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The search for a medieval Lex mercatoria

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by Albrecht Cordes

(2003) Oxford U Comparative L Forum 5 at ouclf.iuscomp.org | How to cite this article

The Argument

In the first winter of the Seven Years War, on the 14th of December 1756 to be precise, French pirates seized the English freighter “Sarah”. At this point she had covered 17 of the estimated 21 days of the journey from Newfoundland to Lisbon. The freight was not lost beyond retrieval, as three days later an English privateer was able to recapture the “Sarah”. The goods were then transported to England, where the privateer had to be rewarded for the re-seizure with half the total value of the goods1. What was the consequence of this loss for the freight due to the carrier? The shipowners and freighters Luke and associates and their customer, the merchant Lyde, argued as to how much of the ₤150 reward Lyde was liable to pay after this incident.

The case appeared before one of the most renowned jurists in English legal history, the recently appointed Chief Justice of the King’s Bench, Lord Mansfield2 who decided as the second and final instance. First of all, Lord Mansfield halved the disputed amount, i.e. ₤75. As half of the cargo’s value was to be paid to the privateer, half of the freight should be lost, too. But not even this second half was entirely granted to the petitioner. Lord Mansfield ruled that the sum payable to him was to be diminished in correspondence with the part of the journey which had in fact been covered. As the incident had occurred after 17 of 21 days, Lord Mansfield decided accordingly that the defendant should pay 17/21 of the ₤75 – i. e. ₤60 and 14 s. The principle of this decision is that of proportional freight – in Mansfield’s words freight “pro rata itineris”3. The contrary maxim is that of half freight: if the journey is interrupted by an incident for which the freighter is not responsible, nothing is due for the lost cargo, whereas for the saved cargo half of the freight has to be paid irrespective of the part of the journey covered4.

Lord Mansfield based his judgement in the first place on “common sense”. This sounds very British but is rather similar to a way of reasoning which became popular in Germany at that same time, i.e. to deduce arguments from the “Natur der Sache”5, the nature of the matter. Secondly, Lord Mansfield based his findings on the result of his own comparative investigation. He concluded that all past and present systems of law, from the ancient Lex Rhodia through the medieval maritime laws of the Catalan Llibre del Consolat de Mar and the French Rôles d’Oléron to the Hanseatic maritime laws and King Louis XIV’s Ordonnance de Commerce had come to this same decision6. Lord Mansfield concluded that Maritime Law was not the law of one particular country but instead a general law of nations: “Non erit alia lex Romae alia Athenis; alia nunc alia posthac; sed et apud omnes gentes et omni tempore una eademque Lex obtinebit7 – Neither Rome nor Athens had any other law, neither today nor previously; but in all countries and at all times the same rule would did apply.

A similar pattern of reasoning is used in today’s discussion about the principles of the so-called New Lex mercatoria8. According to its supporters, its rules emerge and come into being independent from the will of any particular national legislator9. The belief in the unchanging content of the rules may have been lost since the days of Lord Mansfield but there is a clear similarity in the conviction as such. Supporters of International Private Law challenge the idea of the so-called mercatorists that law could possibly come into being without the explicit enactment by a legislator10 – among other reasons because their own set of rules for norm collision might become superfluous in view of such a system of supranational law. Another objection they have against the New Lex mercatoria is that this supposed area of law appears so nebulous that it is impossible to determine its content and its standards11. But above all, a law without state authority is unthinkable for the scholars of International Private Law for theoretical reasons. In defence of their theory, the supporters of International Trade law have used a historical argument, which even provided them with a name for their new matter: “Lex mercatoria”. A law merchant such as that developing today, the argument states, had already existed in the Middle Ages12. Their suggestion that law develops without any national or transnational legislator having a word in the process demonstrates what dynamism the concept of a modern Lex mercatoria could unleash in times of globalisation of large areas of hitherto purely national law.

Alas, the legal historian is forced to water the wine of Lex mercatoria euphoria and state that this use of a legal system of the past is both inconsistent and unhistorical. A similar problem results from current attempts to resort to the early modern Ius commune for the purpose of creating a European order of private law13. In both cases the laws of the past are divorced not only from their theoretic but also from their social and economic context, and dragged into legal surroundings which are completely foreign to them.

In these two cases the robor antiquitatis, the vigour of (old) age, seems to strengthen the authority of a set of legal rules. On the other hand it would be easy to draw up a list of examples in which the antiquity of a legal institute is used against its continuation or renewal because it is démodé, outdated. Whether the fact that a particular set of laws once existed speaks for or rather against its “return”14 is an open question. In order to find an answer, one has to consider the reasons why it was renounced in its time and subsequently forgotten15.

The following expositions deal with the hypothesis which Harold Berman accentuated in the following way:

The crucial period of change were the late eleventh and twelfth centuries. It was then that the basic concepts and institutions of modern western mercantile law – Lex mercatoria, ‘the law merchant’ – were formed, and even more important, it was then that mercantile law in the west first came to be viewed as an integrated, developing system – a body of law.16

Accordingly, three features characterize the medieval Lex mercatoria: (1) its existence is not derived from any “national” – for the Middles Ages one should more accurately speak of “particular”17 – legislator, (2) it is a body of law in the sense of a coherent system of rules, and (3) its most fundamental concepts and legal institutes originate in the High Middle Ages.

The discussion of this threefold hypothesis will equally proceed in three steps. First of all, we will take a look at the historical roots of this unhistorical approach towards a “Lex mercatoria”, a search which will lead us to England in the late thirteenth century. Secondly, on a purely theoretical level, we will examine from what point and to what degree one can speak of an independent body of law in the sense of a coherent set of merchant laws at all in the Middle Ages – a search which takes us to an impasse once we leave the spheres of Roman and canon law. And finally, as a third step, we will have to look at those spheres of law which really were important for medieval merchants; the opening example of the allegedly universal principle of payment of freight for an unfinished journey fits within that context. Yet, the research which has so far been undertaken in this field is by no means sufficient to tackle this question in a sufficiently thorough manner which would en able us to visualise the outlines of medieval commercial law. Especially in the various fields of substantive law the (envisaged) search for ubiquitous principles frequently leads into an impasse as soon as crucial details are examined. In the area of legal procedure the search proves to be more promising. This does not mean that a universal system of legal procedure did exist. But there is no doubt that merchants all over Europe had similar interests when confronted with court or arbitration proceedings, and that their specific interests were attended to. Compared with regular proceedings, this concerned in particular a more rational law of evidence and a swifter procedure for the summoning of defendants, which helped to speed up trials as a whole.

(1) The earliest recordings of the term Lex mercatoria originate from this same area of legal procedure. They date back to late thirteenth-century England. The law book Fleta from around 129018 explains the writ of debt and describes in detail the rigid distribution of the burden of proof between plaintiff and defendant. In this context, it is a question of exceptions made in favorem mercatorum, in favour of the merchants. The plaintiff is granted a privilege by royal grace that under certain circumstances, namely in towns, at markets and between merchants, he may bring forward proof according to the Law merchant: “…quod parti affirmative secundum legem mercatoriam erit probacio19. The plaintiff was permitted to support his claim with his own proof, as opposed to regulations in continental law. There the merchants doggedly fought for the permission to maintain the oath of office of the defendant, which the church, conceiving this as an invitation to perjury, wanted to restrict20. This striking difference is probably an early reaction to the developing system of writs which made claiming debts a difficult enterprise in England. Simultaneously, merchants on the continent were preoccupied with another problem: the danger to be subjugated to an uncertain and possibly perilous process of establishing proof through duels and other ordeals. If this assumption is right, the same rational attitude of merchants lead to opposing expectations and demands according to the legal system under which the merchants conducted business. It is safe to say that the Lex mercatoria in late thirteenth-century England was connected to a royal privilege, which partially freed the merchants from the rigid law of evidence of the common law.

The law of evidence is also among the main subjects in a short treatise entitled “Lex mercatoria”. It was written around 1280 and thus represents the earliest reference of this term to be found to date21. It was included in the Little Red Book of the city of Bristol, which owed its name, like many other medieval town books, to the colour of its cover and to its size. It contained a variation of entries regarding the law of commerce, among others one of the oldest copies of the famous Rôles d’Oléron, a collection of maritime laws from the west coast of France dating from the middle of the 13th century.

In this treatise, Common law is depicted as the mother of Lex mercatoria, who endowed her daughter with certain privileges: “Lex communis, que est mater legis mercatorie et que suam filiam ex certis privilegiis et in certis locis dotavit22.Three differences between the two areas are named by way of direct contrast23. All three relate to speedier court trials and the simplified way of adducing evidence under the umbrella of the “daughter” Lex mercatoria. In other words, there are no traces of substantive merchant law to be found here. There is no mention of purchase deeds, methods of payment or fairs, nor of partnerships, trade companies, banks or insurance. In the perception of the treatise, as in the above-mentioned passage in the law book of Fleta, Lex mercatoria is a set of rules regarding only the merchant coming before the court.

Before carrying on with the search for a medieval Lex mercatoria on a theoretical level, it may be useful to continue with the history of the term up into early modern times. At the beginning of the seventeenth century, common law and the Lex mercatoria no longer appeared like mother and daughter, but rather like two hostile sisters. In 1622 the famous book by the merchant Gerard Malynes, entitled “Lex mercatoria or the Ancient Law-Merchant”, was published in London24. Malynes penned his work as a party supporter in a contemporary dispute in judicial politics. It concerned the question whether or not mercantile affairs fell under the jurisdiction of the English Common law courts. The merchants were quite content with the court of Admiralty handling their cases, as had become common practice since the fourteenth century. At first, the court had only heard cases regarding the law of the sea, but under the protection of King Henry VIII. the court’s competence had been extended to all trade matters, in which foreigners were involved. But at the beginning of the seventeenth century, in the course of the struggle for power between the Stuarts and Parliament, the court was suspected of being too close to the king. As a consequence, the competence of the Admiralty was reduced again in favour of the common law courts. In this situation, the merchants faced the challenge that they had to convince their new judges to apply the well-tried rules that had been in use at the Admiralty court. In order to achieve this, they argued their case by giving a new interpretation to the Lex mercatoria. They reasoned that this was a legal system that had been and remained in force in all countries and at all times, regardless of the will of any national legislator. Thus, the Lex mercatoria belonged to English law, even if it was not part of common law in a stricter sense. Therefore, the judges ought to take heed of the rules of the Lex mercatoria regardless of parties relied on this set of rules a court hearing.

Malynes thus took part in a juridical debate that had been ignited when in 1610 the House of Commons had installed a committee whose aim it was to stop the king from introducing new trade duties without the consent of Parliament. If it could be proved that there existed a system of trade law which had evolved separately from common law and therefore separately from the will of Parliament, this could strengthen the king’s point of view. The most important advocates taking part in the debate were James Whitelocke on the side of parliament and John Davies on the side of the king25.

This line of argument did not convince the judges, but that is not our point. It suffices to say that it was not before 1600 that the term “Lex mercatoria” was used in the sense of a system of substantive trade law – used in this sense by English merchants as an instrument against the disliked common law. Mentioning the Lex mercatoria’s respectable age in this context was quite evidently not meant to be a historical statement but an argument within a controversial legal discussion. Starting from here, the notion of the Lex mercatoria as a universal and uniformed system of law began a life of its own as became apparent in Lord Mansfield’s argumentation from the mid-eighteenth century. For him, the doctrine of a universal trade law no longer served as a weapon in a war for the competence of the court. To him, it was a fact, backed by his own investigations – a vivid example of how historical “facts” come into being. These “facts” still influence today’s discussion without ever having been examined from a critical historical perspective26. Yet, Lord Mansfield is to be credited for integrating the rules of trade law into the common law and thereby fundamentally contributing to a new dynamism of the latter. For this reason, he is nowadays rightfully deemed to be the father of mercantile law in England. He has, to use the Little Red Book’s terminology, reconciled mother and daughter.

To sum it up: in the Middle Ages, the term “Lex mercatoria” is used in the context of advantages and privileges granted to merchants in the field of civil litigation. This is quite different from the modern sense of a system of substantive trade law that cannot be traced back any further than to the seventeenth century. In this sense, Lex mercatoria formed part of an English dispute about court competence in which the merchants argued that the Lex mercatoria was an integral part of the English Ius Commune, i.e. the common law. Contrary to this, in contemporary Germany, trade law was not viewed as part of continental common law (in Germany: “Ius commune – Gemeines Recht”), but as a specific legal system based upon privileges, a Ius singulare27. Therefore the sources on the continent refer to “Ius mercatorum” instead of “Lex mercatoria”: a set of subjective rights, of privileges, with the merchants as the bearers of special rights, instead of a system of law with “mercantile” as its description28. Investigating the history of the term Lex mercatoria thus leads to a clear result: Lex mercatoria is not a term of European or international, but of English law. In English law, it stands for certain privileges in thirteenth-century legal procedure, maybe even for a separate system of judicial procedure. Until the seventeenth century, the term Lex mercatoria does not gain any meaning beyond that.

(2) This outcome leads to another question: if the use of “Lex mercatoria” in the sense of a body of substantive trade law can not be traced back to the Middle Ages, did a widespread, cross-border legal system of this kind nevertheless exist, perhaps under another name or without any denotation at all – a system which may well have served as an example to the modern international trade law? Has there been a Lex mercatoria avant la lettre? The Lex mercatoria has occasionally been called a universal trade law 29 but this is not very convincing. Only two areas of medieval law could claim to be universal (in the eurocentric sense of the word of before 1492): canon law and imperial law, the law of the catholic church and the law of the Roman Emperor30. From the late eleventh century, both were treated scholarly at Bologna and other northern Italian and French universities. As for the sphere of trade law, opinions differ greatly. It is even discussed whether a body of objective rules of law could have existed at all before 110031. Be that as it may, there is a consensus concerning one point: a theoretical concept of a substantive law of trade did not come into existence before the beginning of the twelfth century32. On the continent, the famous foundation charter of the market of Freiburg im Breisgau, located at the foot of the Black Forest, most likely from the year 1120, may well be one of the earliest examples for the term “Ius mercatorum” to be used in the sense of a body of law33.

Have elements of a juridical system of trade law developed from a practice of granting homogenous privileges to merchants by kings, dukes and bishops? Have other such elements emerged through a constant use in contracts through which they established themselves as custom34? For each of these two possible sources of trade law one example will be given. The merchants striving for privileges from the medieval rulers must have had distinct expectations, ideas and hopes as regards their content. Amongst other things, they referred to the legal position of other groups of merchants. For example, the Christian merchants asked the Emperor Louis the Pious, grandson of Charlemagne, to grant them the same privileges as their Jewish competitors. Thus, the status previously obtained only by Jewish merchants may have established itself as a standard expected by all groups of merchants35. The second example leads us to Northern Italy. As early as the tenth and eleventh centuries, notaries in Genoa and Pisa drew up certain contracts in company law, namely the commenda contracts, in a fully standardized form.36 Those formulas had most likely proved their practical merit; at the same time all participants must have become acquainted with them and have learned to conduct business using these standardized contracts. It is crucial in this context, though, that there is not the slightest hint that a privilege had to be granted in a certain way or that a contract had to be drafted with those standard formulas. This would have been a precondition for a fixed body of law. What was common were not the sets of rules but the interests and claims of the merchants, such as speedy trials, a more rational law of evidence, freedom of trade, a similar treatment of all groups of merchants, an established and reliable practice as regards the drawing up of contracts. There may have existed a widespread consensus that these patterns were useful, but there is no proof of a common conviction that they were legally binding.

We could finish our reflections at this point with the conclusion that we have detected yet another example of a superficial use of history, motivated by an attempt to back a certain line of argument in favour of one side in a current juridical discussion, but not supported by evidence from historical sources. But this discovery does not bear any fruits for the discussion about the future of international trade law. The question whether an old Lex mercatoria existed 350 or 700 years ago can do little to influence the outcome of a dispute about the theoretical basis and practical value of a 21st century law of merchants as a separate body of law which is not linked to any domestic law.37 But to finish here solely for the reason that the historical arguments prove to be of little value in this modern debate, would mean to allow today’s law to dictate the topics and limits of historical research. If indeed legal historians would restrict themselves to questions which are of direct use for contemporary jurisprudence, they would loose sight of the most interesting and significant spheres of those legal ideas which the merchants themselves contributed to before modern times. To overcome the dogma of a widespread and uniform Lex mercatoria is like breaking free from a chain. The perspective then broadens; the loss of a clear pattern is counterbalanced by a gain of colourful details that have been suppressed before. Phenomena can now be observed which, due to their strangeness, complexity and lack of contours, may puzzle a jurist who is simply searching for the dogmatic roots of a system of law.

(3) When examining further the medieval law of merchants and trade, one would have to go deeper into the different aspects of life and law that were influenced by these merchants, such as the law of shipping and of transport, of fairs and of transfer of payments, of trade guilds and societies. As became apparent when examining the English Lex mercatoria, procedural law would play an important role in commercial courts. All these questions would merit to be examined on a comparative basis. Great care should be taken in establishing a method of comparison38 as the uncritical application of the Lex mercatoria doctrine has often led to uncertain assumptions of uniformity, frequently made by exaggerating similarities and diminishing differences39. In this new approach, fundamental differences between the European regions would have to be taken into account. One would have to distinguish clearly between influences based on relations on the one hand and similar but independent developments on the other. Such comparative studies could then become the nucleus of the search for a medieval Lex mercatoria. However, until today, only few detailed works that fulfil these requirements have been published. To cover the entire subject would be too much work for one person alone. It should serve as a warning that Levin Goldschmidt made three such attempts, all of which remained unfinished. It will therefore be necessary to limit individual research to particular sectors of the law, concentrating on those essential themes and on the chief legal institutes, of which the availability of sources and the work already done raises hopes for a fruitful comparison.

Procedural law in mercantile cases is the most ancient and most important of these subjects. As has been mentioned above, the oldest evidence for the use of the term Lex mercatoria pointed to this context, but the most ancient privileges for merchants regarding court procedure date even back to the Carolingian era. A merchant’s legal position and his position before the courts are hardly to be separated in terms of the medieval notion of law. Within a population predominantly consisting of peasants and knights, the merchant is a stranger – not only metaphorically because of his different way of life, but also literally, since he had to seek justice and defend his rights before foreign courts, especially in the earlier, orally organized phases of trade history40. In this field, the law of evidence played the most important role. What kinds of privileges the merchants desired depended significantly on the civil procedure of the courts in the area in which the merchants were conducting their trade. Within the rigid common law system of actions based on fixed writs, their main goal was to extend their options as plaintiffs to submit evidence, in particular for claims for money debts under the writs of debt and covenant. On the continent, we see merchants who mainly strive to be allowed to defend an action by their oath without having to resort to other parties to confirm that oath.

An important topic in substantive law concerns the history of trade companies. Willy Silberschmidt, a pupil of Levin Goldschmidt, devoted a monograph to this topic in the early twentieth century41. This remained the only attempt to apply Goldschmidt’s universal approach to a distinct topic, and to verify this approach through time and space, starting with Germanic sources and ending in contemporary Malaysia. He chose the Italian commenda contract whereby one partner of a joint venture travels over sea and trades the common goods while the other stays at home and is involved only as an investor. Silberschmidt generalized both the outline of the contracts and the definition of commenda and, not surprisingly, “rediscovered” these in all the regions he examined. When one takes a closer look, certain doubts arise whether Silberschmidt has not just oversimplified the matter42. As subsequent research has established what, hopefully, can be described as a reasonably firm foothold on the Hanseatic trade ventures, a renewed comparative study with also extends to the Mediterranean types of trade companies would probably make a promising field of research.

Similar results are to be expected regarding many fields of maritime law, e.g. the legal treatment of jettison. Is it not obviously a classic example of unchanging law that the group on board of a ship, forged together by a common danger of life, also become a group which bears joint liability in case of peril, if the goods belonging to one member are sacrificed for the sake of the others? But who exactly is part of that community? Is it limited to the merchants or does it extend to the skipper? And what about the ship owner? Does he have to reimburse part of the value of the goods which were sacrificed, on the ground that his ship was saved in the process? Can he, conversely, claim part of his damage from the merchants whose goods were saved when the mast was cut down to save the ship in heavy weather? The various maritime laws in Europe provided very different answers to these questions43; again, one encounters that there at least two different ways to solve such conflicts of interests.

The same applies more or less to the opening example from the law of freight. Lord Mansfield’s comparative study was not entirely correct, at least not as concerns the law of Lübeck. It was not the principle of dividing the freight to correspond to fraction of the journey that was covered (“Teilfracht” – proportional freight) which was applied in Lübeck, but rather the simple principle of halving the freight ( “Halbfracht” – half freight). In August 1488, almost 300 years before Lord Mansfield’s judgement, the council of Lübeck decided the case of skipper Poppe Claussen against the two merchants Hans van Ryme and Hans Leyfferd. The skipper had sued the two defendants for his freightage. His journey from Kampen44 in the Netherlands to the Hanseatic Kontor in Bergen had gone well, but on his way back, Claussen’s ship burned through no fault of his own. Half of the goods could be saved, and for the lost goods the merchants were not obliged to pay any freightage – as the case of Luke v. Lyde. But, as opposed to Lord Mansfield, the council of Lübeck did not relate to the fraction of the journey which had been covered when the accident took place. Instead, the council decided on the basis of a more rigid principle: “(For that reason) the merchant is obliged to pay half45 of the freightage.”46 It cannot be ruled out that this is an earlier stage of the development of the law of freightage. Perhaps there existed a general tendency to abandon the more rigid, but also more usable principle of half freight in favour of the more flexible and in a way fairer principle of proportional freight47. But Lord Mansfield’s “one and the same law” that according to him existed in all countries and at all times in an identical form, did not even exist in the field of the maritime law of freight, which is a central field of the alleged “Lex mercatoria”. A body of international rules of law as postulated by Harold Berman can be detected only by choosing to focus on overly general issues. When taking a closer look at the institutes of commercial law, one will in most cases discover at least two competing legal concepts and solutions. If the search for the medieval roots of the term Lex mercatoria led to quite clear results, the search for the laws shaping the merchants and their trade still lies before us. Its outcome is open.

Endnotes

* Revised version of a paper previously published in German (Zeitschrift der Savigny-Stiftung für Rechtsgeschichte, Germanistische Abteilung, Vol. 118, 2001, p. 168-184) and French (Pierre Monnet and Otto Gerhard Oexle (eds), Stadt und Recht im Mittelalter / La ville et le droit au Moyen Âge, 2003, 117-132). Translated with the help of Bernd Kannowski, Edda Frankot and Gerhard Dannemann. I am very grateful to all three for this invaluable support. However, I alone bear the responsibility for all flaws in language and content.

1 Luke v. Lyde (1759) 2 Burr 882. It is obvious that the privateer’s reward was based on an established action, since Counsel for plaintiff argued that the privateer should have received a reward of only one third of the value because he had had the cargo in his possession for less than 96 hours. It is unclear why this argument was not taken up by either the other party or the court.

2 Kent Lerch ‘Murray, Sir William, Lord Mansfield’, in: Michael Stolleis (ed) Juristen. Ein biographisches Lexikon. Von der Antike bis zum 20. Jh., (1995), 448 f. (2nd ed. 2001), including references to recent literature on Lord Mansfield. See in particular James Oldham The Mansfield Manuscripts and the Growth of English Law in the Eighteenth Century (1993).

3 Luke v Lyde (n. 1), 888.

4 Götz Landwehr ‘Prinzipien der Risikotragung beim Seefrachtvertrag’, in: Gerhard Köbler and Hermann Nehlsen (eds) Wirkungen europäischer Rechtskultur. Festschrift für Karl Kroeschell zum 70. Geburtstag (1997), 595-615 (598 f.), traces this older principle (half of the freightage for saved goods no matter where the accident took place) back to old Icelandic law. Today’s German commercial law, § 630 Handelsgesetzbuch (HGB, Commercial Code), enacts the principle of “Distanzfracht – distance freightage”. According to this, the charterer also has to pay a fraction of the freightage for the saved cargo. However, this is calculated not only in regard of the fraction of the journey covered but also in regard of the proportion of the costs and perils the carrier took upon him up to the point of the accident, § 631 HGB.

5 Heinrich Marx Die juristische Methode der Rechtsfindung aus der Natur der Sache bei den Göttinger Germanisten Johann Stephan Pütter und Justus Friedrich Runde (1967), 27 f.; Karl Kroeschell Deutsche Rechtsgeschichte 3 (seit 1650) (3rd ed. 1989), 65-67, 109, 116; Klaus Luig ‘Schäfchen zählen – mit gesundem Menschenverstand’, in: Köbler and Nehlsen (n. 4), 687-693.

6 2 Burr 890 f.

7 2 Burr887; cited also by CHS Fifoot ‘Lord Mansfield’, (1936, reprint 1977), 87f. Among the cited authorities for the concept of a universal law of commerce is Gerard Malynes Lex mercatoria or the Ancient Law-Merchant (1622), which therefore will be discussed below. Lord Mansfield also based other decisionson the “Lex mercatoria” as e.g. in the insurance case Pelly v. Royal Exchange Assurance, Burr. 1, 341. This notion of a universal character of trade law gained considerable influence and was among others reflected in Levin Goldschmidt Universalgeschichte des Handelsrechts (3rd ed 1891). On Goldschmidt see Lothar Weyhe Levin Goldschmidt, Ein Gelehrtenleben in Deutschland; Grundfragen des Handelsrechts und der Zivilrechtswissenschaft in der zweiten Hälfte des 19. Jahrhunderts (1996). On Goldschmidt’s universal approach see the two recent articles by Karl Otto Scherner ‘Lex mercatoria – Realität, Geschichtsbild oder Vision?’, in: Zeitschrift der Savigny-Stiftung für Rechtsgeschichte, Germanistische Abteilung 118 (2001), 148-167, and: ‘Goldschmidts Universum’, in: Mario Ascheri et al. (eds), “Ins Wasser geworfen und Ozeane durchquert”. Festschrift für Knut Wolfgang Nörr (2003), 859-892.

8 The new website http://www.tldb.de, founded and maintained by Prof. Dr. Klaus-Peter Berger, University of Cologne, adopts this name in its introducing remarks: “The new Lex mercatoria is online! The Transnational Law Database (TLDB) makes the new Lex mercatoria workable for every-day legal practice. It provides the hitherto missing link between the theory of transnational commercial law and international legal practice.”

