civ 1954; the fact that a document is a nullity does not constitute an exception to the autonomy principle.
Often cited in leading practitioner texts, the American Accord is referenced in Chitty on Contracts, 35th Ed inter alia as support for the proposition that 'if the fraud is that of an independent third party… then the seller can still enforce the credit, so long as he is unaware of the fraud at the time of presentation.'
According to Benjamin on Sale of Goods, 12th Ed, the case demonstrates that 'a documentary credit will not be enforced if realization would contravene the UK's obligations under supra-national norms'.
Relying on the judgment to help define 'an exchange contract', Dicey, Morris and Collins on the Conflict of Laws, 16th Ed, observes that '[t]he question is whether the transaction as a whole is in substance a monetary transaction, irrespective of the form of the individual contracts that make it up.'
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