9 Berthold Goldman ‘Frontières du droit et lex mercatoria’, in: Archives de philosophie du droit 1964, 177-192; Clive M. Schmitthoff ‘International Business Law. A New Law Merchant’, in: 2 Current Law and Social Problems (1961), 129-142. The flood of literature on this subject is enormous and still rising. A comprehensive bibliography can be found on the website mentioned in n. 8. A recent overview in print is offered by Klaus Peter Berger ‘Einheitliche Rechtsstrukturen durch außergesetzliche Rechtsvereinheitlichung’, in: Juristen-Zeitung 1999, 369-377, who rightfully draws a connection to a parallel problem, i.e. the utilization of the Ius commune, which shaped most continental legal systems up to around 1800 and beyond, for the shaping of the future European civil law or possibly even an European codification. Typical, however, is Berger’s use of history. He polishes his introduction with a few “historical reminiscences” which are hardly more than a decoration and to which he does not return in his further arguments. Intense discussion of the theoretical implications of the Lex mercatoria debate can be found in two articles by Hans-Joachim Mertens, ‘Lex Mercatoria: A Self-applying System Beyond National Law?’, in: Gunther Teubner (ed) Global Law Without a State (1997), 31-44, and ‘Nichtlegislatorische Rechtsvereinheitlichung durch transnationales Wirtschaftsrecht und Rechtsbegriffe’, in: Rabels Zeitschrift für ausländisches und internationales Privatrecht 56 (1992), 215-233.

10 For references to Christian von Bar and other critics of the modern Lex-mercatoria doctrine see Ursula Stein Lex mercatoria. Realität und Theorie (1995), 5-8. The question is still discussed today with a vigour which makes it look as one of the “last issues of state doctrine” – (“letzte Fragen des Staatsgefühls”), as already mocked by Hans Großmann-Doerth ‘Der Jurist und das autonome Recht des Welthandels’, in: Juristische Wochenschrift 1929, 3447-3451.

11 The website mentioned above (n. 8) tries to lift these clouds by collecting citations of such standards in trade treaties, articles and court rulings from all over the world and bringing them into a systematic order – this process of arranging of course being much more than a mere sorting of material in an obvious order. International Trade Law certainly would gain consistency if its scholars would effectively agree upon an order into which their principles should be classified.

12 Rather typical Bruce Benson ‘Customary law as a social contract: International commercial law’, in: 3 Constitutional Political Economy (1992), 2: “International law is still largely independent of nationalized legal systems, retaining many of the basic (though modernized) institutional characteristics of the medieval Law Merchant.” Alas, no examples for such a remarkable continuity are given. Benson is cited after Oliver Volckart and Antje Mangels ‘Are the roots of the Modern Lex Mercatoria Really Medieval?’, in: 65 Southern Economic Journal (1999), 427-450. This useful article adds to our legal perspective from an economic viewpoint and makes the extensive economic literature on this topic accessible.

13 Berger (n. 9) lists much of the literature on the subject; but see also the important volume by Pio Caroni and Gerhard Dilcher (eds) Norm und Tradition (1998).

14 Thus citing the title of the renowned and influential article by Theodor Mayer-Maly, ‘Die Wiederkehr von Rechtsfiguren’, in: Juristen-Zeitung 1971, 1-3.

15 Klaus Luig ‘Was kann die Rechtsgeschichte der Rechtsvergleichung bieten?’, in: Zeitschrift für Europäisches Privatrecht 1999, 521-530, shows the ambiguity of the historical argument by using the textbook by Hein Kötz Europäisches Vertragsrecht, vol. 1 ( 1996) (also available in English translation by Tony Weir as European Contract Law, Vol. 1 (1998)) as example. Kötz uses historical evidence only to explain, illustrate or strengthen his points, and never to refute arguments derived from other forms of reasoning.

16 Harold Berman ‘Law and revolution: The formation of the western legal tradition’ (1983).

17 Karl Kroeschell ‘Universales und partikulares Recht in der europäischen Rechtsgeschichte’, in: Karl Kroeschell and Albrecht Cordes (eds) Vom nationalen zum transnationalen Recht. Symposium der Rechtswissenschaftlichen Fakultäten der Albert-Ludwigs-Universität Freiburg i.Brsg. und der Städtischen Universität Osaka (1995) 265-278.

18 HG Richardson and GO Sayles (eds) Fleta, 4 vols., 1955-1984.

19 The complete citation reads: “In paritate […] iuris prius admittatur defensor quam pars actrix in probacione. […] Et quod dicitur de secta ad vocem probandam dici poterit de secta producta ad tallias probandas, contra quas sine secta prolatas simplici sacramento negans erit credendum. Secus tamen erit in civitatibus et nundinis et inter mercatores, quibus ex gratia principis conceditur ob favorem mercatorum, quod parti affirmative secundum legem mercatoriam erit probacio concedenda, et ipsis conceditur tallias dedictas probare per testes et per patriam”, Fleta (n. 18), vol. 2, 1955, 211 f. The greatest disadvantage to the legal position of the merchants were the rigid conditions which the common law laid down for actions for debts for which no formal charter could be produced.

20 A first example of this dispute between church and merchants can be found in the early report of the monk Alpert of Metz to his principal, the famous bishop Burkhart of Worms (1018), in which he described the customs of the merchants of Tiel, the Carolingian trading post on the lower Rhine; Albrecht Cordes Spätmittelalterlicher Gesellschaftshandel im Hanseraum (1998), 55-70. It would merit further reflection whether it is indeed a question of two contrary solutions for one and the same problem, or whether the problems, i.e. the procedural situations, differ. At any rate, it is worth stating that even for this crucial issue in civil procedure, it is by no means evident that a similar doctrine had developed all over Europe under the rule of the “Lex mercatoria”.

21 There are three editions of this source: Francis B. Bickley (ed) The Little Red Book of Bristol (1900), reviewed by L. Toulmin Smith, in: 17 The English Historical Review (1902), 353-357; Daniel R. Coquillette Incipit Lex Mercatoria, que, quando, ubi, inter quos et de quibus sit. El Tratado de Lex Mercatoria en el Little Red Book de Brístol (ca.1280 AD), in: Carlos Petit (ed) Del ius mercatorum al derecho mercantil (1997) 143-205; Mary Elizabeth Basile et al. (eds) Lex mercatoria and Legal Pluralism. A Late Thirteenth-Century Treatise and its afterlife (1998), reviewed by Christopher McNall, in: 20 The Journal of Legal History (1999), 135-137.

22 Coquillette (n. 21), 215f.

23Lex mercati differt a communi lege regni tribus modis…”; ibid., Cap. 2, 208. The same intention, i.e. to satisfy the merchants’ need for swift court procedure, appears a few decades earlier in the treatise ‘De legibus et consuetudinibus Regni Angliae’, traditionally attributed to Henricus de Bracton and dated into the first third of the 13th c. Although there appears to be no mention of “Lex mercatoria”, legal rules which reflect particular interests of merchants play a certain role in Bracton’s treatise, which is conveniently accessible through the Internet edition of the Harward Law School, http://hlsl.law.harvard.edu/bracton/index.htm (9th Dec. 2003). The roughly twenty mentions of merchants deserve further examination.

24 Of equal interest is a later follower of Malynes, Wydham Beawes Lex mercatoria rediviva, or the Merchant’s directory, being a compleat guide to all men in business (3rd ed London 1771).

25 Their reasoning is described and explained thoroughly by Basile et al. (n. 21), 125-154, esp. 132f and 139f.

26 Through the work of Levin Goldschmidt (on this connection see n. 7), this thesis continues to influence today’s debate about the modern Lex mercatoria – without ever having been tested thoroughly. The state of research on the medieval commercial societies may serve as an example: on the one hand there are comparative studies which do not prove the dogma of universal trade law but take it for granted and use it as a starting point. On the other hand, we have local or regional studies which are not aimed to lead to results on a larger scale. Typically, one pillar of the comparison is know well, the other one much less. On this problem and the very convincing exception of John Pryor’s studies on Mediterranean trade companies in the Jewish, Muslim Byzantine and catholic societies see Cordes (n. 20), 10-51.

27 Quite telling is the use of the plural “iura” mercatorum indicating that it was not a question of a single legal order but of a multitude of merchants’ rights; Heinz Mohnhaupt ‘ ‘Jura mercatorum’ durch Privilegien, Zur Entwicklung des Handelsrechts bei Johann Marquard (1610-1686)’, in: Gerhard Köbler (ed) Wege europäischer Rechtsgeschichte, Festschrift für Karl Kroeschell zum 60. Geburtstag (1987).

28 This difference between English and continental concepts of integrating trade law into the general legal system would also merit deeper reflection than can be offered here.

29 Goldschmidt (n. 7).

30 On the latter see Gerhard Dilcher ‘Kaiserrecht. Universalität und Partikularität in den Rechtsordnungen des Mittelalters’, in: Rivista internazionale di diritto comune 5 (1994), 211-245.

31 Karl Kroeschell Deutsche Rechtsgeschichte 1 (bis 1250) (11th ed 1999), 272.

32 Gerhard Dilcher ‘Marktrecht und Kaufmannsrecht im frühen Mittelalter’, in: Untersuchungen zu Handel und Verkehr der vor- und frühgeschichtlichen Zeit in Mittel- und Nordeuropa 3, 1985, 392-417; Karl Kroeschell ‚‘Bemerkungen zum ‚Kaufmannsrecht’ in den ottonisch-salischen Markturkunden’, ibid., 418-430; reprinted in: Karl Kroeschell Studien zum frühen und mittelalterlichen deutschen Recht (1995), 381-398.

33 Karl Kroeschell ‘Ius omnium mercatorum, precipue autem Coloniensium’ in: Festschrift für Berent Schwineköper (1982), 283-290; reprinted in: Kroeschell (n. 32), 335-346. On the other hand, in the Early and High Middle Ages – e.g. in the Ottonian market privileges – “Ius mercatorum” is used in the sense of a personal right granted by the emperor or a prince, Kroeschell (n. 32) ibid. As around the year 1000 even the word “lex” can have this subjective connotation, it cannot be ruled out that the continental “Ius mercatorum” and the English “Lex mercatoria” both underwent this change from right to law, from an individual claim to an objective, supra-individual legal system. But this is only an assumption, as no evidence is available for a use of “Lex mercatoria” in the sense of an individual right.

34 Kroeschell (n. 17), 273, cites examples from three different areas, i.e. the law of sale, corporate law and maritime law. In Germany, it has recently become common to prefer the term “legal custom” (Rechtsgewohnheit) to “customary law” (Gewohnheitsrecht) in this context, following Kroeschell (n. 31), 212. The term “legal custom” may indeed be preferable, as it does not evoke any inappropriate connotations to learned doctrine (such as duratio longa and opinio necessitatis). Still, the shift in terminology has hardly led to a real breakthrough. The new term does not express much more than the fact that the phenomenon had not yet been grasped fully in terms of legal theory. A collection of articles on the subject has been published recently: Albrecht Cordes and Bernd Kannowski (eds) Rechtsbegriffe im Mittelalter (2003).

35 Cordes (n. 20), 64f.

36 Max Weber, Zur Geschichte der Handelsgesellschaften im Mittelalter. Nach südeuropäischen Quellen (1889, reprint 1964); John H. Pryor Commerce, Shipping and Naval Warfare in the Medieval Mediterranean, (1987); Albrecht Cordes ‘Gewinnteilungsprinzipien im hansischen und oberitalienischen Gesellschaftshandel des Spätmittelalters’, in: Köbler and Nehlsen (n. 4), 141f.

37 Legal history also has a disappointment in store for those believing law cannot come into existence without state power. This is easily falsified by the fact that the state as historical phenomenon is much younger than law. Amongst the fields of research in medieval and early modern legal history, state-made law is rather a secondary phenomenon.

38 The methodical preconditions for such a historical comparison of law were discussed at the German Congress of Legal Historians (Deutscher Rechtshistorikertag) at Regensburg in 1998; the six presentations on this topic were published together with an introduction by the section’s president, Mathias Reimann, in: Zeitschrift für Europäisches Privatrecht 1999, 494-569.

39 Apparently, comparative law scholars are willing to accept such a “praesumtio similitudinis”, Konrad Zweigert ‘Die “praesumtio similitudinis” als Grundsatzvermutung rechtsvergleichender Methode’, in: Mario Rotandi (ed), Buts et méthodes du droit comparé (Inchieste di diritto comparato 2), (1973), 735; Konrad Zweigert and Hein Kötz Einführung in die Rechtsvergleichung (3rd ed 1996), 39 (translated by Tony Weir as An Introduction to Comparative Law (3rd edn. 1998); Berger (n. 9) 370. For medieval legal history such an assumption is to be judged as highly problematic since it may influence the results of a comparative study. See Albrecht Cordes ‘Was erwartet die (mittelalterliche) Rechtsgeschichte von der Rechtsvergleichung und anderen vergleichend arbeitenden Disziplinen?’, in: Zeitschrift für Europäisches Privatrecht 1999, 544-552 (548 f.).

40 Claudia Seiring Fremde in der Stadt (1300-1800). Die Rechtsstellung Auswärtiger in mittelalterlichen und neuzeitlichen Quellen der deutschsprachigen Schweiz (1999) (reviewed by A Cordes, in: Zeitschrift der Savigny-Stiftung für Rechtsgeschichte, Germanistische Abteilung 117 (2000) 720-722), dedicates the extensive second chapter of her book to the merchants (15-79).

41 Willy Silberschmidt Beteiligung und Teilhaberschaft. Ein Beitrag zum Rechte der Gesellschaft (1915).

42 Cordes (n. 36), 146f.

43 These question and their solutions for the North Sea and the Baltic Sea in the Middle Ages are discussed by Götz Landwehr Die Haverei in den mittelalterlichen deutschen Seerechtsquellen (1985), in particular at 44. According to Landwehr, the older North European law did not include the skipper in the risk-bearing community. However, by the thirteenth century, the opposite principle appears to have been established, possibly under Mediterranean influence. A connection could be assumed between this change on the one hand and the tendency to replace the older principle of half freight by the more modern one of proportional freight on the other; Landwehr (n. 4), 599. The most recent account of Hanseatic maritime law is given by Antjekathrin Graßmann and Carsten Jahnke (eds) Seerecht im Hanseraum des 15. Jahrhunderts. Edition und Kommentar zum Flandrischen Copiar Nr. 9 (2003).

44 Kampen owes its crucial importance for the system of Hanseatic trade routes to its strategic location at the mouth of the IJssel river, the northernmost branch of the river Rhine, into the Zuiderzee. Here the goods were unloaded from barges and loaded onto seagoing vessels.

45 Landwehr (n. 4). The concept of the division into equal parts, which is of major importance for the legal thinking in the Hanseatic world, finds another application in this context. Other examples are the halving of gains in commercial societies, Cordes (n. 36), the duty to give half the gain of stranded goods to the lord in England, and also the name which Hanseatic pirates gave to themselves: “Likedeeler – equal dividers”.

46 Wilhelm Ebel Lübecker Ratsurteile, Vol. 1 (1955), 205, Nr. 321.

47 I am grateful to Götz Landwehr for this information, which is based on his yet unpublished work on the history of the carriage contract. See Landwehr, above (n. 4 and 43), and his article on ‘Seerecht’, in: Handwörterbuch zur deutschen Rechtsgeschichte, Vol. 4 (1990), 1596-1614.

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Universal Jurisdiction In Absentia: Is It A Legally Valid Option for Repressing Heinous Crimes?

by Mohamed El Zeidy*

(2003) Oxford U Comparative L Forum 4 at ouclf.iuscomp.org | How to cite this article

Table of contents

I. Background

On April 11, 2000, an investigating judge of the Brussels tribunal of first instance issued an international arrest warrant in absentia against Mr. Abdulaye Yoridia Ndombasi.1 The warrant was issued for offences constituting grave breaches of the 1949 Geneva Conventions, and the Additional Protocols thereto, and crimes against humanity.2 At the time of the arrest warrant issuance, Ndombasi was the Minister for Foreign Affairs of the Democratic Republic of Congo.3 The Ndombasi warrant was circulated to both the international criminal police organization (Interpol) and the Congolese authorities.4

Accordingly, on October 17, 2000, the Republic of Congo filed, in the registry of the ICJ, an application instituting proceedings against the Kingdom of Belgium in respect to a dispute concerning the issuance of the international arrest warrant against the Minister of Foreign Affairs of the Democratic Republic of Congo.5 In its application, the Republic of Congo contended that Belgium had not acted in accordance with the principles of international law. It based this challenge mainly on three grounds: (1) that Belgium had violated “the principle that a State may not exercise its authority on the territory of another State”; (2) that it had infringed the “principle of sovereign equality among all members of the United Nations as laid down in Article 2, paragraph 1 of the Charter of the United Nations”; and (3) that it had violated the diplomatic immunity of the Minister for Foreign Affairs of a sovereign State.”6

Thus, the Republic of Congo’s application relied on two main arguments. First, it claimed that “[t]he universal jurisdiction that the Belgian State attributes to itself under article 7 of [its law] constituted a violation”7 of the first two aforementioned points and, secondly, it claimed that “[t]he non recognition, on the basis of Article 5 … of the Belgian Law, of the immunity of a Minister of Foreign Affairs in Office constituted a violation of [his] diplomatic immunity.”8

The Republic of Congo’s memorial and final submissions presented at the end of the oral proceedings, however, excluded the first legal ground, namely, the pleas regarding universal jurisdiction.9 Thus, the Republic of Congo focused on the issue concerning the violation of a norm of customary international law that grants a Foreign Minister “absolute inviolability and immunity” from criminal jurisdiction. Thus, the Arrest warrant of April 11, 2000 would be unlawful on this assumption.10 Belgium countered and invoked the non ultra petita rule, which operates to restrict the jurisdiction of the ICJ to those issues that are the subject of the Republic of Congo’s final submissions. Therefore, Belgium requested that the ICJ refrain from ruling on the question of whether the rules and principles of international law permit the exercise of universal jurisdiction in absentia where the accused person is not present on the Belgium territory.11

Interestingly, the ICJ replied that “it is [its] duty not only to reply to the questions as stated in the final submissions of the parties, but also to abstain from deciding points not included in those submissions, [and] thus [it is] not entitled to decide upon questions not asked of it, it did not preclude, however, the possibility of addressing certain legal points relevant to the main issue.”12 The ICJ held that the non ultra petita rule would not preclude it from answering part of the question in the operative part of the judgment, namely, whether the issuance of the arrest warrant on the ground of universal jurisdiction in absentia complied with the rules of international law.13 Furthermore, the ICJ considered it necessary to rule on this issue before ruling on the question of immunity.14 Despite this promising and progressive step taken by the court, it avoided ruling on this question on the merits of the case and thus left the judgment open for criticism. Alternatively, several judges made some comments in their dissenting and separate opinions as seen below.

This study is devoted to examining the question of universal jurisdiction in absentia and seeks to (1) shed light on the concept of universality, (2) answer the question of absolute universal jurisdiction in the abstract, and (3) answer the question in light of the judgment of the ICJ in Congo.

II. What is Universal Jurisdiction in absentia?

Under international law, there are different forms of jurisdiction, each requiring a certain link.15 These forms are territoriality,16 active personality,17 passive personality,18 and protective principles.19

Unlike these forms of jurisdiction, the universality principle does not require any link between the state demanding to assert jurisdiction and the offence.20 Arguably, the only requirement is the voluntary physical presence of the person on the territory of the state that demands to exercise jurisdiction (judex loci deprehensionis).21 But even that requirement is not absolute and might be questionable. It can be argued that universal jurisdiction can be exercised without the voluntary physical presence, or even without any presence of the person in question — leading to universal jurisdiction in absentia.

Two significant points have to be clarified for a proper understanding of universality in absentia. First, some commentators hold the view that this type is a different version of universal jurisdiction. Thus, universal jurisdiction in absentia is different than the other type — namely conditional universal jurisdiction, which requires the presence of the offender at the time of initiating proceedings22. Other commentators, though, treat universality in absentia as a part of the main issue of universal jurisdiction. In other words, they believe that universal jurisdiction in general implies some power to search for and apprehend perpetrators wherever they may be.23 In this view, search and apprehension in order to secure the presence of the offender is a factual requirement for the application or enforcement of universal jurisdiction.

Second, and building on this first distinction, the term universal jurisdiction in absentia connotes at least three different meanings. It could refer to the possibility of initiating proceedings in the absence of the offender. Hence, international arrest warrants may be issued to secure the offender’s presence to stand trial. It may, however, go further by using enforcement means, such as abductions. Finally, it could refer to trials in absentia. The present article leans towards the first meaning. Without going into details, the other two meanings raise serious human rights issues, which are outside the scope of the present article. However, as will be demonstrated below, the language used in some cases is broad and may be construed to support even the third meaning of the term.24 If the language goes as far as supporting trials in absentia, by implication, this would include jurisdiction to initiate investigations and issue international arrests.

Third, international law divides jurisdiction into two major categories: prescriptive or legislative jurisdiction on the one hand, and enforcement jurisdiction on the other.25

Prescriptive jurisdiction is the power or capacity of a state to make law, decisions, or other rules within its own territory.26 An example for this category is the right of a state to criminalize acts by enacting criminal codes.27 On the other hand, the competence to ensure compliance with that law through an “executive action” is known as jurisdiction to enforce.28 Enforcement jurisdiction is not problematic if it is limited to the territory of the state who exercises it. However, enforcement jurisdiction can also take the form of a state acting within the borders of another state in order to enforce its laws,29 and it is frequently in this narrow sense that the term “enforcement jurisdiction” is used. The general rule in international law is that any such action requires consent by the other state, in view of that state’s equality and territorial sovereignty, and that correspondingly states have full competence to prescribe and enforce their laws only within their own territory. This poses an important question: under which category falls universal jurisdiction in absentia?

I believe that the first and third aforementioned meanings of universality in absentia — i.e., initiating proceedings against an absent offender, and trials in absentia, are covered by either prescriptive jurisdiction in a wide sense (i.e., including enforcement on the state’s own territory). In other words, this is what a state can do within its own territory, when “investigating and prosecuting crimes” committed on a foreign soil.30

The first meaning of universality in absentia, which includes notably issuing international arrest warrants, does not seem to lie under the prohibited category of enforcement jurisdiction. Technically speaking, an international arrest warrant, for example, is normally enforced by the authorities or by the consent of the receiving state. This finding is in line with Professors Van Den’s argument in the Congo v. Belgium judgment, where she rightly observed that “[for the purpose of enforcing an international arrest warrant in a third state] : there is always a need for a validation by the authorities of the State where the person, mentioned in the warrant, is found…[and thus the warrant is not] automatically enforceable.”31

Thus, a state that issues an international arrest warrant is still acting within the frame of the wider form of prescriptive jurisdiction (including enforcement within the state’s own territory) as opposed to enforcement jurisdiction within the territory of a foreign state.

Let us examine this issue from a different approach. The opposite view — i.e. that universality in absentia as understood here ventures beyond the permitted into the prohibited type of enforcement jurisdiction — would have to take into account that there is a growing tendency to shrink the sovereign rights of states in cases involving human rights violations on a large scale. Authority for this view can be taken from the Tadic decision,32 which is also supported by a considerable part of the legal literature on the subject. Professor Brownlie goes as far as stating that, in cases of fighting crimes against international law, both customary law and general principle of law relating to jurisdiction, and also the principle of non — intervention in the internal affairs of other states have no stand and do not apply.33 This argument is in line with the presumption that a state may exercise universal jurisdiction without necessarily complying with the element of the presence of the accused. Crossing boarders and intervention in state’s internal affairs could be justified in case of fighting crimes against international law. This is the exception and not the rule. Since it is settled that universality of jurisdiction exists for heinous crimes, and since there is strong support for the view that the traditional rules of jurisdiction do not apply in cases of international crimes, one may conclude that practicing universality in absentia is permitted.

III. The Idea Behind Universality of Jurisdiction in General

The genesis of the universal jurisdiction principle can be traced back to two different periods in history, and also two different categories. As Professor Bassiouni has noted, the history of universal jurisdiction “stems [from] the customary international practices regarding pirates and brigands in the 1600s; even before international law in the modern sense of the term was in existence.”34 Commentators of the sixteenth century, such as Francisco de Vitoria, and those of the seventeenth century, such as Hugo Grotius, “recognized it as a general principle of law applicable to crimes under international law and ordinary crimes.”35 On the other hand, Professor Sunga pointed out that the principle of universal jurisdiction, with regards to violations of international humanitarian law, dates back to the fourteenth century when the jus militare became part of the jus gentium, and “the military profession became widely recognized as an honorable profession governed by the jus gentium.”36 Honor was of the utmost importance to the military, and breach of the rules and customs of the jus militare was seen as a breach of honor, which led to the instigation of universal jurisdiction.

While the gravity of the crime of piracy and the need to protect the interest of the international community was an element for triggering universal jurisdiction, the fact that it was committed outside the territorial jurisdiction of any state was the rationale for its application.37 This is different from the idea of universality in regard to war crimes, crimes against humanity, and genocide, where only the seriousness of those crimes is the rationale for its application.38

Under the principle of universal jurisdiction, each and every state has jurisdiction to try particular offences. As Randall stated:

[T]his principle provides every state with jurisdiction over a limited category of offenses generally recognized as of universal concern, regardless of the situs of the offense and the nationalities of the offender and the offended. While the other jurisdictional bases demand direct connections between the prosecuting state and the offense, the universality principle assumes that every state has an interest in exercising jurisdiction to combat egregious offenses that states universally have condemned.39

The rationale for such an extension of jurisdiction is that crimes such as genocide, war crimes, and crimes against humanity are an affront to humanity and, therefore, are of concern to all states.40 The demand for universal jurisdiction is compelling. Justice and law should intervene when innocent human beings are slaughtered, tortured, and subjected to other inhumane treatment. Thus, perpetrators of those crimes should not be granted safe haven. In spite of the latter goal, the question that poses itself in this context is whether the demand for this form of jurisdiction is conditional and thus dependent on the presence of the accused in the territory of the state that asserts jurisdiction. The early reference to this principle in post-war trials and its codification in some treaties might be of useful guidance to examine this question.

IV. The Nuremberg International Military Tribunal and Subsequent Trials

After World War II, the Nuremberg International Military Tribunal (IMT) was established by a joint decision of the Victorious Allied Powers to try the major war criminals, in particular German Nazi leaders who had violated the laws and customs of war.

While it is debatable that the IMT’s jurisdiction was based on the idea of universality, the statement made by the IMT in its judgment at Nuremberg at least makes reference to the recognition and existence of such a principle over crimes against peace, war crimes, and crimes against humanity. The IMT stated:

[T]he Signatory Powers created this Tribunal, defined the law it was to administer, and made regulations for the proper conduct of the Trial. In doing so, they have done together what any one of them might have done singly; for it is not to be doubted that any nation has the right to set up special courts to administer law. With regard to the Constitution of the Court, all that the defendants are entitled to ask is to receive a fair trial on the facts and law.41

The U.N. Secretary General construed this statement, in the 1949 Report on the Nuremberg Tribunal, as stating, “[the] Court considered the crimes under the Charter to be, as international crimes, subject to the jurisdiction of every state,”42 and accordingly, subject to universal jurisdiction.43 Although the statement made by the tribunal may be construed as supporting the universality principle, it did not explain how far this principle could be applied and whether there were any restrictions on its application. But, reading the entire paragraph in light of the statement, “in doing so, they have done together what any one of them might have done singly,” arguably supports a theoretical proposition that if any of them had to exercise universal jurisdiction, nothing would have prevented any of them from applying it in an absolute manner without any restrictions regarding the presence of the accused on the territory of that state. This conclusion is drawn from the fact that the Allied Powers demanded, by all means necessary, to place those criminals on trial. It follows from the final sentence of the statement, i.e. “all that the defendants are entitled to ask is to receive a fair trial,” that any legal procedure could have been adopted to bring those persons to justice. Once present, their trial should be fair. It is the strong and wide language used by the tribunal that suggests this reading.

The concept of universality jurisdiction also gained support during the post-World War II trials in the U.S. and British military courts. The language used by those tribunals, however, inclined more toward conditional universal jurisdiction, namely restricting its application to the presence of the accused in the prosecuting state’s custody at the time the proceedings were initiating.

In the Hadamar Trial,44 a military commission appointed by the Commanding General of the Seventh U.S. Army, tried Alfons Klein and six others for violating the laws of war. In examining the possibility of exercising jurisdiction, the commission stated:

[t]he Commission had to decide the question whether it could assume jurisdiction despite the fact that the crime, committed by foreigners outside United States territory, had not affected United States nationals …The Commission decided the question in the affirmative [and thus] the … reasons sustaining the Commission’s jurisdiction can be adduced from (a) the general doctrine recently expounded and called “universality of jurisdiction over war crimes,” which has the support of the United Nations War Crimes Commission and according to which every independent State has, under International Law, jurisdiction to punish not only pirates but also war criminals in its custody, regardless of the nationality of the victim or of the place where the offence was committed, particularly where, for some reason, the criminal would otherwise go unpunished.45

Moreover, in the Almelo46 and Zyklon B47 cases, the same principle was adopted by the British Military Courts. The cases stated that “under the general doctrine called universality of jurisdiction over war crimes, every independent state has an international law jurisdiction to punish pirates and war criminals in its custody regardless of the nationality of the victim or the place where the offence was committed.”48

A close reading of the texts previously referred to suggests that any state could punish war criminals by virtue of universal jurisdiction, but only when they are found in that state’s custody. But, the question remains, how could that person be found in the state’s custody? Is it the voluntary presence of the accused, his surrender to the detaining power, incidentally being present at the time of his arrest or capture, being captured in the territory of the detaining power, or being absent and eventually extradited from another country to the detaining power on the basis of an arrest warrant? If the language points to the last scenario, then it is possible to argue that the military courts were authorized by the practice of absolute universality.

Nevertheless, in Eisentrager and others,49 the U.S. Military Commission in China, which tried the German national Lothar Eisentraeger and others for violations of laws and customs of war committed in China against the United States, made no reference to such a requirement when stating:

[A] war crime, however, is not a crime against the law of or criminal code of any individual nation, but a crime against the jus gentium. The laws and usages of war are of universal application, and do not depend for their existence upon national laws or frontiers. Arguments to the effect that only a sovereign state of the locus criminis has jurisdiction and that only the lex loci can be applied, are therefore without any foundation.50

Unlike the abovementioned cases that explicitly required the presence of the accused in the state’s custody at the time of the initiating proceedings, the wording of the U.S. Commission in this case makes no apparent reference to any restriction when applying universal jurisdiction over a war crime. Thus, it left room for different interpretations. An examination of the facts of this case, however, suggests that the U.S. Commission exercised extraterritorial jurisdiction over foreigners who committed crimes against foreigners—a sort of absolute universal jurisdiction (in absentia). In this case, the United States extended its jurisdiction over Shanghai even though the accused persons were German nationals, who had committed their crimes in China and were residents of China at the time of initiating proceedings. Thus, no links existed between the United States and the accused.51

V. Universal Jurisdiction in light of Recent Jurisprudence and Contemporary National Legislations

It is interesting to note that while some of the national legislations do not support universal jurisdiction without any connection between the offender and the forum state, others do allow such exercises of jurisdiction in an absolute manner.

A. National Legislation requiring the presence of the accused

(1) United Kingdom

The United Kingdom War Crimes Act of 1991 allows proceedings to be brought against a person in the UK irrespective of his nationality at the time of the alleged offence. This act applies in cases of murder, manslaughter, or culpable homicide committed between September 1, 1935 until June 5, 1945, in circumstances where the accused was at the time or has become a British citizen or resident of the UK, and the offence constituted a violation of laws and customs of war.52

(2) Austria

Articles 64, 64.6, and 65.1.2 of the Austrian Penal Code permit Austrian courts to exercise extra-territorial jurisdiction over war crimes and torture. But, article 65.1.2 limits such application by requiring the presence of the accused in Austria.53

Thus, in the Cvjetkovic case, the accused was a Bosnian Serb who was arrested in Salzburg on July 14, 1994, on the ground of having committed genocide in Bosnia. He challenged the legality of the arrest warrant on the grounds that Austrian courts lacked jurisdiction over the case. The question was subsequently referred to the Austrian Supreme Court, which held that Austrian courts were entitled to exercise jurisdiction over Cvjetkovic. On July 27, 1994, the District Court of Salzburg acquitted him for insufficient evidence. Although the Austrian courts based its jurisdiction on the universality principle, the latter based its jurisdiction on article 65.1.2, which required the presence of the accused on the Austrian territory. Indeed, the accused had been arrested in Salzburg.54

(3) Australia

The Australian War Crimes Act 1945, as amended in 1988, requires a similar rule to that of the aforementioned. In the Polyukhovich case, the Australian High Court mentioned that the “universality principle … permits jurisdiction to be exercised over a limited category of offences on the basis that the offender is in the custody of the prosecuting state.”55

(4) Netherlands

Likewise, in the S.H.T. case, the District court of Haarlem (Netherlands) applied article 7(4)(b) of the Dutch Penal Code, which limits the exercise of extraterritorial jurisdiction to the presence of the “offender” in the Netherlands.56

B. National legislation not requiring the presence of the accused

On the other hand, there exist other national laws that make it permissible to apply absolute universal jurisdiction (in absentia) without the accused being physically present in the state that is asserting jurisdiction. This different version of the universality principle is upheld in Spain, Germany, Belgium, Italy, New Zealand, and Israel.57 As their provisions differ, I will limit my examination to the first three countries.

Professor Antonio Cassese argues that this version of the universality principle is “legally” permissible for two reasons. First, given the gravity of war crimes, crimes against humanity, and genocide, universal prosecution and repression is warranted. Second, because the exercise of this jurisdiction does not amount to a breach of the principle of sovereign equality of states, as set out in article 2(1) of the U.N. Charter, its application is permissible.58 Indeed, both the Trial and Appeals Chambers, in the Tadic case, adopted a similar view, namely, when dealing with the most odious crimes of international concern, the sovereign rights of states should not be invoked. The Tadic decision stated:

It would be a travesty of law and a betrayal of the universal need for justice, should the concept of State sovereignty be allowed to be raised successfully against human rights. Borders should not be considered as a shield against the reach of the law and as a protection for those who trample underfoot the most elementary rights of humanity …59

[T]he crimes which the International Tribunal has been called upon to try are not crimes of a purely domestic nature. They are really crimes which are universal in nature, well recognized in international law as serious breaches of international humanitarian law, and transcending the interest of any one State. The Trial Chamber agrees that in such circumstances, the sovereign rights of States cannot and should not take precedence over the right of the international community to act appropriately as they affect the whole of mankind and shock the conscience of all nations of the world …60

Based on this finding, it is arguable that when a state exercises universal jurisdiction by default, it is hardly persuasive for any other state to claim a violation of article 2(1) of the UN Charter. The state exercising that type of jurisdiction is not acting to merely protect its own interest, Instead, it is acting on behalf of the international community for the sake of saving a common interest.

As mentioned previously, some countries have applied the wider idea of universality, and thus, have extended their laws to cover extraterritorial acts committed by foreigners without any connection between the offender, the offense, the victims, and the state asserting jurisdiction. Those countries allow the application of universality by default or in absentia.

(1) Spain

For example, article 23(4) of the Law on Judicial Powers of 1985 provides that “Spanish courts have jurisdiction over crimes committed outside Spain when such crimes constitute genocide, terrorism, or other crimes which Spain is obliged to prosecute under international treaties.”61 Accordingly, it has been argued that the grave breaches may be prosecuted in Spain regardless of where they were committed or the nationality of the offender.62 The requirement of a certain link between the offender and the state asserting jurisdiction is not significant.63 The presence of the accused on the Spanish territory is required only for the actual passing of the sentence.64 Although article 75(4)(e) of Additional Protocol I65 necessitates the presence of the accused for his trial and thus outlaws in absentia trials, it does not seem to bar proceedings to be taken in the absence of the accused to guarantee his presence to stand trial before the courts of the state asserting jurisdiction.66

In May 1996, based on a complaint against General Pinochet and others, the Spanish Judge Manuel Garcia agreed to investigate. Later, Judge Baltazar Garzon issued an arrest warrant and a request for extradition of General Pinochet from London, where he was obtaining medical treatment.67 He was arrested in a London clinic in October 1998.68 Moreover, in 1998 Judge Garzon issued an international arrest warrant for retired General Galtieri and nine other Argentine officers to obtain their custody in Spain.69 Thus, according to these warrants, Spain exercised de facto universal jurisdiction in absentia within the meaning of the Congo v. Belgium case.70

(2) Belgium

It is interesting to note that on November 1, 1998, another complaint was filed against Pinochet in Belgium.71 The Belgian Magistrate observed that by virtue of the 1993 War Crimes Act, Belgian courts were competent to exercise universal jurisdiction over the alleged crimes.72 Even in the absence of any link between the forum state and the perpetrator, in particular the voluntary presence of the accused on Belgian territory, Belgium could still assert jurisdiction.73 This was a departure from the general rule set out in article 12 of the preliminary title of the Code of Penal Procedure.74 Despite the fact that the Belgian magistrate issued an arrest warrant for Pinochet, the Belgian Government failed to obtain his custody because the British authorities released him on medical grounds.75 The Belgian experience with universal in absentia jurisdiction has led to some subsequent changes, which will be discussed in the conclusions to this article.

(3) Germany

Section 6(9) of the German Penal Code refers to “Acts committed abroad which are made punishable by the terms of an international treaty binding in the Federal Republic of Germany.”76 Consequently, German courts are entitled to try international crimes covered by those acts under the principle of universality.77 Although the German law and the traditional jurisprudence required the existence of a factual link for a German court to exercise jurisdiction over crimes committed abroad by foreigners,78 this view has recently been reversed. In the Sokolovic case, the Federal Supreme Court (Bundesgerichtshof) opposed the early finding of the Court of Appeal with regard to the requirement of a ‘factual link’ and upheld the principle that universal jurisdiction does not require any link between Germany, the crime, the offender, or the victim.79 The court stated, “[t]he Court however inclines, in any case under Article 6, paragraph 9 of the German Criminal Code, not to hold as necessary these additional factual links that would warrant the exercise of jurisdiction.”80

The court found that universal jurisdiction in absentia was permitted in some instances when it ruled on a sensitive legal issue stating, “when Germany prosecutes and punishes under German law an offence committed by a foreigner abroad, it is difficult to speak of an infringement of the principle of non-intervention”, provided that Germany is under a duty to prosecute by virtue of an international treaty .81 This conclusion finds its way in the new German Code of Crimes Against International Law (Völkerstrafgesetzbuch, CCIL).82 On June 30, 2002, the CCIL entered into force.83 Section 1 permits the exercise of universal jurisdiction to genocide, crimes against humanity, and war crimes, despite the fact that the offences have no specific link to Germany.84 Accordingly, Professor Gerhard Werle, argues that the “deviating jurisprudence” which set out the requirement of “the additional link to Germany” has no standing for the application of the CCIL.85

Nevertheless, although the scope of extraterritorial jurisdiction is broad, it is not without limitations or suitable guidelines to avoid or reduce its danger. Some modifications to the German Code of Criminal Procedure have been made. Section 153(f) has been inserted and provides the prosecutor with full discretion to decide whether or not to prosecute “where the crime has been committed abroad by a non-German national against a non-German national and where the offender is neither present on German territory nor expected to enter German territory.”86 In sum, Germany has taken positive steps that inevitably contribute to the development of the idea of absolute universality.

C. Consequences on universal jurisdiction under international law

Based on the foregoing, one may conclude that while universal jurisdiction in absentia is excluded under some legal systems, it is permissible under others. Thus, the question whether such practice is prohibited under international law remains unresolved.

In her dissenting opinion in the Congo v. Belgium case, Professor Van Den Wyngaert argued that because of the diversity of state practice and national systems regarding that type of jurisdiction, the existence of a barring rule of “ customary international law” was lacking. She made her point in the following words:

There is no customary international law to this effect either. The Congo submits there is a State practice, evidencing an opinio juris asserting that universal jurisdiction, per se, requires the presence of the offender on the territory of the prosecuting State. Many national systems giving effect to the obligation aut dedere aut judicare and/or the Rome Statute for an International Criminal Court indeed require the presence of the offender. This appears from legislation and from a number of national decisions …. However, there are also examples of national systems that do not require the presence of the offender on the territory of the prosecuting State. Governments and national courts in the same State may hold different opinions on the same question, which makes it even more difficult to identify the opinio juris in that State.87

Furthermore, even the practice of states to abstain from initiating proceedings in absentia or to choose to initiate proceedings in the presence of the accused, did not lead to the conclusion that such practice was contrary to international law.88 This might be due to other “practical” or “political” considerations.89

Moreover, the Lotus case, examined by the Permanent Court of International Justice (PCIJ), is instructive and as mentioned by Professor Van Den Wyngaert “not only an authority on jurisdiction, but also on the formation of customary international law.”90 In that case, the court tested the extraterritorial scope of a country’s criminal law and concluded that:

According to international law, the jurisdiction of States was territorial in the sense that, failing the existence of a permissive rule to the contrary, a State must not exercise its power in any form in the territory of another State. But from that it does not follow that international law prohibits a State from exercising jurisdiction in its territory in regard to acts committed abroad. Such a view would only be tenable if international law contained a general prohibition to States to extend the application of their laws and the jurisdiction of their courts to persons, property and acts outside their territory …. But this is certainly not the case under international law as it stands at present.91

Thus, a state must not exercise absolute or universal jurisdiction in absentia where there is a “general” prohibitive rule under international law to that effect. To determine the existence of such a prohibitive or restrictive rule, “it is necessary [as Cowles mentioned] to show that States generally, as a matter of practice expressing a rule of law, have consented not to exercise [such type of] jurisdiction…As independent States are involved, any such restriction must be conclusively proved, and to do this municipal law and practice must not be divided”92 and if “municipal jurisprudence [is] divided, it is hardly possible to see in it an indication of the existence of the restrictive rule of international law.”93

Based on this conclusion, one may argue that because the municipal jurisprudence and laws of various countries are divided, in regard to this issue, international law lacks the restrictive rule that bans the exercise of absolute universality.

Nevertheless, some commentators disregard the validity of Lotus as too liberal with no precedential value. This may be because the rules regulating the formation of custom have slightly changed. The previously prevailing idea, that the “tacit” agreement or “consent of all states” is required for a rule of customary law to emerge is no longer tenable.94 It is sufficient for a majority of states to engage in a consistent practice corresponding with the rule95 and accepting it as legally binding.96 The ICJ confirmed this viewpoint in the case concerning Military and Paramilitary Activities in and against Nicaragua, when it stated:

The Court does not consider that, for a rule to be established as customary the corresponding practice must be in absolutely rigorous conformity with the rule… the Court deems it sufficient that the conduct of states should, in general, be consistent with such rules, and that instances of State conduct inconsistent with a given rule should generally have been treated as breaches of that rule, not as indication of the recognition of a new rule.97

Thus, one may wonder whether current national legislation, case law, and opinio juris that discounts absolute jurisdiction are sufficient grounds for the formation of a custom or a restrictive rule.98

VI. The Codification of the Doctrine of Universal Jurisdiction under the 1949 Geneva Conventions

A. The 1949 Geneva Conventions

The late 1940ies saw the creation of a new series of treaties that codified the use of universal jurisdiction over war crimes “treating the [doctrine] as an accepted feature of customary international law.”99 These are the 1949 Geneva Conventions.

Articles 49,100 50,101 129,102 146,103 common to the four Geneva Conventions, impose a duty upon the States to prosecute or extradite (aut dedere aut judicare) perpetrators of grave breaches of international humanitarian law through a mechanism of “mandatory universal jurisdiction.”104 These provisions oblige state parties to the Geneva Conventions to undertake enactment of any legislation necessary to provide effective penal sanctions for persons committing, or ordering to be committed, any of the “grave breaches” defined in the conventions. More importantly, each party “shall be under an obligation to search for [those] persons alleged to have committed or to have ordered to be committed, such grave breaches, and shall bring them before its own courts.” This is true regardless of their nationality. Should a state party decide not to try any of those persons, it is under an obligation to extradite them to another state party for trial, provided that the latter “has made out a prima facie case.”

Paragraph 2, common to the aforementioned four Geneva Conventions, is the key to the mechanism of repression through the concept of universality of jurisdiction. A literal reading of the text of paragraph 2 suggests that every state is under a duty to search, arrest, and try those who commit any of the “grave breaches” set out in the conventions, regardless of any link between the perpetrator and the state asserting jurisdiction. Furthermore, it could be argued that the wide language used by the drafters, “shall be under an obligation to search for persons alleged to have committed…such grave breaches,” supports the proposition that every state party is obligated not only to search for those perpetrators, but also to arrest them wherever they might be found. Obviously, this could be achieved through the issuance of an international arrest warrant accompanied by an extradition request, which would be enforced by the authorities of the state where the accused is present. In addition, while the wording of the text supports the application of universal jurisdiction generally, it does not include any language that precludes its application by default. In its advisory opinion on the reservations to the genocide convention, the ICJ stated:

[I]n this state of international practice, it could certainly not be inferred from the absence of an article providing for reservations in a multilateral convention that the Contracting States are prohibited from making certain reservations…The character of a multilateral convention, its purpose, provisions, mode of preparation and adoption, are factors which must be considered in determining, in the absence of any express provision on the subject, the possibility of making reservations.105

In a parallel line of argument, it cannot be inferred from the absence of a specific article or explicit language providing for absolute universal jurisdiction that the parties are prohibited from applying it. Indeed, the language used in the Geneva Conventions requires the exercise of universal jurisdiction. The only problem, however, is that the text is silent regarding the method of application. An examination of the humanitarian character, beyond the Geneva Conventions and their purposes, reflects that a highly effective system of repression was required and intended by the drafters.106 This can hardly be reconciled with the view that the Geneva Conventions do not allow states to exercise absolute universal jurisdiction.

B. Modern Interpretation and the Principle of Effectiveness

Although Pictet argues that states are under a duty to arrest perpetrators of grave breaches only when found on their territory107and, therefore, universality by default would be impermissible under the Geneva Conventions, this strict interpretation108 can no longer accommodate the development of international law and the pressing need to suppress the increased number of gross violations that have taken place during the last few decades. This view has been upheld in an early advisory opinion of the ICJ regarding Namibia, when the court stated that “[i]interpretation cannot remain unaffected by the subsequent development of law, … Moreover, an international instrument has to be interpreted and applied within the framework of the entire legal system prevailing at the time of the interpretation.”109

On the other hand, the European Court of Human Rights (ECHR) adopts a similar approach of interpretation by applying the “principle of effectiveness.” The latter principle, as Professor Merrills argues, is a means “to interpret [a treaty] in a way which gives its provisions a maximum of effectiveness, having regard to its language and its object and purpose.”110

Thus, in the early Airey case and in the recent, Mamatkulov, Öcalan, and Loizidou cases, the ECHR made a reference to the principle of effectiveness when stating, “the Convention must be interpreted in the light of present day conditions …”111 This evolutionary interpretation is consistent with the underlying character and goals of the aforementioned Geneva Conventions that face critical situations subject to continuous development.112

Thus, applying the above principles to the text of the Geneva Conventions leads to the conclusion that the practice of absolute universal jurisdiction is consistent with the spirit of those conventions. Although the four common provisions set out in the Geneva Conventions, and similar provisions in other treaties, are based on the principle of aut dedere aut judicare, which normally envisages the presence of the accused on the territory of the state asserting jurisdiction, this conclusion “cannot be interpreted a contrario so as to exclude a voluntary exercise of universal jurisdiction.”113 Thus, as mentioned in the joint separate opinion of Judges Higgins, Kooijmans, and Buergenthal, in the Congo case, “if the underlying purpose of designating certain acts as an international crimes is to authorize a wide jurisdiction to be asserted over persons committing them, there is no rule of international law (and certainly not the aut dedere principle) which makes illegal co-operative overt acts designed to secure their presence within a State wishing to exercise jurisdiction.”114 Hence, according to their conclusion, universal jurisdiction in absentia is not forbidden.

VII. The ICJ’s Approach to Universality in Absentia

As mentioned above (I), the ICJ did not address the question of universality in absentia, and therefore, as Professor Cassese pointed out, the court missed “a golden opportunity to cast light on a difficult and topical legal issue.”115 Some of the judges, however, tackled this significant issue in their separate opinions and reached different conclusions.

President Guillaume vigorously opposed the idea of universal jurisdiction to all heinous crimes with the exception of piracy.116 He asserted moreover that international law did not recognize what is known as universality in absentia.117 His argument was based on the grounds that neither treaties that entail the duty to prosecute or extradite, nor customary international law, recognize jurisdiction in the absence of the offender in the prosecuting state at the time of initiating procedures against him.118 Instead, he cited various treaties that embody the rule of aut dedere aut judicare that requires only the state where the person is found, to either prosecute or hand over the accused to another state for prosecution.119 “None of [the mentioned treaties] has contemplated establishing jurisdiction over offences committed abroad by foreigners when the perpetrator is not present in the territory of the State in question.”120

But, the fact that the listed conventions require the voluntary presence of the perpetrator on the territory of the state asserting jurisdiction does not mean that the general practice of universality in absentia is outlawed.121 It should not be forgotten that the grave breach provisions to the 1949 Geneva Conventions do not beg such requirement and, therefore, could be interpreted in an effective manner or a broad sense, as demonstrated above (VI.B), and would not require such restriction.122 This conclusion is in line with Professor Brigitte Stern’s following statement:

The Universality principle is generally understood as giving jurisdiction to a state for acts committed by foreigners anywhere in the world, merely on the basis of the perpetrator being in that state’s territory. This is an unduly limited interpretation of what universal jurisdiction should be, however. If such a territorial link is required, real universal jurisdiction is not being exercised.123

Furthermore, President Guillaume’s assertion that the principle of universal jurisdiction is limited to piracy clearly contradicts the finding of the Appeals Chamber in the Tadic case, in which it affirmed the early finding of the Italian Supreme Military Tribunal in the case of General Wagener stating:

[T]he solidarity among nations, aimed at alleviating in the best possible way the horrors of war, gave rise to the need to dictate rules which do not recognize borders, punishing criminals wherever they may be … Crimes against the laws and customs of war … are … crimes of lése-humanité (reati di lesa umanita) and,…the norms prohibiting them have a universal character, not simply a territorial one. Such crimes … concern all civilised States, and are to be opposed and punished, in the same way as the crimes of piracy …124

The finding of this chamber that the punishment for some crimes “need to dictate rules which do not recognize borders,” … [and] (“Such crimes,…are to be opposed and punished, in the same way as the crimes of piracy”) makes it clear that universal jurisdiction is neither limited to the crime of piracy nor should be narrowed or restricted in its application. Thus, universality in absentia is justified.

President Guillaume found no ground for this type of jurisdiction under state practice or customary law. In so doing, he cited to the French, Dutch, and German legislations as valid examples to support his viewpoint.125 Despite these arguments, this conclusion is hardly persuasive. It is true that the French126 and Dutch systems do not recognize absolute universality (in absentia). But, along the same line of argument, it does not follow from this conclusion that the practice is generally prohibited under international law. Still, there exists other laws such as the Spanish, Belgian (although currently being changed, as will be discussed in the conclusion), Italian, New Zealand, and Israeli legislations that recognize the type of universality in absentia as mentioned previously (V.B). President Guillaume was right to point out that in the past, German courts have restricted the exercise of universal jurisdiction under section 6 paragraphs 1 and 9 Criminal Code to the presence of a “factual link” between Germany and the offender. This view, however, does not stand anymore, as the Federal Court of Justice reversed it recently in the Sokolovic case.127 In addition, section 1 of the new CCIL evidences that a new trend has emerged that favors universality in absentia.128

Aside from the aforementioned arguments, it is worth noting that heinous crimes, such as war crimes, crimes against humanity, and genocide are part of jus cogens. As a result, all states have an obligation erga omnes to repress these crimes and combat impunity by all legal means including universal jurisdiction.129 To outlaw a highly legal mechanism that contributes in the repression of those odious crimes might rise to a violation of a jus cogens norm. One cannot believe, for example, that a state that initiates proceedings by issuing an international arrest warrant accompanied by an extradition request to subsequently secure the presence of the offender would be in violation of international law. It should be seen as an effective type of cooperation between all states in order to fight those crimes that shock the conscious of not only one state, but humanity as a whole.130 Professor Brigitte Stern has expressed a similar view when she has stated:

In state’s efforts to bring a perpetrator into its custody, all legal devices should be used. Especially in this period where civil society is often at the root of positive changes, all possibilities available to set in motion the prosecution of international crimes should be encouraged…Universal jurisdiction must always imply some rights of research on the perpetrator in order to bring him into that state’s territory…search for, and apprehended persons charged with international crimes under universal jurisdiction cannot be contested.131

In contrast to President Guillaume’s opinion, Judges Higgins, Kooijmans, and Buergenthal hold the view that absolute universal jurisdiction is permissible under international law, despite the variations in national legislation, case law, and opinio juris.132 But such permissibility is subject to the following five conditions:133 (1) a State that demands to initiate criminal proceedings must first offer to the national State of the prospective accused person the opportunity to act upon the charges concerned; (2) charges may only be brought by a prosecutor or investigating judge in order to ensure independence of the government; (3) commencement of legal proceedings are subject to a complaint to the prosecutor or the investigating judge filed by the person concerned; (4) the alleged crimes must be regarded as the most heinous by the international community; and (5) jurisdiction cannot be exercised as long as the prospective accused is a foreign minister in office. After he leaves office, jurisdiction may be exercised over private acts.

These prerequisites are well constructed. The first requirement, however, poses some interesting questions. The three judges mentioned that the state which initiates criminal proceedings should first give the national state of the accused the opportunity to act. But the reason for choosing the state of nationality of the accused rather than the state where the offence took place, or the state of which the victim is a national, is not clear.

Nonetheless, a close reading of paragraph 59 of the joint separate opinion suggests two distinct conclusions. First, the judges examined this issue in a strict sense, namely with regard to state officials as opposed to civilians or other state agents who are not immune. This conclusion is supported on several grounds. Under international law only the sending state, which in this case is the national state of the accused (diplomatic agent), has the competence to waive the immunity over its diplomatic agents.134 Moreover, international law does not grant diplomatic agents immunity from criminal jurisdiction in their own countries, which signifies that they could be tried before the domestic courts of those countries.135 Finally, in the interest of good relations between states, it deems necessary to offer the national state of the accused the opportunity to act. The sum of these reasons makes it more plausible to offer the national state of the accused the opportunity to prosecute. This can explain why the chance to prosecute first should be given to the state of which the offender is a national, rather than the state where the offence was committed, or of which the victim is a national.

This conclusion is conceivable, but only when dealing with situations that involve diplomatic agents. It is hardly persuasive to reach the same conclusion when dealing with civilians, because it would not appear necessary to restrict such offer to the state of nationality of the accused as is the case with diplomatic agents. The question remains whether such an offer is also deemed necessary when dealing with non-diplomatic agents, especially when the first two of the reasons mentioned above are lacking. As the three judges provided no guidance to this question, it remains presently unsolved. Second, according to another reading of paragraph 59, if the three judges initially intended to apply such an offer to cover also situations involving non-diplomatic agents, it would be unreasonable to conclude that they have chosen to restrict such an offer to the state of nationality of the accused on the basis of the first two above mentioned reasons. The only logical justification would be the third above mentioned reason, namely to save international relations and avoid inter-states diplomatic friction. The latter justification, however, cannot be taken in the abstract because offering the national state of the accused the opportunity to act, while it preserves international relations between the states directly involved, may not save those relations with the territorial or the national state of the victim.

Thus, if the exercise of absolute universality should be limited to an offer from the third state, that offer should be directed to all states that are directly connected with the accused or the crime, including the territorial and the national state of the victim. The conflict between those states as to which state should exercise jurisdiction could be solved through diplomatic channels or classical state practice.

VIII. Conclusion

The question of universality of jurisdiction in absentia is highly debatable. The trials held post-World War II by the U.S. and British Military courts showed recognition to the principle of universal jurisdiction. But the prevailing language used by these courts inclines toward the classical or conditional form of universality, which requires voluntary presence of the offender on the territory of the state which exercises jurisdiction.

The adoption of the 1949 Geneva Conventions demonstrated another significant development of the concept of universality of jurisdiction. Arguably, the provisions regulating universal jurisdiction under the Geneva Conventions also require the voluntary presence of the accused on the territory of the state asserting jurisdiction. Nevertheless, the language used in those provisions does not entail any such restrictive rule and may accommodate a broader effective interpretation. Consequently, they could be construed in a manner that permits the exercise of absolute universality to ensure the highest mechanism of fight against impunity.

Although it has been argued that a number of treaties do not permit the application of universality in absentia,136 this does not mean that such practice is prohibited under international law. Rather, the idea had not been developed at the time.137 While contemporary legislations and jurisprudence in some countries exclude this practice, it is allowed in others. For example, the practice is still allowed in the Spanish, Italian, New Zealand, and Israeli legislation. Conversely, given the gravity of genocide, crimes against humanity, and war crimes, both courts and legislature in Germany are now leaning towards this a type of jurisdiction.138 Although state practice seems to be divided regarding this type of jurisdiction, such controversy may support the view that a restrictive rule of international law that bars its application is lacking, as previously demonstrated.139

It does not follow from this conclusion, however, that this type of jurisdiction is not perilous. It could lend itself to abuse140 and interstate friction,141 especially if procedures target a high state official or a diplomatic agent. This was clearly mentioned by the three judges in the joint separated opinion of the ICJ judgment in the Congo case. Thus, the five conditions set out by three of the judges aim to reduce the degree of danger, if a state has chosen to exercise that type of universality. Notwithstanding this reasonable compromise, the outcome of the judgment that favored Congo’s application caused diversity in views142 and forced the Belgium Government and courts to re-asses this type of universality. On April 16, 2002, a pre-trial appeals court in Brussels ruled that the proceedings against Mr. Ndombasi were “inadmissible (irrecevables) from the beginning” because the accused, at the time of issuing the arrest warrant, was not voluntarily present in Belgium, as required by virtue of article 12 of preliminary title of the Code of Penal Procedure.143 Moreover, on June 26, 2002, the same court reached the same conclusion with regard to the proceedings against the President of Ivory Coast Laurent Gbagbo and others. It further concluded that the exercise of universal jurisdiction in absentia was inconsistent with international law.144 Interestingly, on February 12, 2003, the Court of Cassation reversed this decision.145 It held that although article 12 of preliminary title of the Code of Penal Procedure requires the presence of the accused on the Belgian territory, this article is limited to a certain category of crimes that does not include genocide, crimes against humanity, or the grave breaches under the 1949 Geneva Conventions.146 By contrast, heinous crimes similar to those covered by article 7 of the 1993 War Crimes Act as amended in 1999, does not call for such a requirement.147

Furthermore, legislation was announced to save this type of universality before the Court of Cassation could hears these cases.148 A broader model of article 7 of the War Crimes Act was proposed, which would clearly permit the exercise of universality in absentia.149 Despite such fear, the Court of Cassation was supportive. Nevertheless, due to tensions between Belgium and other countries, such as Israel, and the United States resulting from this law, the government passed two amendments.150 The first amendment took place in April 2003,151 and may be seen as regulating rather than abolishing universality in absentia.152 Under the so-called “anti-atrocity” law,153 the prosecutor can proceed with a case in the absence of any link with Belgium, but only if the countries concerned with the crimes lack “democracy or fair trials.”154 Moreover, the amendment affirms a significant legal issue, namely that the 1993 War Crimes Act intended to apply even if the suspect was not present in the territory of Belgium at the time of initiating proceedings.155 Thus, an investigation could be opened in his absence.156 However, it seems that the first amendment was not sufficient to satisfy the United State’s demands.157 Under continuous political and economic pressure from the United States, the Belgian Prime Minister Guy Verhofstadt declared that the 1993 law (as amended in 1999) would be repealed in full.158 A new Bill is likely to go through Parliament soon, which will limit jurisdiction to cases involving Belgian citizens or residents.159 At this stage, it seems that universal jurisdiction in absentia will be abandoned in Belgium.

But even if this is the case, this does not lead to the conclusion that the principle of universal jurisdiction in absentia is no longer valid. It is clear that such change is based on political and economic pressure rather than any legal justification.160 The United States threatened to move the NATO headquarters out of Belgium if the law was not repealed.161 The recent action undertaken by the Belgian legislator, which contradicted the Belgian higher Court’s finding, demonstrates that when politics interferes law could suffer.

Endnotes

* Ph.D. Candidate (Galway, Ireland), LL.M. (Galway, Ireland), LL.M. (Cairo), LL.B. and BS (Police Academy Cairo); Senior prosecutor, Office of the Attorney General of the Arab Republic of Egypt. Special thanks to Professor William Schabas for commenting on an earlier draft of this article, and to Noelle Higgins. My gratitude to the editorial board for their great efforts in preparing this article for publication. An earlier version of this article was published in 37 The International Lawyer (2003), 835-862.

1. Case Concerning the Arrest Warrant of 11 April 2000 (Democratic Republic of Congo v. Belgium), 2002 I.C.J. (Feb. 14, 2002), ¶ 1 [hereinafter Congo v. Belgium Case]. See also Annex: Arrest Warrant of 11 April 2000 (Democratic Republic of Congo v. Belgium), 8 Ann. Surv. Int’l & Comp. L. 151 (2002) (summarizing the judgment of Congo v. Belgium).

2. Congo v. Belgium Case, supra note 1, ¶¶ 13, 15, 67. The acts were committed in 1998, before Mr. Yerodia became Minister of Foreign Affairs. Those acts included speeches “allegedly inciting attacks on the Tutsi population in Kinshasa.” See Steffen Wirth, Immunity for Core Crimes? The ICJ’s Judgment in the Congo v. Belgium Case, 13 Eur. J. Int’l L. 877, 878 (2002).

3. Id.

4. Congo v. Belgium Case, supra note 1, ¶ 14.

5. Id.¶ 1.

6. Id.

7. Id. ¶ 17. Article 7 contains a jurisdictional clause, which reads, in part, as follows: “Belgian courts shall be competent to deal with breaches provided for in the present Act, irrespective of where such breaches have been committed.” Loi relative à la répression des violations graves du droit international humanitaire (Act Concerning the Punishment of Grave Breaches of International Humanitarian Law) (Feb. 1999).

8. Congo v. Belgium Case, supra note 1, ¶ 17.

9. Id. ¶ 21.

10. Id. ¶ 41.

11. Id.

12. Id. ¶ 43.

13. Id.

14. Id. ¶ 46.

15. For a thorough discussion regarding the various forms of jurisdiction, see Christopher L. Blakesley, Extraterritorial Jurisdiction, in: International Criminal Law: Procedural and Enforcement Mechanisms 43-69 (M. Cherif Bassiouni ed., Transnational Publishers 2d ed. 1999); D. W. Bowett, Jurisdiction: Changing Patterns of Authority over Activities and Resources, in: International Law: Classic and Contemporary Readings 210-217 (Charlotte Ku et al. eds., Lynne Rienner Publ. 1998); Rosalyn Higgins, Problems and Process: International Law And How We Use It 56-77 (Clarendon Press 1994); Covey T. Oliver, The Jurisdiction (Competence) of States, in International Law: Achievements and Prospects 307-321 (Mohammed Bedjaoui ed., Unesco 1991); Georg Schwarzenberger & E. D. Brown, A Manual of International Law 72-79 (6th ed. 1976); D. J. Latham Brown, Public International Law 121-126 (Sweet & Maxwell 1970).

16. The place where the crime is committed.

17. Where the accused is a national of the state asserting jurisdiction.

18. Where the act perpetrated abroad affected the nationals of the state claiming jurisdiction.

19. According to this principle a state may exercise jurisdiction over aliens who have committed an act abroad which prejudiced the security of that state.

20. M. Cherif Bassiouni, Crimes Against Humanity in International Law 227 (2d ed. 1999); Howard S. Levie, Terrorism in War-The Law of War Crimes 230-231 (1992).

21. Luc Reydams, Prosecuting Crimes Under International Law on the Basis of Universal Jurisdiction: The Experience of Belgium, in: International and National Prosecution of Crimes Under International Law: Current Developments 812 (Horst Fischer et al. eds., 2001); Levie, supra note 20, at 231; see, e.g., Convention for the Suppression of Unlawful Seizure of Aircraft, December 16, 1970, art. 4(2); Convention for the Suppression of Unlawful Acts against the Safety of Civil Aviation, 1971, art. 5(2). However, these conventions only cover crimes described as international terrorism. But see Joan Fitzpatrick, Sovereignty, Territoriality, and the Rule of Law, 25 Hastings Int’l. & Comp. L. Rev. 303, n.37 (2002) (noting that there are, however, “some states assert the capacity to exercise universal jurisdiction in absentia.”).

22. See Cassese, infra note 57, at 261-2.

23. See Stern, infra note 130 text above.

24. See, e.g., Bundesgerichtshof, 21.2.2001, 3 STR 372/00, 20, available at http://www.bundesgerichtshof.de/ [hereinafter Sokolovic Case]; Prosecutor v. Tadic, Case No. IT-94-1-AR72 ¶ 57 (Oct. 2, 1995) [hereinafter Tadic Case].

25. Higgins, supra note 15, at 78

26. Malcolm N. Shaw, International Law 452 (4th ed. 2001), Covey, supra note 15, at 307; Ian Brownlie, Principles of Public International Law 93 (5th ed. 2001).

27. Bowett, supra note 15, at 207.

28. Shaw, supra note 26, at 452; Brownlie, supra note 26, at 301

29. Shaw, supra note 26, at 453.

30. Congo v. Belgium, supra note 1 (Judge Van Den Wyngaert, Dissenting Opinion), ¶ 49

31. Id. ¶¶ 77-8.

32. Prosecutor v. Tadic, 35 I.L.M. 32, ¶ 58 (1995); see below, V.

33. Brownlie, supra note 26, at 314.

34. Bassiouni, supra note 20, at 229; see also A. Hays Butler, The Doctrine of Universal Jurisdiction: A Review of the Literature, 11 Crim. L. F. 353, 357 (2000). According to Oppenheim, “[with regard to pirates] [e]very state has, by international law, the right, on the high seas or in any other place outside the jurisdiction of any state, to seize a pirate ship or aircraft, or a ship taken by piracy and under the control of pirates, arrest the persons and arrest the property on board.” Robert Jennings, Oppenheim’s International Law 753 (Arthur Watts ed., 1992). See Malvina Halberstam, Terrorism on the High Seas: The Achille Lauro, Piracy and the IMO Convention on Maritime Safety, 82 Am. J. Int’l. L. 269 (1988) (discussing further the issue of universal jurisdiction for piracy). Marc Henzelin, Le Principe De L’ Universalité En Droit Pénal International: Droit et obligation pour les Étates de poursouivre et juger selon le principe de l’universalité (Bale/Geneve/Munich: Bruxelles, 2000) (providing a thorough historical survey of universal jurisdiction); see also Alfred P. Rubin, The Law of Piracy at 102 ff (2d ed. 1998).

35. Amnesty International, Universal jurisdiction: The Duty to Enact and Enforce Legislation Ch. II. (2001), available at http://www.amnestyusa.org/icc/ujqanda.pdf; see also Henzelin, supra note 34, at 90-97. Henzelin quoted Vitoria when he made reference to universal jurisdiction in the following: “en vertu du droit naturel, le pouvoir de punir et de chattier ses propres citoyens quand ils lui portent prejudice, (alors) le monde le possède (rait) sans aucun doute vis-à-vis de tous ceux qui lui portent prejudice et ne vivent pas humainement (même s’il) ne l’exerce (rait) que par l’intermédiaire des princes.” Id. at 90. While Grotius stated: “…les rois, et ceux qui ont un pouvoir égal à celui des rois, ont le droit d’infliger des peines non seulement pour des injures commises contre eux ou leurs sujets, mais encore pour celles qui ne les touchent pas, et qui violent à l’excès le droit de nature ou des gens à l’égard de qui que ce soit.” Id. at 97.

36. Lyal S. Sunga, Individual Responsibility in International Law for Serious Human Rights Violations 102-03 (Martinus Nijhoff Publishers 1992).

37. Id. at 103. He expressed himself in the following words: “[T]he basis for universal jurisdiction as it arose in connection with efforts to suppress slave-trading and piracy relates primarily to the peculiar character of the locus delicti, rather than to the serious nature of the crime.”

38. Id. at 104. Sunga refers to the differences of their rationale in the following words: “Unfortunately, confusion between the two rationale for universal jurisdiction appears in some of the efforts at codification, in adjudication, and in certain doctrinal works.”

39. Kenneth C. Randall, Universal Jurisdiction under International Law, 66 Tex. L. Rev. 785, 788 (1988). See also Attorney General v. Eichmann, 36 I.L.R. 26 (1968) (where the court mentioned the core reason for applying the universality principle: “[T]he abhorrent crimes defined in this Law are not crimes under Israel law alone. These crimes, which struck at the whole of mankind and shocked the conscience of nations, are grave offences against the law of nations itself (delicta juris gentium). Therefore, so far from international law negating or limiting the jurisdiction of countries with respect to such crimes, international law is, in the absence of an International Court, in need of the judicial and legislative organs of every country to give effect to its criminal interdictions and to bring the criminals to trial. The jurisdiction to try crimes under international law is universal.” Although Eichmann’s apprehension was illegal, it could reflect one of the types of universality in absentia; namely taking action to secure his presence. The court, however, exercised jurisdiction notwithstanding his abduction. I do not believe that exercising universality of jurisdiction in this way is valid and in conformity with the norms of international law. Similarly in the Finta case the court observed that “some acts are crimes under international law. They may be punished by any state which has custody of the accused. Example of this … basis of jurisdiction include breaches of the laws of war.” R. v. Finta (Can.) 1 S.C.R. 701, ¶ 171 (1994).

40. United States v. Yunis, 681 F. Supp. 896 (1988); see also Bruce T. Smith, Assertion of Adjudicatory Jurisdiction by United States Courts over International Terrorism Cases, 1991 Army Law. 13 (1991) (noting that “[t]he basis for universal jurisdiction that the offense violates the law of nations and humanity and that, in effect, the prosecuting state is acting on behalf of all nations by bringing the criminal to justice.”); see also Bruno Simma & Andreas L. Paulus, Symposium on Method in International Law: The Responsibility of Individuals for Human Rights Abuses in Internal Conflicts: A Positivist View, 93 Am. J. Int’l L. 302, 314 (1999) (emphasizing that “the establishment of universal jurisdiction for genocide and crimes against humanity, even if committed by aliens against aliens abroad, seems almost universally to be considered permissible, although the Genocide Convention is silent on the matter … Universal jurisdiction for grave breaches of the Geneva Conventions seems to be increasingly accepted.”).

41. The International Military Tribunal (Nuremberg), Judgment and Sentences, Oct. 1, 1946, reprinted in 41 Am. J. Int’l L. 172, 216-17 (1947); see also Nicolaos Strapatsas, Universal Jurisdiction and the International Criminal Court, 29 Manitoba L.J. 1, 19 (2001).

42. See Madeline H. Morris, Universal Jurisdiction in a Divided World: Conference Remarks, 35 New Eng. L. Rev. 337, 344 (2001); see also Matthew Lippman, International Law and Human Rights Edition: Crimes Against Humanity, 17 B.C. Third World L.J. 171, 238 (1997).

43. Bassiouni, supra note 20, at 235-36 (“[T]he foundation for the application of the universality principle to war crimes, as well as crimes against humanity, stems from the proceedings before the IMT and subsequent trials…. It may be inferred from [the above] statement that “any nation” would have jurisdiction to prosecute the war criminals, whether or not the nation had a nexus with the offenses at issue … This conclusion is supported by [the] memorandum prepared by the United Nations Secretary General.”). However, Professor Bassiouni’s recently expressed a different view point regarding the IMT’s jurisdictional basis when he stated, “In both the IMT and IMFTE, the states in question exercise their powers to enforce international criminal law on a territorial jurisdictional basis because they exercised de facto sovereign prerogatives over the occupied territories where these tribunals were established…it could be said [that the IMT and IMTFE] have also relied on “passive personality.” M. Cherif Bassiouni, Universal Jurisdiction for International Crimes: Historical Perspectives and Contemporary Practice, 42 Va. J. Int’l L. 81, 91, 118 (2001) (hereinafter Universal Jurisdiction). Nonetheless, both arguments have merit. Also, Professor’s Morris’s argued that “neither the Nuremberg nor the Tokyo tribunal based its competence on the collective exercise of universal jurisdiction.” Madeline Morris, High Crimes and Misconceptions: The ICC and Non-Party States, 64 Law & Contemp. Prob. 13, 37 (2001).

44. 1 U.N. War Crimes Comm’n Law Reports of Trials of War Criminals 46 (1945).

45. Id. at 52-53.

46. 1 U.N. War Crimes Comm’n Law Reports of Trials of War Criminals 35 (1945) (hereinafter Almelo).

47. 1 U.N. War Crimes Comm’n Law Reports of Trials of War Criminals 93, 103 (1946) (hereinafter Zyklon B).

48. Almelo, supra note 46, at 42.

49. 14 U.N. War Crimes Comm’n Law Reports of Trials of War Criminals 8 (1947) (hereinafter Eisentrager).

50. Id. at 15.

51. For example, the plea to the jurisdiction of the Court (Commission) filed on behalf of all accused by the defense alleging “in substance that the accused were German citizens and residents of China, and thus subject only to Chinese law and the jurisdiction of Chinese courts.” Id. Although it appears that the U.S. Commission exercised absolute universal jurisdiction, because the defendants were residents and found on Chinese territory, the Prosecutor attempted to justify the exercise of such extended jurisdiction based not only on the gravity of the crime that violates the laws of nation, but also for another reason. He asserted that the Chinese Government invited the U.S. to send troops to Chinese territory to wage war. “In view of this, the United States army entered China as an allied expeditionary force with rights and privileges as well as the duties which are well recognized in international law as attaching to such a force.” Id. Thus, the United States has the right to punish those “who violate the laws of war.” Id. at 16. Moreover, the defendants had been initially captured in China. See Jordan J. Paust, Antiterrorism Military Commissions: Courting Illegality, 23 Mich. J. Int’l L. 1, 23-24 (2001).

52. Reprinted in Malcolm Evans, Blackstone’s: International Law Documents, 525 (5th ed. 2001); see also Theodor Meron, International Criminalization of Internal Atrocities, 89 Am. J. Int’l L. 554, 573, n.103 (1995) (Article 7 of the Criminal Code of Canada 1985 allows exercise of universal jurisdiction, when “at the time of the act or omission Canada could, in conformity with international law, exercise jurisdiction over the person on the basis of the person’s presence in Canada.”). Moreover, section 8(b) of the Crimes Against Humanity and War Crimes Act stipulates “[A] person who is alleged to have committed an offence under section 6 or 7 may be prosecuted for that offence if … (b) after the time of the offence is alleged to have been committed, the person is present in Canada,” Crimes Against Humanity and War Crimes Act, S.C. 2000, c.24, available at http://laws.justice.gc.ca/en/C-45.9/40062.html (last updated Dec. 31, 2002). For a discussion regarding the Canadian Act, see William A. Schabas, Canadian Implementing Legislation for the Rome Statute, 3 Y.B. Int’l Humanitarian L. 337, 343-344 (2000); see also Bassiouni, supra note 43, at 142. See Luc Reydams, Niyonteze v. Public Prosecutor, Tribunal Militaire de Cassation (Switzerland), April 27, 2001, 96 Am. J. Int’l L. 231 (2002), at 263, n.13 (a new article has been inserted in the Swiss Criminal Code, which entered into force December 15, 2000. Article 264 of the Swiss Criminal Code incorporates genocide as a crime under domestic law that is subject to the exercise of universal jurisdiction by “civilian courts,” however, such power is subject to the presence of the suspect on the Swiss territory). See Brigitte Stern, International Decision: In re Javor, 93 Am. J. Int’l L. 525 (1999). Likewise, article 689(2) of the French Criminal Procedure Code provides the basis for universal jurisdiction only if the accused is “found in France.” Id. at 528. But in the re Javor case, Bosnian victims “of the policy of ethnic cleansing” who were refugees in France filed a complaint “against their Serb torturers” with an investigating magistrate. Id. at 525. They relied on universal jurisdiction. At the Tribunal de grande instance, Judge Getti accepted both the 1949 Geneva Conventions and the Torture Convention as “authorizing the French courts to decide this case involving foreign plaintiffs for acts committed abroad by foreign defendants.” Id. at 527. It is interesting to note that in interpreting article 689(2), Judge Getti adopted a broad construction. He afforded it “some power [to apply] even when the accused is not on French territory.” Id. at 527. He considered that “all the actes d’instruction, that is, all the acts of preliminary inquiry, could be undertaken even without the presence of the accused on French territory.” Id. However, both the court of appeals and the court of cassation rejected this interpretation by holding that, as long as the offender is not on the French territory, universal jurisdiction cannot be exercised. Even the jurisdiction to try to ascertain the offender whereabouts is not permissible. Moreover, the Court of cassation, while accepting the narrow type of universality to Torture under article 689(2), disregarded it for the 1949 Geneva Conventions. She concluded that although the conventions were ratified by France, no specific legislation to incorporate universal jurisdiction has been enacted. Thus, they could not have a direct effect in the national legal system. Nevertheless, Professor Stern argues that unlike article 689-2, which explicitly requires the presence of the offender on the French territory (for Torture), article 689 does not make any reference to such restriction. Thus, the court of cassation could have relied on it with regard to the 1949 Geneva Conventions. Id. at 528-29. In light of this finding, it appears that even the French legislation seems to recognize universality in absentia. However, as Professor Stern has observed, this case “illustrate[s] the reluctance of the French courts to assert universal jurisdiction. This attitude is not a French exception, but is quite widespread.” Id. at 529. But note Professor’s Cassese’s different opinion that mentioned that article 2 of the Law of January 2, 1995, implementing the Statute of the ICTY regarding the provisions of the 1949 Geneva Conventions (grave breaches) required the presence of the offender on the French territory. See Antonio Cassese, International Criminal Law 286 (2003)[hereinafter ICL].

53. Redress, Universal Jurisdiction in Europe, Annex: Law and Cases in Ten European Countries, Austria: Domestic Legislation, available at http://www.redress.org/publications/annex.html (last visited Aug. 23, 2003) (“Article 64 of the Austrian Penal Code deals with offences which can be prosecuted in the Austrian courts even though committed abroad … [Its application] is extended to specific listed offences (such as treason, kidnapping, offences against the armed forces) and Article 64.4 adds [to those offences] other punishable criminal acts which Austria is under an obligation to punish even when they have been committed abroad.” These might include the “UN Convention Against Torture, and the [1949] Geneva Conventions. Article 65.1.2 provides that Austrian criminal law may apply in respect of offences committed abroad, so long as the acts are also punishable in the place where they are committed (double criminality), and provided, if a foreigner, is present in Austria and cannot be extradited to the other state due to reasons other than the nature and characteristics of the offence.”).

54. Id.

55. Polyukhovic v. Commonwealth of Australia, 91 Int’l L. Reports 1, 118 (1993) (“The accused, who had become an Australian citizen after the Second World War, was charged with having committed war crimes while serving in the German army in the Ukraine between 1942, 1943. These charges were brought under the War Crimes Act 1945, and amended in 1988, which provided for the trial and punishment of persons who had committed serious war crimes in Europe during the Second World War and who had entered Australia and had become Australian citizens or residents after 1945. The Act therefore dealt with acts which had taken place outside Australia and which had been committed by persons who were not at the time citizens or residents of Australia. The Act required that the person to be charged must have become an Australian citizen or resident by the time that he was charged.”).

56. Public Prosecutor v. S.H.T., 74 Int’l L. Reports 162, 162-63 (1987). Although in the current case the court dealt with terrorist acts as opposed to war crimes and crimes against humanity, it provides a good example for the procedural requirements to exercise the universality principle at least with regard to hijacking crimes. The accused, a resident of Jerusalem, was committed for trial in the Netherlands. He was charged together with an accomplice for hijacking a British aircraft on a flight from Beirut to London and forcing the crew to land at Schipol airport in the Netherlands. The main charge against the accused was based on article 385(a) of the Dutch Penal Code, which implemented the Convention for the Suppression of Unlawful Seizure of Aircraft of 1970, and the Convention for the Suppression of Unlawful Acts against the Safety of Civil Aviation of 1971.

57. See Section 8, (1)(c)(iii) of the New Zealand International Crimes and International Criminal Court Act 2000, which permits that type of universality; with regard to Israel; see also Congo v. Belgium, 2002 I.C.J. 121, 41 I.L.M. 536 (President’s Separate opinion, para. 12); United States v. Yunis, 681 F. Supp. 896 (1988), at 348. Meanwhile, Professor Cassese argues that article 7 of the Italian Code could be widely construed to that effect. However, Professor Bassiouni’s expressed a different opinion regarding article 7 of the Italian Criminal Code asserting that “Italy’s criminal code, Article 7, also provides for extraterritorial criminal jurisdiction, but requires a nationality or territorial connection.” Bassiouni, supra note 43, at 144. See below for the situation in Spain, Germany and Belgium.

58. Cassese, International Law 261-62 (2001). Cassese rightly limits such type of universality to the failure of either the national state or the territorial state to take proceedings, Cassese (ICL), supra note 52, at 287; see also Curtis A. Bradley, Universal Jurisdiction and U.S. Law, 2001 U. Chi. Legal F. 323 (2001) (noting that universal jurisdiction does not require a nexus between “the regulating nation and the conduct, offender, or victim.”).

59. Prosecutor v. Tadic, 35 I.L.M. 32, ¶ 58 (1995).

60. Id. ¶ 59; Prosecutor v. Tadic, Case No. IT-94-1-T, 10 August 1995, ¶ 42.

61. See also Cassese, supra note 58, at 206, 445; Jose-Luis Rodriguez et al., The Protection of War Victims under the 1995 Spanish Penal Code: Offences Against Persons and Objects Protected in the Event of Armed Conflict, in National Measures To Repress Violations of International Humanitarian Law (Civil Law Systems): Report on the Meeting of Experts (Geneva, 23-25 September 1997) 287 (Christina Pelladini ed., 2000).

62. Rodriguez, supra note 61, at 287.

63. See Antonio Cassese, When May Senior State Officials Be Tried for International Crimes? Some Comments on the Congo v. Belgium Case, 13 Eur. J. Int’l L. 853, 860 (2002). In this respect, Professor Cassese argues that article 23(4) of the Spanish law of 1985 as amended in 1999 permits the exercise of universal jurisdiction in absentia. However, see the recent decision rendered by the Spanish Supreme Court concerning the Guatemala Genocide Case, where the Court restricted its interpretation of Article 23(4) regarding the application of universal Jurisdiction under Spanish courts, to the existence of a connection with Spain, Spanish Supreme Court: Guatemala Genocide Case [February 25, 2003] 42 ILM 686, 699 (2003). But see the interesting dissenting opinion written by Judges García, Pallín, Tourón, Chavarri, Garcia, Arrieta and Ibanez who considered that the Court erred in its interpretation of Article 23(4). They argued that “The requirement that the offenders be located in Spanish territory[ for the exercise of universal jurisdiction is misleading, since the Court relied on a] series of International Conventions, none of which relate to genocide…[moreover] such treaties normally establish certain international obligations in the exercise of jurisdiction…, which constitute an obligatory minimum and not a maximum for this it cannot be concluded that there is a generic prohibition on the exercise of universal jurisdiction over those responsible who are not located in national territory….” Id. at 707-8.

64. Rodriguez, supra note 61, at 287.

65. Additional to the Geneva Conventions of August 12, 1949 and relating to the Protection of Victims of International Armed Conflicts (Protocol I), adopted June 8, 1977, entered into force December 7, 1978, 1125 U.N.T.S. 17512, art. 75(4)(e).

66. The Spanish law is compatible in this regard, since it does not allow trials in absentia. However, “initial stages” could be taken “before a trial could commence.” See Daniel Rothenberg, “Let Justice Judge”: An Interview with Judge Baltasar Garzon and Analysis of His Ideas, 24 Hum. Rts. Q. 924, 930 (2002). Thus, presumably among those permitted initial stages, the initiation of arrest warrants to ensure the physical presence of the person to stand trial. But, if the territorial state or the nationality state is acting or started acting, Spanish courts should yield to them. In its ruling of December 13, 2000, in the case of Guatemalan Generals, the Audiencia nacional affirmed this view when she “rejected a claim to the exercise of universal jurisdiction by Spanish courts” on the ground that the Guatemalan authorities could investigate and try them. Cassese (ICL), supra note 52, at 287.

67. R. v. Bartle, 37 I.L.M. 1302, 1305 (1998) [hereinafter Ex Parte Pinochet I]; Naomi Roht-Arriaza, The Pinochet Precedent and Universal Jurisdiction, 35 New Eng. L. Rev. 311, 312 (2001).

68. Roht-Arriaza, supra note 67, at 311. Pinochet was arrested on October 23, 1998 based on the second arrest warrant, which was issued on October 22, 1998. See Ex Parte Pinochet I, supra note 67, at 1303.

69. Roht-Arriaza, supra note 67, at 311.

70. This does not deny the fact that there existed a link, namely that some victims were Spanish nationals. However, Spain requested Pinochet’s extradition based on the passive personality principle only with regard to the first request. Nonetheless, in October, Judge Garzon issued a second international arrest warrant for Pinochet based mainly on the broader ground of universality principle. See Antonio F. Perez, The Perils of Pinochet: Problems for Transitional Governance Solution, 28 Den. J. Int’l L. & Pol. 175, 191 (2000). The first warrant was issued on October 16, 1998, while the second warrant was issued on October 22, 1998. See Ex Parte Pinochet I, 37 I.L.M. 1302; see also Rothenberg, supra note 66, at 936.

71. Luc Reydams, International Decision: Belgian Tribunal of First Instance of Brussels (investigating magistrate) 93 Am. J. Int’l L. 700 (1999) [hereinafter International Decision]. On November 1, 1998, a criminal complaint was filed by “six Chilean exiles” against Pinochet. They alleged that during his presidency, he committed, “crimes under international law” in Chile that are punishable under the Belgian statute implementing the 1949 Geneva Conventions and Additional Protocols thereto. Id.; see also Luc Reydams, Universal Jurisdiction: International and Municipal Legal Perspectives (forthcoming 2003).

72. See Loi relative à la répression des infractions graves aux Conventions de Genève du 12 août 1949 aux Protocoles I et II du 8 juin 1977 ct (June 16, 1993), art. 7. This Complaint was filed before the amendment of the Act in 1999.

73. Damien Vandermeersch, Belgian Legal System for the Repression of Crimes under International Law, in Rodriguez, supra note 51, at 166-67; see also International Decision, supra note 71, at 701 (noting: “the magistrate observed that the Belgian statute implementing the Geneva Conventions and Additional Protocols endows the Belgian judicial authorities with universal jurisdiction and that it was the legislator’s unambiguous intent that the law should apply even when the alleged perpetrator is not present on Belgian territory.”). Id.

74. Article 12 provides that jurisdiction of Belgian courts is restricted to the presence of the suspect in Belgium. See Vandersmeersch, supra note 73, at 167. However, see the attempts taken by the Belgian Government to repeal the law, infra notes 143-161 and texts above.

75. Reydams, supra note 71. Even the Spanish extradition request was denied because Britain considered that Pinochet was “mentally unfit to stand trial.” Major Christopher M. Supernor, International Bounty Hunters for War Criminals: Privatizing the Enforcement of Justice, 50 A.F. L. Rev. 215, 223 (2001).

76. Cassese, supra note 63, at 861, n.22.

77. Horst Fischer, National Systems to Repress Violations of International Humanitarian Law, in Rodriguez, supra note 61, at 78.

78. Id; Cassese, supra note 58, 445, n. 63; see also Sascha Rolf Luder, The Repression of Violations of international Humanitarian Law under German Domestic Law, in Pellandini, supra note 61, at 247-48.

79. Cassese, supra note 63, at 861. “[T]he Court noted that in its decision of 29 November 1999 that the Court of Appeal, following the traditional German case law, had held that a factual link was required by law for a German court to exercise jurisdiction over crimes committed abroad by foreigners (in the case at issue the offender was a Bosnian Serb accused of complicity in genocide perpetrated in Bosnia). The court of appeal had found this factual link in the fact that the accused had lived and worked in Germany from 1969 to 1989 and had thereafter regularly returned to Germany to collect his pension and also to seek work.” However, after recalling these findings, the Supreme Court found that the factual link is not significant and thus, its absence does not bar German courts from exercising absolute universal jurisdiction. However, see Wirth’s different opinion who mentions that under German Law trials in absentia are not permitted. Thus, presumably his interpretation of the new CCIL (infra notes 81-85) leads to the conclusion that only initiating proceedings including issuing international arrest warrants is the only permissible type of universality in absentia., Steffen Wirth, Germany’s New International Crimes Code: Bringing a Case to Court, 1 J. Int’l Criminal Justice 152, 160, 164(2003).

See Demjanjuk v. Petrovsky, 79 Int’l L. Rep. 535 (1985). The facts of this case, as well, may reflect an exercise of universal jurisdiction in absentia. The accused John Demjanjuk a “native of the USSR” and a resident of the United States, was charged of having murdered “tens of thousands of Jews and non-Jews” during his service in the SS at the Treblinka concentration camp in Poland during World War II. Israel issued an arrest warrant which later was the ground for requesting his extradition from the United States, pursuant to the 1950 Nazis and Nazi Collaborators (Punishment) Law. No link existed between Israel and the offences or the offender, and the United States Court of Appeal realized this fact when stating “[A] state’s courts may exercise jurisdiction to enforce the state’s criminal laws which punish universal crimes or other non-territorial offenses within the state’s jurisdiction to prescribe. Israel is seeking to enforce its criminal law for the punishment of Nazis and Nazi collaborators for crimes universally recognized and condemned by the community of nations.” Id. at 545. “The courts of Israel had jurisdiction to try Demjanjuk, even though he had never been a citizen of Israel.” Id. at 536. “[T]he fact that [he] is charged with committing these acts in Poland does not deprive Israel of authority to bring him to trial…When proceeding on [universal jurisdiction] premise, neither the nationality of the accused or the victim(s), nor the location of the crime is significant. The underlying assumption is that the crimes are offenses against the law of nations or against humanity and that the prosecuting nation is acting for all nations. This is being so, Israel or any other nation, regardless of its status in 1942 or 1943, may undertake to vindicate the interest of all nations by seeking to punish the perpetrators of such crimes.” Id. at 545-46. However, Professor Bassioni’s different opinion considers that although “the United States Courts of Appeals for the Sixth Circuit referred to universal jurisdiction over crimes of genocide and crimes against humanity, [it] relied [however] on the same Israeli law that was based on the theory of passive personality.” See Bassiouni, supra note 43, at 138.

80. Sokolovic Case, supra note 24, at 20. The original German text reads: “Der Senat neigt jedoch dazu, jedenfalls bei § 6 Nr. 9 StGB, solche zusätzlichen legitimierenden Anknüpfungstatsachen für nicht erforderlich zu halten,” available at http://www.bundesgerichtshof.de/ (last visited February 7, 2003); see also Cassese, supra note 58, at 445, n. 63; Cassese, supra note 63, at 861, n. 22.

81. Sokolovic Case, supra note 24, at 20. The original text reads as follows: “Wenn nämlich die Bundesrepublik Deutschland in Erfüllung einer völkerrechtlich bindenden, aufgrund eines zwischenstaatlichen Abkommens übernommenen Verfolgungspflicht die Auslandstat eines Ausländers an Ausländern verfolgt und nach deutschem Strafrecht ahndet, kann schwerlich von einem Verstoß gegen das Nichteinmischungsprinzip die Rede sein.” Id; see also Cassese, supra note 58, at 445, n. 63; Cassese, supra note 63, 861, n. 22.

82. Gerhard Werle & Florian Jessberger, International Criminal Justice is Coming Home: The New German Code of Crimes Against International Law, 13 Crim. L.F. 191 (2002).

83. Id.

84. Id. at 201.

85. Id. at n. 49.

86. Id. at 213. Section 153(f) stipulates: “(1) In the cases referred to under Section 153c subsection (1), numbers 1 and (2), the public prosecution may dispense with prosecuting an offence punishable pursuant to sections 6 to 14 of the Code of Crimes against International Law, if the accused is not present in Germany and such presence is not to be anticipated. If in the cases referred to under Section 153c subsection (1), number 1, the accused is a German, this shall however apply only where the offence is being prosecuted before an international court or by a State on whose territory the offence was committed or whose national was harmed by the offence. (2) In the cases referred to under Section 153c subsection (1), numbers 1 and (2), the public prosecution office may dispense with prosecuting an offence punishable pursuant to sections 6 to 14 of the Code of Crimes against International Law, in particular if

1. there is no suspicion of a German having committed such offence,

2. such offence was not committed against a German,

3. no suspect in respect of such offence is residing in Germany and such residence is not to be anticipated and

4. the offence is being prosecuted before an international court or by a State on whose territory the offence was committed, whose national is suspected of its commission or whose national was harmed by the offence. The same shall apply if a foreigner accused of an offence committed abroad is residing in Germany but the requirements pursuant to the first sentence, numbers 2 and 4, have been fulfilled and transfer to an international court or extradition to the prosecuting state is permissible and is intended.

(3) If in the cases referred to under subsection (1) or (2) public charges have already been preferred, the public prosecution office may withdraw the charges at any stage of the proceedings and terminate the proceedings.”

Id. at Appendix 222-23. It should be noted that sections 6 to 14 referred to in the above text covers the three crimes, in addition to the command responsibility. It is interesting to note that Section 153(f)(2) seems to offer a solution for the problem that might arise in cases of conflict of jurisdiction between states. This is one of the major problems of universality in absentia. However, this amendment seems to offer a valid solution to reduce such danger by leaving room for the dismissal of cases in the situation where any of the International, territorial, or the national state courts of the accused and the victim are acting.

87. Congo v. Belgium, supra note 1, ¶ 55 (Judge Van Den Wyngaert, Dissenting Opinion).

88. Id. ¶ 13.

89. Id.

90. Id. ¶ 56.

91. Annual Digest, 1927-1928, Case No. 98, at 155-56. Thus, the water mark here is as long as a state has not exercised jurisdiction into the territory of another state (enforcement jurisdiction) or exercised such jurisdiction without the consent of that state, there is no other restrictive rule under international law that bar a state from exercising jurisdiction in its territory over acts committed abroad.

92. Willard B. Cowles, Universality of Jurisdiction over War Crimes, 33 Cal. L. Rev. 177, 181 (1945).

93. PCIJ, 1927, Series A, No. 10, at 29. See also Cowles, supra note 92, at 180. However, see Shaw’s different opinion, citing to the Anglo-Norwegian Fisheries and the Nottebohm cases, where he considers that the liberal rule set out in the Lotus case does not stand anymore. Shaw, supra note 26, at 460-61.

94. Cassese, supra note 58, at 123; see also Brownlie, supra note 26, at 6.

95. Cassese, supra note 58, at 123.

96. Karol Wolfke, Custom in Present International Law 44 (2d ed. 1993).

97. I.C.J. Reports, 1986, at 98; but see Advisory Opinion on the Legality of the Threat or Use of Nuclear Weapons, July 8, 1996, ¶¶ 71, 73, available at http://www.amnestyusa.org/icc/ujqanda.pdf. The Court noted that the diversity of opinions impeded the determination of the rule of customary law prohibiting the use or threat of nuclear weapons as follows:

Examined in their totality, the General Assembly resolutions put before the Court declare that the use of nuclear weapons would be &;a direct violation of the Charter of the United Nations’; and in certain formulations that such use ‘should be prohibited’. The focus of these resolutions has some times shifted to diverse related matters; however, several of the resolutions under consideration in the present case have been adopted with substantial numbers of negative votes and abstentions; thus, although those resolutions are a clear sign of deep concern regarding the problem of nuclear weapons, they still fall short of establishing the existence of an opinio juris on the illegality of the use of such weapons…The emergence, as lex lata, of a customary rule specifically prohibiting the use of nuclear weapons as such is hampered by the continuing tensions between the nascent opinio juris on the one hand, and the still strong adherence to the practice of deterrence on the other.

Id; see also Rodney Dixon et al., Archbold: International Criminal Courts Practice, Procedure and Evidence 8 (2003) (noting that it is “necessary to consider whether there are divergent views and conduct in State practice — the inquiry must not be limited to those States that support the rule of customary law.” Id. Based on the aforementioned wording, one may therefore argue that the diversity of opinion regarding universality in absentia supports the conclusion that a customary rule prohibiting its application is lacking.

98. As Villiger has rightly observed, the “fluid and dynamic nature of customary law makes it difficult to asses in abstracto at what point State practice and the opinio give rise to a rule.” Mark E. Villiger, Customary International Law and Treaties 194 (1985).

99. Morris, supra note 42, at 346; see also Theodor Meron, International Criminalization of Internal Atrocities, 89 Am. J. Int’l L. 554, 572 (1995).

100. 1949 Geneva Conventions: Geneva Convention for the Amelioration of the Condition of the Wounded and Sick in Armed Forces in the Field, Aug. 12, 1949, 75 U.N.T.S. 31.

101. 1949 Geneva Convention for the Amelioration of the Condition of the Wounded, Sick and Shipwrecked Members of Armed Forces at Sea, Aug. 12, 1949, 75 U.N.T.S. 85.

102. 1949 Geneva Convention Relative to the Treatment of Prisoners of War, Aug. 12, 1949, 75 U.N.T.S. 135.

103. 1949 Geneva Convention Relative to the Protection of Civilian Persons in Time of War, adopted Aug. 12, 1948, entered into Oct. 21, 1950, 75 U.N.T.S. 287.

104. Prosecutor v. Tadic, Case No. IT-94-1-AR72, Oct. 2, 1995, ¶ 80; Prosecutor v. Zejnil Delalic` et al., Case No. IT-96-21-T, Nov. 16, 1998, 200 (noting that “[t]he system of mandatory universal jurisdiction over those offenses described as ‘grave breaches’ of the Conventions requires all States to prosecute or extradite alleged violators of the Conventions.”); see also Horst Fischer, The Grave Breaches of the 1949 Geneva Conventions, in: Substantive and Procedural Aspects of International Criminal Law: The Experience of International and National Courts: Commentary 73 (Gabrielle Kirk McDonald et al. eds., 2000); Bartram S. Brown, Nationality and Internationality in International Humanitarian Law, 34 Stan. J. Int’l L. 347, 392-93 (1998); L.C. Green, ‘Grave Breaches’ or Crimes Against Humanity, 8 U.S. Air Force Academy J. Legal Studies 19, 27-29 (1997); Sonja Boelaert Suominen, Grave Breaches, Universal Jurisdiction and Internal Armed Conflict: Is Customary Law Moving Towards a Uniform Enforcement Mechanism for All Armed Conflicts?, 5 J. Conflict & Security L. 63, 71 (2000); Mary O’Connell, Symposium Method in international Law: New International Legal Process, 93 Am. J. Int’l L. 334, 341 (1999); Reydams, supra note 52, 231. Despite the fact that this case reflects the application of universal jurisdiction where the accused was present in Switzerland, it is worth mentioning as set out below. In the Niyonteze case, the Swiss Tribunal militaire de cassation is considered the first municipal court to render a conviction based on universal jurisdiction under the 1949 Geneva Conventions and Additional Protocol II in an internal armed conflict. After crimes were committed and the government forces defeated during the armed conflict between the government forces and the rebel army of Rwanda Patriotic Front (RPF), which took place from April to July 1994, Mr. Fulgence Niyonteze and his family fled to Switzerland, where he was arrested. The ICTR did not request deferral, while Rwanda requested his extradition, but to no avail. Id.

105. Advisory Opinion on Reservations to the Convention on the Prevention and Punishment of Genocide, 1951 I.C.J Rep. 15, 22 (May 28, 1951).

106. See, e.g., Re Javor, supra note 52 (expressing the opinions of Professor’s Claude Lombois and Brigitte Stern’s regarding the interpretation of the 1949 Geneva Conventions); Meron, supra note 99, at 570. Judge Meron stresses the main purposes and objects of the Conventions and the legal consequences that might result from not acting inconformity with them, by saying: “[G]iven the purposes and objects of the Geneva Conventions and the normative content of their provisions, any state that does not have the necessary laws in place, or is otherwise unwilling to prosecute and punish violators of clauses other than the grave breaches provisions that are significant and have a clear penal character, calls into serious question its good faith compliance with its treaty obligations.” Id.; see also Oren Gross, The Grave Breaches System and the Armed Conflict in the former Yugoslavia, 16 Mich. J. Int’l L. 783, 792-93 (1995) (noting that there are several arguments that support the mechanism of universal jurisdiction for grave breaches.) These arguments demonstrate that “there was an apparent need to foster respect for the Conventions and to ensure their efficient implementation. Grave breaches were given a special place in the Conventions in order to prevent such acts from going unpunished.” Id. If this is the underlying premise of those Conventions, then one might wonder why an exercise of universality by default should not be allowed in specific cases to avoid “such acts from going unpunished.”

107. Commentary on Geneva Convention IV, art. 146, at 578; but see Amnesty International, Universal Jurisdiction: The Duty of States to Enact and Implement Legislation, Ch. I., 2001, at 14 (noting that the Geneva conventions do not require any link between the state exercising jurisdiction and the accused.). On the basis of that jurisdiction a prosecutor or an investigating judge may commence an investigation, gather evidence, issue international arrest warrants, and file extradition requests where a state is unwilling or unable to act. Id.

108. Rudolf Bernhardt, Evolutive Treaty Interpretation, Especially of the European Convention on Human Rights, 42 German Yearbook Int’l L. 11, 14 (1999). It seems that the demand to preserve states national sovereignty played a major role in Pictet’s strict interpretation to the above mentioned provisions. However, as Judge Bernhardt has rightly mentioned: “the principle that treaties should be interpreted restrictively and in favor of State sovereignty, in dubio mitius…is no longer relevant…Treaty obligations are in case of doubt and in principle not to be interpreted in favor of State sovereignty. It is obvious that this conclusion can have considerable consequences for human rights conventions: Every effective protection of individual freedoms restricts State sovereignty.” Id. In a same line of argument the fight against impunity in the sake of effective protection of individual human rights may permit a limitation or restriction on state sovereignty.

109. 1971 I.C.J. at 31.

110. J.G. Merrills, The Development of International Law By the European Court of Human Rights 97 (1990).

111. Series A. No. 32, ¶ 26; Mamatkulov and Abdurasulovic v. Turkey, (Merits) App. No., 00046827/99, Judgment Feb. 6, 2003, ¶ 94 ; Öcalan v. Turkey, (Merits), App. No. 00046221/99, Judgment Mar. 12, 2003, ¶ 193; Loizidou v. Turkey (Preliminary Objections), App. No., 0001531/89, Mar. 23, 1995, ¶¶ 71-72 Tyrer Case, Series A. No. 26, ¶ 31. Minelli Case, Series A. No. 62; Artico Case, Series A. No. 37; Klass Case, Series A. N. 28.

112. Deborah Mangion, Article 3 of the ECHR: Relative Interpretations of a Universal Right? 6 Mediterranean J. Hum. Rts. 247, 251 (2002).

113. Congo v. Belgium Case, supra note 1, ¶ 57 (opinions of Judges Higgins, Kooijmans, and Buergenthal)

114. Id. ¶ 58.

115. Cassese, supra note 63, at 856.

116. See Congo v. Belgium Case, supra note 1, ¶ 16 (stating President Guillaume’s Separate Opinion).

117. Id. ¶¶ 12-13; see also Alexander Orakhelashvili, International Decision: Arrest Warrant of 11 April 2000 (Democratic Republic of the Congo V. Belgium), 96 Am. J. Int’l L. 677, 681 (2002) (supporting Judge’s Guillaume opinion).

118. Congo v. Belgium Case, supra note 1, ¶ 13. (President Guillaume’s Separate Opinion).

119. Id. ¶¶ 7-9.

120. Id. ¶ 9.

121. See, e.g., Clark’s early article where he does not preclude the possibility of universality in absentia. He said: “one of the dangers of conceding universal jurisdiction that is sometimes mentioned is that states will try officials of another state in absentia, for political reasons. [The provision of article V of the Apartheid Convention], at least does not legitimate trials held in the absence of the accused. The sparse material on this point concerning this and other treaties certainly does not support a general proposition that trial in absentia is inappropriate in respect of other crimes of international concern. The point is simply not developed.” Roger S. Clark, Offenses of International Concern: Multilateral State Treaty Practice in the Forty Years Since Nuremberg, 57 Nordic J. Int’l L. 49, 93, n.60 (1988); see also The Princeton Principles, which states in Principle 1(1): “For the purposes of these Principles, universal jurisdiction is criminal jurisdiction based solely on the nature of the crime, without regard to where the crime was committed, the nationality of the alleged or convicted perpetrator, the nationality of the victim, or any other connection to the state exercising jurisdiction. Principle 2(1). …serious crimes under international law include: (1) piracy; (2) slavery; (3)war crimes; (4)crimes against peace; (5) crimes against humanity; (6) genocide; and (7) torture.” See Neil Boister, The ICJ in the Belgian Arrest Warrant Case: arresting the Development of International Criminal Law, 7 J. of Conflict & Security Law 293, 311 (2002).

122. But, President Guillaume’s opinion that argues that even the common provisions of the 1949 Geneva Conventions require the presence of the accused on the territory of the arresting state. See Congo v. Belgium Case, supra note 1, ¶ 17.

123. Brigitte Stern, Better Interpretation and Enforcement of Universality of Jurisdiction, 14 Nouvelles Estudes Penales 175, 185 (1998); see also Judge Higgins’ opinion regarding the meaning of universal jurisdiction. Her apparent opinion seems to suggest that true universal jurisdiction does not require any nexus what so ever. Higgins, Problems and Process, supra note 15, at 64-65.

124. Tadic Case, supra note 24, at ¶ 57 (quoting an early judgment of the Italian Supreme Military Tribunal Mar in Rivista Penale 753, 757 (Sup. Mil. Trib., Mar. 13, 1950)).

125. Congo v. Belgium Case, supra note 1, ¶ 12 (President Guillaume’s opinion).

126. But see Stern, supra note 52, at 528-29 (stating that article 689 of the Code of Criminal Procedure leaves room for the applicability of universality in absentia).

127. See supra notes 78-81.

128. See supra notes 82-86; see also Congo v. Belgium Case, supra note 1, ¶ 20 (stating the joint separate opinion of judges Higgins, Kooijmans, and Burgenthal regarding the initial proposal for this Code.).

129. M. Cherif Bassiouni, International Criminal Law: Crimes, Vol. I, 46 (Ardsley, New York: Transnational Publishers, 1999); M. Cherif Bassiouni, “Accountability for International Crime and Serious Violations of Fundamental Human Rigths: International Crimes: Jus Cogens and Obligation Erga Omnes,” 14 Nouvelles Estudes Penales 133 (1998); see also, e.g, Barcelona Traction, Light and Power Co. Ltd. (Belgium v. Spain), 1970 I.C.J. 3, 32 (Feb. 5, 1970). The ICJ defined the concept of “ erga omnes” and its legal effect towards the entire community in the following terms:

[A]n essential distinction should be drawn between the obligations of a State towards the international community as a whole, and those arising vis-à-vis another State in the field of diplomatic protection. By their very nature the former are the concern of all States. In view of the importance of the rights involved, all States can be held to have a legal interest in their protection; they are obligations erga omnes.

See also Case Concerningthe Application of the Convention on the Prevention and Punishment of the Crime of Genocide (Bos. & Herz. v. Yugoslavia), 1996 I.C.J. 4, 27-33 ¶ 33 (July 11, 1996). The I.C.J. expressed itself regarding obligations erga omnes in the following words: “The Court is of the view that it follows from the object and purpose of the Convention that the rights and obligations enshrined by the Convention are rights and obligations erga omnes.” Id. This wording emphasizes that the Convention imposes an obligation erga omnes to punish and prevent the crime of Genocide. Id. at 25.

130. See, e.g., G.A. Res., U.N. GADR 2840 (XXVI), adopted 1971, which stipulates that: “[A state’s refusal] to co-operate in the arrest, extradition, trial and punishment of persons accused of war crimes and crimes against humanity is contrary to the United Nations Charter and to generally recognized norms of international law.” Despite the fact that GA Resolutions are considered soft law and thus, do not create other than moral obligations, “it does at least suggest [as Prof. Stern has validly pointed] the right to act in accordance with such a resolution.” Stern, supra note 123, at 181-82. It follows that any denial of cooperation on the part of a State for the sake of arresting a war criminal might place that state in violation of international law norms. However, see Reydams different opinion who considers that “[t]he proposition that the presence of the accused can be self-generated through extradition is …untenable both from the perspective of the rights of the States and from the perspective of human rights.” Reydams, supra note 21, at 815.

131. Stern, supra note 123, at 180-82.

132. Congo v. Belgium Case, supra note 1, ¶¶ 45, 54 (stating the joint separate opinion of judges Higgins, Kooijmans, and Burgenthal). See also Judge Koroma’s Opinion that mentioned the judgment “cannot be seen either as a rejection of the principle of universal jurisdiction.” It is available to certain crimes, such as war crimes and crimes against humanity, Genocide, and Slave trade. The Court, however, did not rule on it because it was not indispensable to do so to reach its conclusion, nor was such submission before it. Id. ¶ 9.

133. Id. ¶¶ 59-60, 79-85.

134. See Vienna Convention on Diplomatic Relations, 1961, art. 32; Congo v. Belgium Case, supra note 1, ¶ 59.

135. Id. art. 31(4); Congo v. Belgium Case, supra note 1, ¶ 61.

136. See id. ¶ 8 (President Guillaume’s Opinion reviewing those treaties).

137. See, e.g., Clark, supra note 121.

138. See the new German Code, supra note 82. However, Professor William Schabas argues that states who are willing to apply universality in absentia “only exercise it when they have a real interest in the offender, rather than the alleged interest in the good of humanity that publicists all invoke but that states rarely seem to be concerned about.” Nevertheless he believes that states might be hesitant to exercise that type of universality, because “when the offender is on the territory, they have an interest in dealing with him or her that they rarely have in other cases.” Private Conversation with William Schabas, May 26, 2003.

139. See Section V.C, supra; Congo v. Belgium Case, supra note 1, ¶ 51 (Judge Van Den Wyngaert Dissenting Opinion). Judge Van Den holds the proposition that based on the Lotus case, each state is authorized “to provide extraterritorial jurisdiction on its territory unless there is a prohibition under international law.” She concludes, however, that such a rule does not exist under an international law that bars investigating or prosecuting war crimes and crimes against humanity committed abroad.

140. For a thorough discussion regarding the pitfalls of universal jurisdiction in general, see Morris, supra note 42, at 351-59; see also Prof. Bassiouni’s opinion when he stated: “With respect to the [practice of universal jurisdiction in absentia], this case is, for all practical and legal purposes, a case of first impression as there has never before been a state with such extraterritorial jurisdictional reach. One way of considering this issue is to balance the positive effects of such legislation on the enforcement of international criminal law with respect to jus cogens crimes against the negative effects of potentially disrupting the stability, and predictability of the international of the international legal order and its potential for infringing upon human rights because of the possibilities of politically motivated, vexatious prosecutions, and its potential for multiple prosecutions (in light of the non-applicability of non bis in idem to [prosecutions] sic by separate sovereigns).” Bassiouni, supra note 43, at 147. One has to admit that the issue of non bis in idem, the restriction of its application to the same state sovereign and the lack of respect to foreign judgments might be one of the pitfalls for the exercise of universal jurisdiction in absentia. Some states do not recognize or give weight to foreign judgments and thus a person could be prosecuted or tried simultaneously for the same offense. According to this writer, however, a sort of practice of universality in absentia, which does not exceed the limit of initiating proceedings, or securing the presence of the offender as opposed to the actual trial, renders the argument of violating the non bis in idem principle sometimes inapplicable. For a discussion regarding the problem of foreign judgments and the application of the non bis in idem principle, see Mohamed El Zeidy, The Doctrine of Double Jeopardy in International Criminal and Human Rights Law, 6 Mediterranean J. Hum. Rts. 183, 204-09 (2002); see also Christine Van Den Wyngaert et al., The International Non Bis In Idem Principle: Resolving Some of the Unanswered Questions, 48 Int’l & Comp. L. Q. 779, 784 (1999).

141. Morris, supra note 42, at 354; see also Cassese ICL, supra note 52, at 289-90 (providing a detailed list of pitfalls especially for exercising universality in absentia).

142. See Bassiouni, supra note 42, at 147. “A solution that would preserve the positive effects and mitigate the negative ones is to recognize a state’s right to enact such legislation, but not to recognize a state’s power to seek to enforce such legislation beyond that state’s territory, unless a nexus can be shown to exist with the enforcing state, such as the physical presence of the accused in that state. The result would be that Belgium’s law would be declared not to be in violation of international law, but that its attempt to secure the arrest of the accused outside its territory would be invalid unless it can be shown for enforcement purposes that a nexus to the enforcing state exists.” Id. Although Professor Bassiouni’s statement refers to a “solution,” a close reading of his statement emphasizes that he opposes the entire idea of universality by default, but in a relaxed indirect manner. Apparently he believes that universality in absentia lies within the category of enforcement jurisdiction which is normally prohibited by the classical rules of international law.

143. Reydams, supra note 71. See also Abbas Hijazi et al. v. Sharon et al., Decision of June 26, 2002 (holding, by the same court, but differently composed, that the proceedings against Sharon and others were inadmissible for the same reason listed above). Id.

144. Id. The court observed that such practice violates the principle of sovereign equality of States.

145. Cour de Cassation, Section Française, 2e Chambre, 12 February 2003, available at http://www.cass.be/juris/jucf.htm (Arrêt no. JC032C1_1), (last visited Mar. 25, 2003).

146. Id. at 4-5.

147. Id. The original text appears as follows : “Qu’étrangers au contenu du chapitre II du titre préliminaire du Code de procédure pénale, les crimes de droit international visés par la loi du 16 juin 1993, modifiée par celle du 10 février 1999, ne constituent pas des infractions pour la poursuite desquelles la loi requiert, lorsqu’elles ont été commises en dehors du territoire, que l’inculpé ait été trouvé en Belgique.” Id. at 6.

148. Reydams, supra note 71.

149. Id.

150. BBC News World Edition, Belgium Restricts ‘Genocide Law, Apr. 6, 2003, available at http://news.bbc.co.uk/2/hi/europe/2921519.stm [hereinafter Genocide Law]; Paul Ames, Former Prime Minister Proposes Repealing Belgian War Crimes Law, Associated Press World stream, June 21, 2003, available at LEXIS, News Library. The U.S. State Department spokesman Philip T. Reeker reacted towards the first Belgian amendment by saying, “…, even with the recent amendments, the law does not work and we believe should be repealed.” Id.

151. Luc Reydams, Commentary on the 2003 Amendment of the Belgian Act Concerning Grave Breaches of International Humanitarian Law, 1 J. Int’l Criminal Justice (forthcoming 2003).

152. Human Rights Watch, Belgium: Questions and Answers on the “Anti-Atrocity” Law, 3-4 (Feb. 2003), available at http://www.humanrightswatch.org/campaigns/icc/belgium-qna.pdf [hereinafter Human Rights Watch]. According to the new amendment, before the victim could file a case directly, there should be a link with Belgium, whether because the suspect is on the Belgium territory, the crimes were committed in Belgium, or because the suspect or the victims reside in Belgium. However, if such a link is lacking, the victim must take the case to the state prosecutor who will decide whether the case is well-founded. The decision is subject to appeal. Id. Such an amendment seems to be a positive step to avoid abusing such dangerous type of universality. Almost the same regulations appear in a revised study by Human Rights Watch, Belgium: Questions and Answers on the “Anti — Atrocity” Law, p. 3 (June 2003), at http://www.humanrightswatch.org/campaigns/icc/belgium-qna.pdf, accessed 15 July 2003. According to this study, if a link is lacking between Belgium and the crime such as: the suspect is not on the Belgium territory, the crime is not committed in Belgium, or if the victim is not a Belgian national “or has not lived in Belgium for at least three years,” “cases may only be brought by the state prosecutor”. Id. at 3. However, see Reydams’ different opinion who mentioned that cases that bears no link to Belgium “becomes the prerogative of the federal prosecutor (procureur fedédéral).” For a detailed commentary on the first Act, see Luc Reydams, supra note 151.

153. Id. at 1.

154. Genocide Law, supra note 150.

155. Human Rights Watch, supra note 152, at 4.

156. Id.

157. Craig S. Smith, Belgians Angry with U.S. : War — Crimes Law Already Amended to Suit Americans, Foreign Minister Says, The Gazette(Montreal, Quebec), June 14, 2003, available at LEXIS, News Library.

158. BBC Monitoring International Reports, Belgian Government Cancels Genocide Law, July 14 2003, available at LEXIS, News Library.

159. Belgian Change Law Condemned, July 14, 2003, available at http://news.bbc.co.uk/1/hi/world/europe/3063427.stm.

160. This change is intended to prevent prosecution of President Bush, Sharon, Rumsfeld, and other U.S. State officials, Paul Geitner, Critics Say Changes to Belgian War Crimes Law Won’t Solve all Cases that Angered Washington, Associated Press, July 30, 2003, available at LEXIS, News Library.

161. Paul Ames, Human Rights Campaigners Criticize with Changes to Belgian War Crimes Law, Associated Press World stream, July 13, 2003, available at LEXIS, News Library; War Crimes Complaints Filed Against Bush, Blair, Chicago Tribune, June 20, 2003, at 12, available at LEXIS, News Library.

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A Comparative Analysis of the Standard of Fraud Required Under the Fraud Rule in Letter of Credit Law.

by Xiang Gao* and Ross P Buckley**

(2003) Oxford U Comparative L Forum 3 at ouclf.iuscomp.org | How to cite this article

Table of contents

Introduction

National courts have required different standards of fraud to justify non-payment, or restraint of payment, under a letter of credit. The UNCITRAL Convention has adopted its own position. The issue is far from settled in any legal system. Based on an analysis of the law in the United States, United. Kingdom. Canada, Australia and under the UN Convention, this article proposes a standard that is a distinct improvement on the various standards applied around the world and suggests a means for its implementation.

The fraud rule allows the issuer of a letter of credit or a court to disrupt the payment of a letter of credit when fraud is involved. The raison d’etre of letters of credit is to provide an absolute assurance of payment to a seller, provided the seller presents documents that comply with the terms of the credit. The fraud rule thus goes to the very heart of the letter of credit obligation. The fraud rule is necessary to limit the activities of fraudsters, but its scope must be carefully circumscribed so as not to deny commercial utility to an instrument that exists to serve as an assurance of payment.1

This article explores the kind of fraud required to invoke the fraud rule or, in other words, what does fraud mean under the fraud rule in the law governing letters of credit?

This is a challenging question because fraud is an “inherently pliable concept”.2 Some argue that the fraud rule must be applied in a strict fashion, or in cases where only egregious fraud is involved. These commentators emphasise that the letter of credit is a unique commercial device that must be protected from simple contract disputes, which are often difficult to distinguish from certain fraud claims.3 Others favour a more flexible approach to the concept. 4

This article will investigate how this question has been answered in the United States, the United Kingdom, Canada, Australia and under the UNCITRAL Convention, i.e. the United Nations Convention on Independent Guarantees and Standby Letters of Credit (“UN Convention”).5

The Position in the United States

A large number of letter of credit fraud cases have been decided in the U.S. In addition, Article 5 of the Uniform Commercial Code contains state-of-the-art provisions with respect to the fraud rule. 6 Therefore, the US position deserves much attention. To facilitate the discussion, the US position will be examined in three categories: the pre-UCC position, the Prior UCC Article 5 position and the Revised UCC Article 5 position.

Pre-UCC Position

Pre-Sztejn Cases

The seminal case on the fraud rule in letter of credit law was Sztejn v. J. Henry Schroder Banking Corp.7 Before Sztejn was decided, a number of letter of credit cases in the US touched on the issue of fraud, but none considered the fraud rule in detail. Little discussion appeared in those cases about what kind of fraud might invoke the fraud rule. One of the few passages mentioning the issue was the dissenting judgment of Cardozo J in Maurice O’Meara Co v. National Park Bank8.

In Maurice O’Meara the underlying contract was for the sale of newsprint paper of a specified tensile strength. When the plaintiff presented facially regular documents and required payment against the letter of credit, the defendant bank, the issuer, refused to pay the drafts, claiming that “[t]here has arisen a reasonable doubt regarding the quality of the newsprint paper”.9 The plaintiff, the beneficiary, brought the action against the issuer for damages sustained by its assignor from the issuer’s dishonour. The issuer defended against the beneficiary’s action on the ground that the quality of the paper fell far short of that required. The majority judgment of the Court of Appeals of New York rejected the issuing bank’s claim and said:

The bank was concerned only in the drafts and the documents accompanying them. … If the drafts, when presented, were accompanied by the proper documents, then it was absolutely bound to make the payment under the letter of credit, irrespective of whether it knew, or had reason to believe, that the paper was not of the tensile strength contracted for ….10

However, Cardozo J disagreed with the majority judgment and observed:

We are to bear in mind that this controversy … arises between the bank and a seller who has misrepresented the security upon which advances are demanded. … I cannot accept the statement of the majority opinion that the bank was not concerned with any question as to the character of the paper. If that is so, the bales tendered might have been rags instead of paper, and still the bank would have been helpless, though it had knowledge of the truth, if the documents tendered by the seller were sufficient on their face.11

This paragraph shows that, in the view of Cardozo J, fraud under the fraud rule in the law governing letters of credit means misrepresentation. Reading the paragraph further, it appears that the respected judge, by stating “the bales tendered might have been rags instead of paper”, was suggesting that, to invoke the fraud rule, a misrepresentation might have to go as far as complete non-performance of the contract, a kind of gross misrepresentation. 12

However, some eminent commentators of the time seemed to take a different and more flexible view. In their view, the issuer should be allowed to dishonour a draft drawn under a letter of credit where the goods did not conform to the description of the superficially regular documents even if the misrepresentation was made innocently, because under such circumstances “the seller has failed as effectively as in the case of outright fraud to give the bank what the parties contemplated, that is, control over merchandise of a specific description”.13 Some went further and suggested that “the issuing bank may defend the action brought by the seller on the ground of inferiority of quality”.14 These suggestions have been classified as the “breach of warranty or innocent misrepresentation standard” and have been rejected by modern commentators.15

The Test of Sztejn

In Sztejn, Sztejn and Schwarz contracted to buy a quantity of bristles from Transea, and asked Schroder to issue a letter of credit naming Transea as the beneficiary. Transea placed fifty cases of material on board a steamship, procured the documents required by the letter of credit and drew a draft to the order of Chartered Bank, which presented the draft to Schroder for payment along with the required documents under the credit. Before payment had been made, Sztejn filed a suit for a judgment declaring the letter of credit and draft thereunder void, and for an injunctive relief to prevent the issuer from paying the draft, alleging that the beneficiary had in fact filled the fifty cases with “cowhair, other worthless material and rubbish with intent to simulate genuine merchandise and defraud the plaintiff and Schwarz”.16 The plaintiff also averred that the presenting bank was merely a collecting bank for Transea, not an innocent holder of the draft for value. The presenting bank moved to dismiss the complaint on the ground that it failed to state a cause of action.

Assuming that all the allegations of the complaint were true, namely, “Transea was engaged in a scheme to defraud the plaintiff and Schwarz, that the merchandise shipped by Transea is worthless rubbish and that the Chartered Bank is not an innocent holder of the draft for value but is merely attempting to procure payment of the draft for Transea’s account”,17 Shientag J of the Supreme Court of New York County rejected the Chartered Bank’s motion and ruled for the plaintiff by saying:

This is not a controversy between the buyer and seller concerning a mere breach of warranty regarding the quality of the merchandise; on the present motion, it must be assumed that the seller has intentionally failed to ship any goods ordered by the buyer. In such a situation, where the seller’s fraud has been called to the bank’s attention before the drafts and documents have been presented for payment, the principle of the independence of the bank’s obligation under the letter of credit should not be extended to protect the unscrupulous seller.18

As can be seen, Sztejn applied the fraud rule where the dispute was not, in Shientag J’s words, “between the buyer and seller concerning a mere breach of warranty regarding the quality of the merchandise; [but where] the seller has intentionally failed to ship any goods ordered by the buyer”. 19

Despite the use of the word “intentionally”, divergent views have emerged among courts and commentators on the standard of fraud adopted in Sztejn. Some say Sztejn set forth a standard of “intentional fraud”.20 Some have read it more narrowly: “Sztejn on its facts exhibits an “egregious fraud’ standard”.21 But others would argue that the apparently severe standard in Sztejn arose out of its special procedural context — a motion to dismiss; if the case had been heard in the context of an equitable injunction, Sztejn would have set forth “a more flexible equitable standard of fraud”.22 Still others are of the view that the “judgment [in Sztejn] does not tell what degree of knowledge of fraud is necessary to justify the issuing bank in refusing to pay”.23

It has been suggested that one year later, in another letter of credit fraud case, Asbury Park & Ocean Grove Bank v. National City Bank,24 Shientag J himself provided some hint of what he had meant in Sztejn.25 In Asbury Park, Silverman Brothers entered into contracts to purchase clothing from the US Army. Payment was to be made by way of letters of credit. At the buyer’s request, the plaintiff itself issued letters of credit in favour of the sellers, but as the amount involved in the transaction was large, the seller required further letters of credit to be issued by other banks. The plaintiff accordingly applied to the defendant for it to issue letters of credit. Just prior to the expiration of the credits, the plaintiff requested the defendant not to honour any more drafts drawn under the credits, but the defendant made the payment in disregard of the plaintiff’s request because it found that the documents were in compliance with the terms of the credits.

The plaintiff sued the defendant for damages it sustained, alleging that the seller and the buyer were using the letters of credit to defraud the plaintiff, and the defendant knew it. The plaintiff claimed that, (1) when the seller shipped the goods to the buyer, it made out drafts on the defendant, but instead of presenting the drafts for payment, the seller held them as a sort of guaranty on its open account, and did not present them until it appeared that the buyer would be unable to pay the account; (2) such use of the credits had not been contemplated by its agreement with the buyer; and (3) the defendant knew that its credits were being used as guaranty even before the plaintiff requested the defendant to honour no more drafts. Shientag J rejected the plaintiff’s arguments and observed:

The authorities … agree that the letters of credit are contracts which are independent of the contract of purchase between the seller and the purchaser … unless there was such a fraud on the part of the seller that there were no goods shipped … .

It therefore follows that a notice given by the correspondent bank [the plaintiff] to the issuing bank [the defendant] to the effect that the former was defrauded by either the buyer, the seller or both, is ineffective to void or suspend the operation of the letter of credit. Any other rule would destroy the effectiveness of this valuable commercial device. The common-law fraud action is one of the most difficult to prove, and the issuing bank cannot be expected to evaluate the soundness of the correspondent bank’s claim. Thus, in the instant case it is not at all clear whether the plaintiff could prove a cause of action for fraud against the Army or Silverman Brothers or both. It would be improper to hold up the payment of drafts by the issuing bank pending the result of such litigation between the correspondent bank and the buyer or seller.26

If Asbury Park can lend assistance to the interpretation of Sztejn, it might have suggested that Shientag J would have applied the fraud rule only in such situations where “no goods” are shipped, “common-law fraud” is involved, or “the seller has intentionally failed to ship any goods ordered by the buyer”. It is therefore open to question whether Shientag J would apply the fraud rule if the beneficiary’s misconduct were less serious.

Prior UCC Article 5 Position

Sztejn or the fraud rule manifested by it has been codified in Article 5 of the UCC, In Prior UCC Article 5, the fraud rule was embodied in s 5-114(2), which read:

(2) Unless otherwise agreed when documents appear on their face to comply with the terms of the credit but a required document … is forged or fraudulent or there is fraud in the transaction:

(a) the issuer must honour the draft or demand for payment if honour is demanded by a negotiating bank or other holder of the draft or demand which has taken the draft or demand under the credit and under circumstances which would make it a holder in due course (Section 3-302) and in an appropriate case would make it a person to whom a document of title has been duly negotiated (Section 7-502 ) or a bona fide purchaser of certificated security (Section 8-302); and

2. in all other cases as against its customer, an issuer acting in good faith may honour the draft or demand for payment despite notification from the customer of fraud, forgery or other defect not apparent on the face of the documents but a court of appropriate jurisdiction may enjoin such honour. 27

Although the fraud provision in Prior UCC Article 5, it disappointed in that “[n]either the Code nor its comments give any hint as to what type of fraud gives the bank an option to pay or not to pay under this section”.28 As a result, a number of standards of fraud were suggested in the cases applying Prior UCC Article 5.

Egregious Fraud

The term “egregious” is not commonly used by courts in connection with letter of credit fraud29 but is a standard advocated by some commentators.30 The elements of egregious fraud are not entirely clear, but the term has been used to denote very serious misconduct in the context of letter of credit transactions. One suggestion is that egregious fraud means “a flagrant violation of the beneficiary’s obligation under the letter of credit”.31 Another is that egregious fraud is a kind of “outrageous conduct which shocks the conscience of the court”.32 Some commentators have used “gross fraud” interchangeably with “egregious fraud”.33 In sum, under the standard of egregious fraud “simple intent to deceive is not sufficient; it is the extreme or outrageous nature of the fraud” that matters.34

One oft-mentioned case for the standard of egregious fraud is Intraworld Industries Inc v. Girard Trust Bank.35 Intraworld involved a contract under which a luxury Swiss hotel was leased. The applicant, the lessee, obtained a standby letter of credit in favour of the beneficiary, the lessor, to guarantee rental payment in advance. Under the letter of credit, the issuer promised to pay a draft accompanied by the beneficiary’s signed statement to the effect that the applicant had not paid an instalment of rent due under the lease.

When a dispute arose and the beneficiary presented a draft accompanied by a statement conforming to the terms of the letter of credit, the applicant attempted to enjoin the bank from paying the beneficiary, alleging that although the beneficiary’s supporting documents on their face conformed to the credit they were false and fraudulent on the following grounds: (1) no rent was due because the beneficiary had terminated the lease, which the beneficiary’s statement failed to disclose; and (2) the beneficiary was not seeking rent at all but rather seeking the stipulated penalty.

After a hearing, the Supreme Court of Pennsylvania found the facts were not as the applicant had claimed. Conversely, the Court found that correspondence had been exchanged between the parties’ lawyers when dispute arose and that one of the letters from the applicant’s counsel to the beneficiary’s stated that “[i]f the transfer of the rent … should not be made in timely fashion, your client … is at liberty to obtain payment by way of the guarantee contract [the letter of credit]”.36 The Court also found that the underlying contract provided that if the applicant should fail to pay the rent, the beneficiary could not only draw under the letter of credit, but also terminate the lease immediately without further notice. Accordingly, the Court rejected the applicant’s claim for an injunction against payment of the letter of credit, reasoning:

In light of the basic rule of the independence of the issuer’s engagement and the importance of this rule to the effectuation of the purposes of the letter of credit, we think that the circumstances which will justify an injunction against honor must be narrowly limited to situations of fraud in which the wrongdoing of the beneficiary has so vitiated the entire transaction that the legitimate purposes of the independence of the issuer’s obligation would no longer be served. A court of equity has limited duty of “guaranteeing that [the beneficiary] not be allowed to take unconscientious advantage of the situation and run off with plaintiff’s money on a pro forma declaration which has absolutely no basis in fact”.37

One case having mentioned the term “egregious fraud” is N Y Life Insurance Co v. Hartford National Bank & Trust Co.38 Here the plaintiff and a real estate developer entered into a mortgage loan agreement under which the developer committed to borrow from the plaintiff a large sum of money. The defendant issued a standby letter of credit in favour of the plaintiff to satisfy one of the terms of the agreement — that the developer would have to pay the plaintiff a sum as liquidated damages if it failed to take up the loan. The sole condition for payment of the letter of credit was that the drafts were to be accompanied by a signed statement of the plaintiff that the liquidated damages were due. When the developer failed to take up the loan, the plaintiff presented to the defendant the draft accompanied by the required document, but it was dishonoured.

The plaintiff sued for wrongful dishonour. The defendant asserted several defences, but none of them alleged that the plaintiff had practised fraud. The Supreme Court of Connecticut made its decision for the plaintiff on the basis that no fraud was involved in the case, stating:

Only in rare situations of egregious fraud would … [Prior UCC Article 5, s 5 -114] have justified the issuer, on the facts presented here, in going behind apparently regular, conforming documents; such fraud “must be narrowly limited to situations of fraud in which the wrongdoing of the beneficiary has so vitiated the entire transaction that the legitimate purposes of the independence of the issuer’s obligation would no longer be served.” … There is no such evidence in the record of this case, and the [lower] court correctly found that the documentation presented by New York Life complied fully with the terms of the letter of credit.39

The court of N Y Life Insurance followed the reasoning of Intraworld. Taking both cases together, under the standard of “egregious fraud” the fraud rule might be applied only in situations where “the wrongdoing of the beneficiary has so vitiated the entire transaction that the legitimate purposes of the independence of the issuer’s obligation would no longer be served”, or the letter of credit was called upon with “absolutely no basis in fact”.

In practice the fraud rule has rarely been activated when the standard of egregious fraud has been applied. Ironically, the standard of egregious fraud has normally been cited in cases where no fraud would have been found to have been involved whatever standard of fraud is applied. For example, in Intraworld, the court properly denied the request for an injunction because the letter of credit was used for precisely the purpose for which it was generated — to guarantee payment of the advance rent as liquidated damages. In N Y Life Insurance, as fraud was not even mentioned as a defence, the statements of the court relating to the standard of fraud were mere dicta. Therefore, it can be seen that the standard of egregious fraud has in fact become the term used by those courts and commentators who regard a letter of credit “as something akin to a claim check redeemable at a bank’s cash vault”40 — courts and commentators who have to recognise the rationale for the existence of the fraud rule but are very reluctant to see the payment of a letter of credit interfered with due to the application of the fraud rule.

Intentional Fraud

The idea that intentional fraud can invoke the fraud rule was articulated in the case of NMC Enterprises Inc v. Columbia Broadcasting System Inc,41 where the underlying contract was for the purchase of stereo receivers. A commercial letter of credit was issued in favour of the defendant to finance the purchase. The plaintiff, the buyer, sought a preliminary injunction restraining the defendant from presenting for payment or negotiating any drafts under the letter of credit.

The affidavit of the plaintiff’s president averred that the technical performance specifications for the receivers were substantially below that specified in brochures that formed the basis of the bargain. These allegations were confirmed by a testing laboratory. One critical element of the case was an allegation that one of the beneficiary’s officers had admitted the seller was aware of such non-conformity prior to the execution of the contract.

The New York Supreme Court, while acknowledging that questions as to quality or condition of the goods could not form the basis of the request for an injunction, nevertheless, granted the requested injunction and stated:

Where no innocent third parties are involved and where the documents or the underlying transaction are tainted with intentional fraud, the draft need not be honoured by the bank, even though documents conform on their face … and the court may grant injunctive relief restraining such honor.42

Another oft-mentioned case applying the standard of intentional fraud is American Bell International v. Islamic Republic of Iran,43 where American Bell International (Bell) contracted with the Ministry of War of the Imperial Government of Iran (the Imperial Government) to provide the latter with consulting services and telecommunications equipment. A down payment was involved, and Bell’s liability to return the down payment would be reduced in proportion to the work completed. In order to protect the down payment, the Imperial Government required Bell to establish a bank guarantee issued by Bank Iranshahr. The bank guarantee was counter-guaranteed by a standby letter of credit from Manufacturers Hanover Trust Company. The payment under the letter of credit would be triggered by a statement from Bank Iranshahr to the effect that it had received a call for payment under the guarantee from the Imperial Government.

Subsequently, the Imperial Government in Iran was replaced by the Islamic Republic and Bank Iranshahr made demands under the standby letter of credit for payment of the remaining balance of the down payment. Bell filed an action for a preliminary injunction against honouring the demand in the Supreme Court, New York County, claiming inter alia that the demand was fraudulent because the old and new Iranian governments had repudiated the underlying contract, but the new Islamic Republic nevertheless caused Bank Iranshahr to demand payment under the letter of credit, thus asserting rights in a transaction it had otherwise repudiated. Rejecting Bell’sargument, Judge MacMahon said:

Even if we accept the proposition that the evidence does show repudiation, plaintiff is still far from demonstrating the kind of evil intent necessary to support a claim of fraud. Surely, plaintiff cannot contend that every party who breaches or repudiates his contract is for that reason culpable of fraud. … [T]he evidence is ambivalent as whether the purported repudiation results from non-fraudulent economic calculation or from fraudulent intent to mulct Bell. … On the evidence before us, fraud is no more inferable than an economically rational decision by the government to recoup its down payment, …44

It seems that the standard of intentional fraud requires a misrepresentation made knowingly or recklessly with the intention of inducing another to rely thereon. It is thus similar to common law fraud, requiring: (1) a false presentation of the fact; (2) knowledge or belief on the part of the defrauder; and (3) an intention to induce the other party to act or to refrain from action in reliance upon the misrepresentation.45 If cases of common law fraud are treated as equivalent to cases of intentional fraud, the number of cases supporting the standard of intentional fraud are significant.46

The critical requirement for the application of the standard of intentional/common law fraud (treating the two as one) is to prove the fraudster’s intention or state of mind to defraud, which is “notoriously difficult”.47 This is especially so in a standby letter of credit scenario where few documents are required to effect a call on a letter of credit. However, if the fraudster’s intention can be proven, the standard of intentional fraud does not seem to be as high as that of egregious fraud. So, in NMC Enterprises the fraud rule was applied because the court was satisfied the buyer had proven that the seller knew of the inferior quality of the goods yet had induced the purchaser into the contract and drawn on the letter of credit.48

Given that the purpose of the fraud rule is to stop dishonest beneficiaries from abusing the letter of credit system, the standard of intentional fraud seems to be an appropriate one, even though the term is a general one and does not specifically reflect the characteristics of letters of credit.

Letter of Credit Fraud

The concept of “letter of credit fraud” was fashioned in Emery-Waterhouse Co v. Rhode Island Hospital Trust National Bank,49 where a back-to-back letter of credit was involved. In Emery-Waterhouse, Hospital Trust National Bank (HTNB) financed the business of a stove importer, Franklin. As security for the financing, Franklin gave HTNB rights to its accounts receivable, which were backed by letters of credit issued by banks of Franklin’s customers. Emery, a Franklin customer, arranged with its own bank, First National Bank of Boston (FNBB), to provide Franklin with a standby letter of credit guaranteeing Emery’s purchases. The credit stated that to draw upon it Franklin must present FNBB with a signed statement that “the amount of your draft represents funds due you as a result of the failure of the Emery company to pay invoices with its terms, that demand for payment has been made, and that payment has not been received by you”.50

When Franklin became insolvent, HTNB took it over and asked a Donnelly to call upon letters of credit that named Franklin as a beneficiary. Donnelly presented three drafts to FNBB with documents apparently complying with the terms of the credit. FNBB honoured two of them immediately, held up the third and notified Emery. Emery told both HTNB and Franklin that it did not owe the money. Franklin’s CEO told HTNB that Emery did not owe the money. HTNB’s own investigation found the same result. Donnelly told HTNB that it was wrong to draw the drafts on Emery in such circumstances. HTNB nonetheless continued to press for payment and refused to return any of the money obtained.

Emery brought the action to recover the money paid, claiming that it owed nothing to Franklin and that HTNB’s call was fraudulent. The trial court agreed and awarded the plaintiff punitive damages. HTNB appealed. Affirming the judgment of the trial court, the United States Court of Appeals for the First Circuit observed:

Hospital Trust Bank argues that, even if the record contains facts showing a “fraudulent” document or “fraud in the transaction,” we must pretend that it does not because the jury refused to find Hospital Trust Bank liable on Emery’s separate charge of common law fraud. The elements of “common law fraud” as charged by Emery, however, are significantly different from the elements of fraud in the statutory letter-of-credit exception. Even if we assumed that both required some showing of a “false” statement, common law fraud as charged by Emery also requires a showing that Emery “justifiably relied” upon the false statement.51

This is one of the most important cases with respect to the development of the notion of fraud under the fraud rule . It is clear that the beneficiary called on the letter of credit with “absolutely no basis in fact”, but the court did not use “egregious fraud” or similar terms that arguably reflect an overly rigid attitude towards the fraud rule. Nor did the court use the term “intentional fraud”, although the beneficiary knowingly called on the letter of credit without a legitimate basis. It chose to use the phrase “statutory letter of credit exception”, an expression proper and responsive to the special characteristics of letters of credit. This can be branded as a new page in the development of the standard of fraud in the fraud rule.

Flexible Standard

The term “flexible standard” was used in the case of United Bank Ltd v. Cambridge Sporting Goods Corp,52 where Cambridge contracted to buy boxing gloves from Duke. Duke arranged with United Bank and another Pakistani bank to finance the sale. Cambridge was asked by the financing banks to cover the payment of the purchase price by opening an irrevocable letter of credit with its bank, Manufacturers Hanover Trust Company. Manufacturers Hanover issued the letter of credit. When the shipments arrived, inspection revealed Duke had shipped “old, unpadded, ripped and mildewed gloves rather than the new gloves” required.53 Cambridge commenced an action against Duke, joining Manufacturers as a party, obtained a preliminary injunction prohibiting the issuer from paying the drafts, and subsequently levied on the funds subject to the credit.

The Pakistani financing banks instituted proceedings to vacate the levy and to obtain payment of the drafts, claiming they were holders in due course of the drafts and hence were entitled to the proceeds thereof irrespective of any defences against the beneficiary. In refusing the petitioners’ request, the Court of Appeals of New York observed:

It should be noted that the drafters of section 5-114, in their attempt to codify the Sztejn case and in utilizing the term “fraud in the transaction”, have eschewed a dogmatic approach and adopted a flexible standard to be applied as the circumstances of a particular situation mandate. It can be difficult to draw a precise line between cases involving breach of warranty (or a difference of opinion as to the quality of goods) and outright fraudulent practice on the part of the seller. To the extent, however, that Cambridge established that Duke was guilty of fraud in shipping, not merely nonconforming merchandise, but worthless fragments of boxing gloves, this case is similar to Sztejn.54

Factually, as mentioned by the court, this case resembles Sztejn. It might be argued that the court in Cambridge Sporting Goods itself takes a “dogmatic approach” towards the issue of fraud in advocating a “flexible standard” of fraud under the fraud rule. Nevertheless, it does set out the range of the flexibility: the degree of fraud is somewhere between “breach of warranty … and outright fraudulent practice”.55 At the extremes, if only a warranty is breached, the fraud rule will not be brought to play; on the other hand, if “outright fraudulent practice” is established, the fraud rule will certainly apply. Under these guidelines, the relevant standard of fraud requires of the beneficiary’s misconduct something which is more serious than mere breach of warranty.

This decision is laudable and the standard of fraud adopted is a good one if it can be implemented because it exactly matches the purpose of the fraud rule: the stopping of fraud in letter of credit transactions without becoming enmeshed in simple contract disputes. However, because the standard is labelled “flexible”, it may be susceptible to misinterpretation and might be misapplied in practice in unanticipated “flexible” ways.56

Constructive Fraud

The standard of constructive fraud was suggested in Dynamics Corp of America v. Citizens & Southern National Bank,57 where Dynamics, the plaintiff, and the Indian government entered into a contract whereby the former agreed to sell to the latter defence-related equipment. The plaintiff agreed further to have the defendant bank issue standby letters of credit by which the issuer promised to pay drafts drawn by the Indian government, and accompanied by the Indian government’s certification in quite general terms that Dynamics had failed to carry out certain of its obligations under the underlying contract.

While part of the contract remained unperformed, war broke out between India and Pakistan. The US government announced an embargo on military supplies to the region, thereby making further delivery of the equipment impossible. The Indian government thereafter refused to pay for some of the supplies previously delivered and presented a draft accompanied by a certificate purporting to comply with the terms of the letter of credit. The plaintiff filed a complaint seeking an injunction to prevent the issuer from honouring the draft, alleging that the certificate provided by the Indian government was fraudulent in that the plaintiff had actually performed its obligations under the contract. The United States District Court of Georgia granted the injunction and stated:

The law of “fraud” is not static and the courts have, over the years, adapted it to the changing nature of commercial transactions in our society … [I]n a suit for equitable relief — such as this one — it is not necessary that plaintiff establish the elements of actionable fraud required in a suit for monetary damages. “[F] raud has a broader meaning in equity and an intention to defraud or to misrepresent is not a necessary element. Fraud, indeed, in the sense of a court of equity properly includes all acts, omissions and concealments which involve a breach of legal or equitable duty, trust, or confidence, justly reposed, and are injurious to another, or by which an undue and unconscious advantage is taken of another.”58

In accordance with this judgment, any conduct of the beneficiary that breaks even an equitable duty may lead to the application of the fraud rule. Such a standard of fraud is unquestionably too low, for it neglects the nature of a letter of credit transaction, normally a commercial transaction between sophisticated parties who can and should look after their own interests.

If the standard of fraud for the application of the fraud rule is set too low, as in the instant case, it may lead to the abuse of the rule by the applicant. Temptation to abuse always exists: “[f]raud is, in practice, virtually the only defence available when one seeks to escape payment”.59 In the commercial world there are almost limitless ways in which an applicant’s bargain with a beneficiary may go sour. When this happens, the applicant will be tempted to use every means to escape from its original bargain. Exploitation of the fraud rule may be one of its choices. Not only is the risk of such abuse inherent, but the signs of abuse have already appeared. As put by Bertrams:

Through the years, a huge volume of case law concerning the issue of fraud has grown up…. It is only natural for the account party, when the risk of a call has materialized, to claim that the demand for payment in his case is indeed fraudulent. He may, therefore, initiate proceedings in order to attempt to prevent payment and, of course, it hardly matters whether he believes honestly or with little conviction, that the demand is totally unjustified.60

If the standard of fraud is set too low so that the fraud rule is abused and payment of letters of credit repeatedly disrupted, the inherent commercial functions of the letter of credit instrument such as prompt payment, allocation of risks and shifting of the forum will disappear. In turn this will ultimately vitiate the reliability and commercial utility of letters of credit. Accordingly the standard of constructive fraud should be avoided.

Summary

As has been seen, Prior UCC Article 5 cases did not provide a consistent answer to the question of notion or standard of fraud. As Prior UCC Article 5 was silent over what kind of fraud could invoke the fraud rule, almost every Prior UCC Article 5 case involving letter of credit fraud cited Sztejn as authority and, in no surprise, the standards of fraud adopted by the courts in those cases were as divergent as the views already considered regarding the position expressed in Sztejn. Some courts stuck to a strict and restrictive approach and adopted an egregious standard of fraud, while others were ready to take a much different approach adopting a constructive standard of fraud. Still others fell somewhere between the two extremes.

The authors have tried to place the mentioned standards of fraud “on a continuum where the suggested standard ranges from, at the one extreme, where fraud must be egregious, to the other extreme, a broader constructive fraud approach, where an intention to defraud is not a necessary element.” 61 However, this is not an easy task. It may be easy to tell the difference of the level of fraud between the two extreme standards — the standard of egregious fraud and the standard of constructive fraud, and people may also say that the flexible standard of fraud is higher than the standard of constructive fraud because the breach of warranty is excluded under the former, but it is not easy to tell the difference between the standard of intentional fraud and that of letter of credit fraud. If there is any difference, it may be that the former looks more to the state of mind of the fraudster while the latter emphasizes the severity of the effect of fraud on the transaction.

Iranian Cases

The Iranian Revolution of 1979 gave rise to considerable litigation in the United States over standby letters of credit. These cases are known as the Iranian cases. The Iranian cases raised novel legal questions and prompted heated discussion upon a range of issues, especially the standard of fraud of the fraud rule, not only at that time but also thereafter. 62

The Iranian cases can be divided into two groups: pre-hostage cases and post-hostage cases. The pre-hostage cases were decided before hostages were taken at the US Embassy in Teheran in November 1979. The post-hostages cases were decided after that date. The post-hostages cases are extreme examples of how the fraud rule, if the standard or concept of fraud is not clearly defined, can be misused by the parties and misapplied by the courts.

The facts of the Iranian cases were similar one to another. Prior to the Iranian Revolution, the Imperial Government of Iran spent billions of dollars modernising the country. Many US companies poured into Iran on this “gold rush”63 and were awarded lucrative contracts by the Imperial Government. At the same time, they were required to procure independent guarantees, counter-guaranteed by standby letters of credit, to secure the good performance of those contracts or the return of advance payments. All transactions involved four parties — a US company, an Iranian government agency, an Iranian bank, and a US Bank. The US company contracted with the Iranian government agency to provide goods or services in Iran. The contract required the US company to provide for the Iranian agency independent guarantees as above. The independent guarantees were issued by the Iranian bank and counter-guaranteed by standby letters of credit issued by the US bank in favour of the Iranian Bank at the request of the US company. In the event of a dispute the Iranian government agency would demand payment under the guarantee from the Iranian bank, the Iranian bank would demand payment under the standby letter of credit from the US bank, and the US bank would in turn look to the US company for reimbursement.

In the wake of the Iranian Revolution US companies, fearing that the new Iranian regime would arbitrarily demand payment under the letters of credit, flocked to US courts, in most of the cases on the ground of fraud, to prevent the letters of credit from being paid and their accounts from being charged. They had “only marginal success in the courts”64 in the pre-hostage cases. There were only two reported pre-hostage cases in which US companies were granted preliminary injunctions, and they were soon vacated.65 In other pre-hostage cases, injunction motions were either denied or only “notice injunctions” were granted.66 For example, in American Bell International v. Islamic Republic of Iran,67 a paradigm pre-hostage case which “typifies the Iranian cases with regard to the facts, relief sought, arguments raised, and results”,68 the court rejected the applicant’s claim of fraud because it failed to meet the test of intentional fraud by showing the beneficiary had “evil intent” or “fraudulent intent to mulct” the applicant.69 In the post-hostage cases, in striking contrast with the pre-hostage cases, US courts changed their attitudes dramatically. They issued preliminary, and in some cases permanent, injunctions when US companies came back to them after the hostage crisis. Payment of letters of credit in many cases was enjoined without an opinion. According to one commentator, out of fourteen injunction motions made in federal district courts, twelve were granted, and only two were denied. Of those twelve enjoined cases, only three were issued with written opinions, eight were decided without an opinion, and the remaining one was decided without a formal written judgment. No-opinion judgments were not limited to federal courts; a similar approach was taken by some of the state courts.

In those cases where an opinion was given, the reasons provided were hardly convincing to letter of credit specialists. For example, in Touche Ross & Co v. Manufacturers Hanover Trust Co,70 Touche had entered into a contract with the Ministry of War of the Imperial Government to audit, examine and review the financial aspects of military contracts that various American contractors were performing for the Government. To assure performance, Touche was required to provide by Bank Saderat in the amount of 10% of the contract price a performance guarantee, which was counter-guaranteed by a standby letter of credit issued by Manufacturers Hanover Trust (Manufacturers). The letter of credit was payable upon presentation of a sight draft together with documents consisting of either Bank Saderat’s statement signed by one of its officers or its tested telex that Bank Saderat had made payment to the Ministry of War pursuant to the guarantee.

There was in the contract a force majeure clause, under which the contract could be cancelled if events of force majeure occurred. The contract also provided that the bank guarantee would be released in the event the contract was cancelled due to force majeure. After the hostages were taken in Teheran, Touche invoked the force majeure clause and cancelled the contract unilaterally. Nevertheless, Touche was advised that Bank Saderat had made a demand on Manufacturers for payment of the letter of credit.71

Touche moved for a preliminary injunction pendente lite enjoining Manufacturers from making any payment under the letter of credit, but it is not clear from the report when Touche made the move, whether before or after the demand for payment was made, and on what basis, whether fraud or something else.72 The Supreme Court of New York granted the plaintiff’s motion, and said:

As a result [of the cancellation of the contract], the guaranty has been released, and no legitimate call could be made on the guaranty or the letter of credit. …

As all financial institutions in Iran, including Bank Saderat, have been nationalized, Bank Saderat is owned by the Islamic Republic of Iran. Bank Saderat could not have legitimately paid on the guaranty, as Bank Saderat would be simply paying itself. Therefore, any call on the letter of credit would be fraudulent.73

The court in Touche cited two grounds for its application of the fraud rule. The first was the effect of the invocation of the force majeure clause by the applicant. However, the soundness of this ground is questionable on two fronts:

1. It seems that the parties were in dispute over whether events such as the Iranian Revolution were within the force majeure clause, for one party invoked the clause and claimed that the independent guarantee had been released while the other party called on the independent guarantee in ignorance of it. This raises the question of whether the case ought not to have been decided on the basis of simple contract rather than fraud.

2. Even if the independent guarantee were released under the force majeure clause in the contract, it is doubtful whether that release would automatically release the issuer’s obligation under the letter of credit, because there was no provision for that in the letter of credit and the two were independent under the law of letters of credit.74

What has struck commentators most is the second ground for the judgment: that nationalisation of the Iranian institutions meant that “any call” by the Iranian bank on the letter of credit would be fraudulent because any payment made by the bank under the independent guarantee would not be legitimate. According to the logic of this statement, the fraud rule may be applied by looking into the identity of the beneficiary, not at what the beneficiary has done. This seems to take the fraud rule a very long way indeed from its purpose.75

While the Iranian cases were extreme cases arising from extreme circumstances, the sudden change of attitude by the US courts shocked the letter of credit world and prompted commentators to ask whether the post-hostage decisions were really “influenced by the widespread sentiment that Iran should be punished”.76 Whatever the answer, the Iranian cases made abundantly plain that the fraud rule needed urgent improvement by the provision of a proper definition or standard of fraud.

Revised UCC Article 5 Position

Observations and Recommendations of the Task Force

Before the revision of UCC Article 5 was commenced, a Task Force was formed to study the previous case law and make recommendations for the revision. With respect to the standard of fraud implemented in the US courts when applying the fraud rule, the Task Force made the following observations:

1. The reported cases indicate general agreement that the defense of fraud in the transaction must be based on serious conduct that “has so vitiated the entire transaction that the legitimate purposes of the independence of the issuer’s obligations would no longer be served.”77

2. The reported cases differ, in rhetoric if not result, as to whether fraud in transaction refers to “egregious fraud” or “intentional fraud” or involves application of a flexible fraud standard … Most of the cases favoring a flexible standard have nonetheless been supported by a showing of serious misconduct equivalent to the shipment of rubbish.78

3. The “fraud-in-the-transaction” defense has generally been construed to require proof of an active intent and proof of no colorable or plausible basis under the underlying contract for the beneficiary to call the credit.79

The Task Force further observed that “[n]ot every instance of misconduct by the beneficiary should interrupt or excuse honor of a letter of credit. Ordinary contracts disputes must be settled by the beneficiary and applicant between themselves and entirely apart from the credit obligation”.80 It agreed with the position taken by the court of Emery-Waterhouse: “letter of credit fraud — i.e., conduct warranting judicial interference — is not the same as common law fraud.”81 However, the Task Force stated that “[h]ow to formulate the requisite fraud standard is not easy”,82 because there is a “grey area of misconduct which is wrongful but not so serious as to justify interruption”83 of the normal operation of the letter of credit. The Task Force pointed out:

Because of the serious possibility of confusion of letter of credit fraud with common law fraud and other types of fraud as well as the critical importance of a narrowly gauged standard, the Task Force believes that an attempt must be made to alert parties and courts that not just any fraud will suffice.84

The Task Force finally recommended that a different standard should apply for commercial letters of credit as opposed to standbys. 85 For commercial letters of credit, the focus should be whether “the purpose of the underlying transaction must be rendered virtually without value”.86 For standby letters of credit, the question should be “whether the drawing has occurred with no colorable basis whatsoever”.87

The Position in the Statute

The Drafting Committee, after deliberating upon the Task Force’s recommendations and holding extensive discussion and consultation, set forth a standard of fraud in the law of letters of credit in Revised UCC Article 5. Revised UCC Article 5, s 5-109, reads:

1. If … a required document is forged or materially fraudulent, or honor of the presentation would facilitate a material fraud by the beneficiary on the issuer or applicant: … the issuer, acting in good faith, may honor or dishonor the presentation….

2. If an applicant claims that a required document is forged or materially fraudulent or that honor of the presentation would facilitate a material fraud by the beneficiary on the issuer or applicant, a court of competent jurisdiction may temporarily or permanently enjoin the issuer from honoring a presentation or grant similar relief against the issuer or other persons.88

Revised UCC Article 5 has adopted “material fraud” as the standard of fraud under the fraud rule. While the Article itself does not define “material fraud”, 89 Official Comment on s 5-109 has made some efforts to explain it. For commercial letters of credit, it has indicated that material fraud “requires that the fraudulent aspect of a document be material to a purchaser of that document or that the fraudulent act be significant to the participants in the underlying transaction”.90 An example has been provided to illustrate the point:

Assume … the beneficiary has a contract to delivery 1,000 barrels of salad oil. Knowing that it has delivered only 998, the beneficiary nevertheless submits an invoice for 1,000 barrels. If two barrels in a 1,000 barrel shipment would be an insubstantial and immaterial breach of the underlying contract, the beneficiary’s act, though possibly fraudulent, is not materially so and would not justify an injunction. Conversely, the knowing submission of those invoices upon delivery of only five barrels would justify an injunction.91

For standby letters of credit, the Official Comment states that “[m]aterial fraud by the beneficiary occurs only when the beneficiary has no colorable right to expect honor and where there is no basis in fact to support such a right to honor”.92 For further illustration, it has quoted the following passage from Ground Air Transfer v. Westate’s Airlines:

We have said throughout that courts may not “normally” issue an injunction because of an important exception to the general “no injunction” rule. The exception, as we also explained in Itek, 730 F.2d at 24-25, concerns “fraud” so serious as to make it obviously pointless and unjust to permit the beneficiary to obtain the money. Where the circumstances “plainly” show that the underlying contract forbids the beneficiary to call a letter of credit, Itek, 730 F.2d at 24; where they show that the contract deprives the beneficiary of even a “colorable” right to do so, id., at 25; where the contract and circumstances reveal that the beneficiary’s demand for payment has “absolutely no basis in fact,” id.; Dynamics Corp. of America, 356 F Supp. at 999; where the beneficiary’s conduct has “so vitiated the entire transaction that the legitimate purposes of the independence of the issuer’s obligation would no longer be served,” Itek, 730 F.2d at 25 (quoting Roman Ceramics Corp. v. Peoples National Bank, 714 F.2d 1207, 1212 n. 12, 1215 (3d Cir. 1983) (quoting Intraworld Indus., 336 A 2d at 324-25); then a court may enjoin payment. 93

Neither s 5-109 nor its Official Comment suggests that the beneficiary’s intention to defraud should be proved, so it seems that “material fraud” under Revised UCC Article 5 looks “more to the severity of the effect of the fraud on the transaction rather than the state of mind of the beneficiary”.94 The thrust of Revised UCC Article 5 is very encouraging. Section 5-109 of the Article has not only laid down a standard of fraud in the law of letters of credit, but also set forth a standard of “a unique kind of fraud” — “letter of credit fraud”,95 a standard specially designed to fight fraud in that mercantile specialty, the letter of credit. In so doing, Revised UCC Article 5 has accepted the Task Force’s recommendations and has endorsed the approach espoused in the case of Emery-Waterhouse.

However, one aspect of the Official Comment is not entirely satisfactory: the example provided for the illustration of the meaning of the standard of fraud for standby letter of credit cases is not as typical as it might be. In the example, Ground Air Transfer v. Westates Airlines,96 Westates provided Charter One with planes and crew services for charter flights and Charter One arranged for a standby letter of credit to guarantee that Westates would not suffer harm should Charter One fail to carry out its contractual obligations. It was agreed that a copy of a ten day default notice would be provided if the letter of credit was to be called.

When a dispute arose and each party claimed that the other had broken the contract, Charter One reacted by withholding certain fees and, anticipating Westates’ draw on the letter of credit, sought a preliminary injunction to enjoin Westates’ obtaining payment under the credit. An injunction was issued by the trial court on the basis that the beneficiary would not be likely to win the underlying contract dispute with the applicant.97 But the decision was reversed by the First Circuit, because

Westates, the beneficiary, can truthfully say that it satisfied the letter of credit’s express conditions; it mailed a ten day notice to Charter One …. More importantly, since Westates has at least a “colorable” claim that it acted lawfully under the contract in doing so, Westates’ call would not fall within the traditional exception for forgery or fraud.98

Reading the facts, Ground Air Transfer was a typical case of a dispute over a simple contract, involving a possible call on a letter of credit. There was no fraud at all in the case, let alone “material fraud”. A typical example providing guidance for the understanding of “material” fraud should be one in which fraud is not only involved but also “material”.

Case Studies

Although the revision of Article 5 of the UCC was completed seven years ago, Revised UCC Article 5 has already been adopted by nearly all the States in the US, and was first applied by US courts as early as September 1997. Nonetheless, the standard of fraud set out in s 5-109 of the Article has not often been tested.99

In Western Surety Co v. Bank of Southern Oregon,100 Western Surety Company (WSC) issued performance bonds on behalf of Black Oak Construction Company (BOC) for work BOC was performing in the State of Washington. WSC also issued performance bonds for work BOC was performing in Oregon. To counter-guarantee the performance bonds, the defendant, the Bank of Southern Oregon (the Bank), opened two letters of credit in favour of WSC. The two letters of credit were essentially identical except for the serial number, the issuing date, the expiration date and the aggregate amount. When BOC defaulted on its project in Washington and the performance bonds were called, WSC presented the Bank with drafts under the letter of credit for payment. The Bank dishonoured on the basis that it believed one of the letters of credit was issued for the project in Oregon and had nothing to do with the project in Washington.

WSC brought suit against the Bank for wrongful dishonour. Because the Bank could not prove that the letter of credit was limited to a specific job, the court ruled for the plaintiff by applying the standard of “material fraud” set forth in Revised UCC Article 5, s 5-109, stating:

The relevant Oregon statute provides that an issuing bank, acting in good faith, may dishonor a draft on a letter of credit, if the presentation of the draft would facilitate a material fraud by the beneficiary.

… However, fraud, as an affirmative defense to the obligation under a letter of credit is to be narrowly construed. … Fraud is not a viable defense if the beneficiary has even a colorable claim or any basis in fact to funds from the letter of credit.101

By so ruling, although the Court claimed it was applying the standard of “material fraud” embodied in s 5-109, its position was similar to that adopted in cases of “egregious” fraud considered above.

In New Orleans Brass v. Whitney National Bank and the Louisiana Stadium and Exposition District,102 New Orleans Brass (Brass) applied for a standby letter of credit with the Whitney Bank in favour of the Louisiana Stadium and Exposition District (LSED) as a guarantee for rental payments. A dispute arose about the rental payments and LSED presented documents under the letter of credit. Brass sought an injunction to prevent the honouring of the letter of credit on the basis that the documents submitted contained false representations, and drawing on the letter of credit would cause irreparable injury, but its request was denied.

On appeal, the decision was affirmed by the Fourth Circuit because no “material fraud” as defined in Revised UCC Article 5, s 5-109, was found in the case. In reaching its conclusion, the Court applied the standard of “material fraud” set forth in Revised UCC Article 5, s 5-109, particularly as elaborated in the Official Comment, and cited the whole paragraph of Ground Air Transfer quoted above to the effect that the fraud rule can only be invoked when the demand for payment has “absolutely no basis in fact” or the beneficiary’s conduct has “so vitiated the entire transaction that the legitimate purposes of the independence of the issuer’s obligation would no longer be served”.103 By so ruling, the Court was taking a similar position to that taken in Western Surety, an approach closely resembling that in the “egregious” fraud cases.

In Mid-America Tire v. PTZ Trading Ltd Import and Export Agents,104 the dispute arose out of extensive negotiations for the purchase of Michelin tyres by Mid-America Tire (MAT) and Jenco from PTZ Trading Ltd (PTZ) through agents of PTZ, financed by a letter of credit. Throughout negotiations, PTZ’s agents made specific representations to the buyers as to the quantity, quality and price of the tyres. When the agreement was made, the quantity, quality and price of the tyres all failed to match what had been promised. The buyers sought an injunction to prevent honour and payment of the letter of credit. The trial court granted the injunction on the basis that the sellers’ agents had made material misrepresentations to the buyers.

However, the decision was reversed by the majority judgement on appeal. The appellate court first asked: “how should ‘material fraud’ … be interpreted”?105 After lengthy discussions, it answered that it “must be narrowly limited to situations of fraud in which the wrongdoing of the beneficiary has … vitiated the entire transaction” 106 and/or the demand for payment under the letter of credit “has absolutely no basis in fact”,107 taking exactly the same approach to the standard of fraud as adopted in the case of New Orleans.

However, Valen J disagreed with the majority view and stated;

By committing fraud, it is my opinion that PTZ violated its obligations of “good faith, diligence, reasonableness, and care” … [I]f the beneficiary, PTZ, fails to act in good faith in its dealings and perpetrates a fraud upon the applicant, MAT, the letter of credit may be enjoined.”108

By regarding the beneficiary’s violation of its obligation of “good faith, diligence, reasonableness and care” as the commitment of “material fraud”, Valen J seems, with respect, to have inadequately advocated “an overly broad fraud exception … material fraud under revised U.C.C. section 5-109 is explained in the official comments, and nowhere is that concept equated with the concept of ‘good faith’”.109

This short survey of cases reveals that the US courts in applying the standard of “material fraud” embodied in Revised UCC Article 5 appear to have generally taken a similar approach to the “egregious” fraud cases mentioned above. They have taken the position that the fraud rule may only be applied in limited situations where the demand for payment under the letter of credit “has absolutely no basis in fact”. This is “an unduly narrow” approach.110 However, it is more disturbing to find that some judges have interpreted the standard of “material fraud” as equivalent to a violation of the obligation of

“good faith, diligence, reasonableness, and care

”. This is close to the standard of “constructive fraud” mentioned above, and utterly inappropriate. This indicates that divergent views as to the standard of fraud may still appear in future in the US although a uniform and appropriate standard of “material fraud” has been set forth in Revised UCC Article 5, s 5-109.

The Position in the United Kingdom (English Law)

As in many jurisdictions, the fraud rule in the law of letters of credit is recognised in English law. However, there are no statutory provisions in respect of the fraud rule in the United Kingdom as in the United States, it is merely embodied in the English common law. The leading English case on the fraud rule is United City Merchants (Investments) Ltd v Royal Bank of Canada, 111 where Lord Diplock stated:

To this general statement of principle [of independence], … there is one 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 fact that to his knowledge are untrue. Although there does not appear among English authorities any case in which this exception has been applied, it is well established in the American cases of which the leading or “landmark” is Sztejn v J Henry Schroder Banking Corp (1941) 31 N.Y.S. 2d 631.112

This statement may be said as the concise summary of the fraud rule in English law, so it has been cited in almost all English letter of credit fraud cases ever since. It has shown that the fraud rule is recognised in England, and that Sztejn is also the “foundation stone of English law in this area”.113

Although the fraud rule has been recognised in England, English courts have been reluctant to interfere with the operation of a letter of credit. The reason has been explained by the well-known statement of Jenkins LJ of the Court of Appeal in the case of Hamzeh Malas & Sons v British Imex Industriers Ltd:114

[I]t seems to be plain enough that the opening of a confirmed letter of credit constitutes a bargain between the banker and the vendor of the goods, which imposes upon the banker an absolute obligation to pay, irrespective of any dispute there may be between the parties as to whether the goods are up to contract or not. An elaborate commercial system has been built up on the footing that bankers’ confirmed credits are of that character, and, in my judgment, it would be wrong for this court in the present case to interfere with that established practice. … That system … would break down completely if a dispute as between the vendor and the purchaser was to have the effect of “freezing,” if I may use that expression, the sum in respect of which the letter of credit was opened.115

Because English courts have normally taken this non-interference approach, it is necessary to mention some of the other issues affecting the application of the fraud rule before considering the standard of fraud. They are: (1) the standard of proof; and (2) the requirement of beneficiary fraud.

The Standard of Proof

Sticking to the general non-interference approach towards the operation of letters of credit, English courts have set up a very high standard of proof in the application of the fraud rule, requiring claimants to prove that fraud has clearly been committed in the transaction. In R D Harbottle (Mercantile) Ltd v Nat Westminister Bank Ltd, Kerr J stated: 116

Except possibly in clear cases of fraud of which the banks have notice, courts will leave the merchants to settle their disputes under the contracts by litigation or arbitration as available to them or stipulated in the contracts. … Otherwise, trust in international commerce could be irreparably damaged.117

The difficulty of meeting this standard of proof is well demonstrated by the case of Discount Records Ltd v Barclays Bank Ltd,118 where the plaintiff, an English buyer, contracted with a French company, Promodisc, to buy 8,625 discs and 825 cassettes. The buyer instructed the defendant to issue a documentary credit in favour of the seller. The seller shipped goods purporting to be those ordered and presented the draft with documents regular on their face to the confirming bank in Paris, which the bank accepted. When the goods arrived, the buyer inspected the goods in the presence of a representative of the issuer. The inspection revealed that “there were 94 cartons, but of these two were empty, five were filled with rubbish or packing, twenty-five of the records boxes and three of the cassette boxes were only partly filled, and two boxes labelled as cassettes were filled with records; instead of 825 cassettes, as ordered, there were only 518 cassettes and 25 cartridges … Out of the 518 cassettes delivered, 75 percent were not as ordered … out of the 8625 records ordered, only 275 were delivered as per order. The rest were not as ordered and were either rejects or unsaleable”. 119

Relying upon Sztejn, the buyer attempted to enjoin the issuer from honouring the seller’s drafts drawn upon the letter of credit, alleging that the seller was guilty of fraud. Megarry J of the Chancery Division rejected the buyer’s claim, distinguished the case from Sztejn and said:

[I]t is important to notice that in the Sztejn case the proceedings consisted of a motion to dismiss the formal complaint on the ground that it disclosed no cause of action. That being so, the court had to assume that the facts stated in the complaint were true. The complaint alleged fraud, and so the court was dealing with a case of established fraud. In the present case there is, of course, no established fraud, but merely an allegation of fraud. The defendants, who were not concerned with that matter, have understandably adduced no evidence on the issue of fraud. Indeed, it seems unlikely that any action to which Promodisc was not a party would contain the evidence required to resolve this issue. Accordingly, the matter has to be dealt with on the footing that this is a case in which fraud is alleged but has not been established.120

In Discount Records, the buyer obtained its evidence in the presence of a third party, the issuer, showing that a great proportion of the shipment was either rubbish or empty cartons, but it was striking to hear the court to say that there was “no established fraud, but merely an allegation of fraud”. In a case as such the plaintiff is regarded as having only produced “mere allegation of fraud”, it is not difficult to imagine how hard it is to establish fraud in English courts in a letter of credit fraud case.

Reqirement of Beneficiary Fraud

Under English law, beneficiary’s involvement or knowledge of fraud is required when applying the fraud rule. In other words, even if fraud is involved the transaction, the fraud rule cannot be applied if the fraud has been committed by somebody other than the beneficiary. This has been illustrated by the cases of United City Merchants (Investments) Ltd v Royal Bank of Canada121 and Montrod Ltd v Grundkotter Fleischvertriebs GmbH.122 As the facts of the cases are novel and the issues involved are significant to the development of the fraud rule, both of them deserve detailed treatment.

The Case of United City Merchants

United City Merchants is famous for its novel facts and its reasoning for third party fraud.123 In this case, Glass Fibres and Equipment Ltd (GFE), an English company, entered into a contract selling glass fibre making equipment to a Peruvian company named Vitrorefuerzos SA (Vitro). Payment was to be made by an irrevocable letter of credit issued by the Banco Continental SA of Peru and confirmed by the Royal Bank of Canada (RBC). GFE assigned their rights, entitlements and benefits under the letter of credit to United City Merchants (UCM). Shipment was to be from London to Callao on or before December 15, 1976. On completion of the equipment, GFE sent it to their forwarding agents, and told the forwarding agents, who in turn told a Baker, an employee of the loading brokers, the details of the requirements for the bills of lading, including the latest shipment date. The goods were nevertheless shipped on December 16, not on December 15 as required, which was discovered by RBC. When the documents were presented, they were rejected.

The plaintiffs sued for wrongful dishonour. The defendants contended that the presentation was fraudulent in that the goods were not loaded on December 15. Mocatta J of the Queen’s Bench Division found that “Mr Baker was not the plaintiffs’ agent for making out the bills of lading and that there was no fraud on the part of the plaintiffs in presenting them

”,124 relied on the principle of ex turpi causa non oritur actio, rejected the defendants’ propositions and concluded:

Where there has been personal fraud or unscrupulous conduct by the seller presenting documents under the letter of credit, it is right that a bank should be entitled to refuse payment against apparently conforming documents on the principle ex turpi causa non oritur actio. But here I have held that there was no fraud on the part of the plaintiffs, nor can I, as a matter of fact, find that they knew the date on the bills of lading to be false when they presented the documents. … Accordingly, I take the view … that the plaintiffs are … entitled to succeed. 125

The trial court’s decision was reversed on appeal. The Court of Appeal reasoned that the applicant’s mandate to the bank was only to pay against genuine documents, forged documents were not conforming and valid, and that the fact that the fraud had been committed by a third party other than the beneficiary could not prevent the bank from raising the defence of fraud against the beneficiary, therefore that the bank would be justified in refusing to pay against forged documents. Ackner LJ stated:

[T]he buyer, unless otherwise agreed, cannot be deemed to have authorised the banker to pay against documents which are known to be forged. If the documents are forged, then obviously they are not valid. The buyer’s instructions to the banker must be construed as requiring the acceptance of valid documents only….

It is the character of the document, not its origin, that must decide whether or not it is a “conforming” document, that is a document which complies with the terms of the credit. …[I]f I am correct in my view that it is the character of the document that decides whether it is a conforming document and not its origin, then it must follow that if the bank knows that a bill of lading has been fraudulently completed by a third party, it must treat that as a nonconforming document in the same way as if it knew the seller was party to the fraud.126

The Court of Appeal also considered the issues of risk allocation between innocent parties and the bank’s security interest resulting from the fraud by a third party. As for the former, Stephenson LJ observed:

Banks trust beneficiaries to present honest documents; if beneficiaries go to others (as they have to) for documents they present, it is important to all concerned that those documents should accord, not merely with the requirements of the credit but with the facts, and if they do not because of the intention of anyone concerned with them to deceive, I see good reason for the choice between two innocent parties putting the loss upon the beneficiary, not the bank or its customer.127

As for the latter, Ackner LJ stated:

A banker cannot be compelled to honour a credit unless all the conditions precedent have been performed, and he ought not to be under an obligation to accept or pay against documents which he knows to be waste paper. To hold otherwise would be to deprive the banker of that security for his advances, which is a cardinal feature of the process of financing carried out by means of the credit.128

Further, the Court of Appeal, based on the principle of strict compliance, took the view that the decision of Mocatta J had put the bank in a curious position by saying:

The latest date for shipment of the machinery was December 15, 1976. The machinery was in fact shipped on December 16, 1976, and if the bill of lading had shown that date the bank would have refused to pay upon presentation of the documents because of the strict rule that the documents must comply in every respect with the terms of the letter of credit … [I]t would be a strange rule that required a bank to refuse payment if the document correctly showed the date of shipment as December 16, yet obliged the bank to make payment if it knew the document falsely showed the date of shipment as December 15 and that the true date was December 16.129

The House of Lords overruled the decision of the Court of Appeal and restored that of Mocatta J. First, relying also upon the doctrine of ex turpi causa non oritur actio as the basis for the application of the fraud rule, Lord Diplock, who delivered the judgement of the Court,130 held that the fraud rule was not applicable in the case because the fraud was committed by a third party without the knowledge of the beneficiary by stating:

The instant case, however, does not fall within the fraud exception. Mocatta J. found the sellers to have been unaware of the inaccuracy of Mr. Baker’s notation of the date at which the goods were actually on board American Accord. They believed that it was true and that the goods had actually been loaded on or before December 15, 1976, as required by the documentary credit …

[The] proposition which does not call for knowledge on the part of the seller/beneficiary of the existence of any inaccuracy would embrace the fraud exception and render it superfluous.131

Then, Lord Diplock rejected RBC’s argument that a confirming bank was legally not obliged to pay to the beneficiary of a letter of credit against the presentation of documents, although conforming on their face with the terms of the credit, containing some statement of material fact that was not accurate, on the basis that under the provisions of the UCP the bank was obliged to pay the beneficiary when the documents tendered were on their face conforming to the terms of the credit, saying:

It has … never been disputed that as between confirming bank and issuing bank and as between issuing bank and the buyer the contractual duty of each bank under a confirmed irrevocable credit is to examine with reasonable care all documents presented in order to ascertain that they appear on their face to be in accordance with the terms and conditions of the credit, and, if they do so appear, to pay to the seller/beneficiary by whom the documents have been presented the sum stipulated by the credit, or to accept or negotiate without recourse to drawer drafts drawn by the seller/beneficiary if credit so provides. It is so stated in the latest edition of the Uniform Customs…. 132

Finally, Lord Diplock denied the Court of Appeal’s ruling that the bank was entitled to refuse to pay against forged documents regardless of the identity of the fraudster, and observed that the pre-dated bill of lading in the case was not a nullity, saying:

The Court of Appeal reached their half-way house in the instant case by starting from the premiss that a confirming bank could refuse to pay against a document that it knew to be forged, even though the seller/beneficiary had no knowledge of that fact. From this premiss they reasoned that if forgery by a third party relieves the confirming bank of liability to pay the seller/beneficiary, fraud by a third party ought to have the same consequence.

I would not wish to be taken as accepting that the premiss as to forged documents is correct, even where the fact that the document is forged deprives it of all legal effect and makes it a nullity, and so worthless to the confirming bank as security for its advances to the buyer. … I would prefer to leave open the question of the rights of an innocent seller/beneficiary against the confirming bank when a document presented by him is a nullity because unknown to him it was forged by some third party; for that question does not arise in the instant case. The bill of lading with the wrong date of loading placed on it by the carrier ‘s agent was far from being a nullity. It was a valid transferable receipt for the goods giving the holder a right to claim them at their destination, Callao, and was evidence of the terms of the contract under which they were being carried.133

Viewed in term of legal principle and commercial policy, it is, with respect, submitted that the judgment of the Court of Appeal is more convincing134 and that those of Mocatta J and the House of Lords are hard to accept for the following reasons.

First of all, the UCP provides that, in a letter of credit transaction, “all parties concerned deal with documents, and not with goods, services and/or performances to which the documents may relate”,135 and that the bank is entitled to honour its obligation when documents presented are facially conforming. It is designed to protect the bank and stops it from opening the door to scrutinise the underlying transaction, which is not within the scope of its normal business.136 However, it is not to say that the bank is obliged to pay the beneficiary or the presenter even if it knows that the documents are not telling the fact of the truth, eg, the tendered documents have been forged. Because documents are the sole concern for everybody in a letter of credit transaction, the required quality for them must be high. Documents must not only facially conforming with the terms of the credit but also be genuine and valid and reflect the true facts. The genuineness of the documents is the foundation of the success of letters of credit.137 If the documents tendered are forged or fraudulent, they are not conforming with the credit under the law of letter of credit albeit facially in compliance with the terms of the credit. It is the nature of the documents, not the identity of the fraudulent party, which matters: the fraud rule applies if the documents presented are forged or fraudulent.

This view is supported by the provisions of the UCC and the UN Convention. Under Prior UCC Article 5, s 5-114(2), the fraud rule would be applicable when “a required document is forged or fraudulent or there is fraud in the transaction” regardless of the identity of fraudulent party. Revised UCC Article 5, s 5-109, now contains a similar provision.138 Article 19(a) of the UN Convention provides that the fraud rule can be invoked if it is “manifest and clear” that “any document is not genuine or has been falsified”. That is to say, the UN Convention is also mainly concerned with the nature of the documents, not the identity of the party perpetrating the fraud.139

It is also supported by many cases both in and outside the United Kingdom. For example, in Edward Owen Engineering Ltd v Barclays Bank Int Ltd,140 Lord Denning MR said that “the bank ought not to pay under the credit if it knows the documents are forged or that the request for payment is made fraudulently in circumstances when there is no right to payment”.141 In Etablissment Esefka International Anstall v Central Bank of Nigeria,142 it was stated that:

The documents ought to be correct and valid in respect of each parcel. If that condition is broken by forged or fraudulent documents being presented — in respect of any parcel — the defendants [the bank] have a defence in point of law against being liable in respect of that parcel.143

In Old Colony Trust Co v Lawyers’ Title and Bank Trust Co,144 the Second Circuit upheld a bank’s refusal to honour a fraudulent warehouse receipt on the basis that “when the issuer of a letter of credit knows that a document, although correct in form, is, in point of fact, false or illegal, he cannot be called upon to recognise such a document as complying with the terms of a letter of credit”.145 In Sztejn, the Court stated that “the application of this doctrine [the principle of independence] presupposes that the documents accompanying the draft are genuine and conform in terms to the requirements of the letter of credit”.146

Secondly, the nature of the letter of credit transaction requires that the documents tendered must be genuine. The letter of credit is designed and developed to facilitate the underlying transaction between the applicant and the beneficiary. The documents required under the letter of credit transaction perform particular functions. In a commercial letter of credit transaction, for example, normally a commercial invoice and a set of bills of lading are required. The commercial invoice is the statement by the beneficiary of the goods shipped. The bill of lading represents the carrier’s receipt for what has been received for shipment and serves as the document of title to the shipment as well. When the applicant asks the issuer to issue the letter of credit and pay the beneficiary in exchange for the documents, it expects that the documents will be those evidencing the performance by the beneficiary of its obligations under the underlying contract. For the issuer’s part, it normally takes the documents as security when the letter of credit is issued and paid. In order to perform these functions, the central requirement for the documents is that they are genuine, evidencing the truth of the fact. Only genuine documents can meet the bargain of the parties and be accepted by bankers and applicants, whose interests otherwise will not properly be protected. Trusting that genuine documents will be tendered, the applicant authorises the issuer to pay the beneficiary, and the issuer agrees to pay the beneficiary when facially conforming documents are received; applicant and issuer agree to use the letter of credit scheme and not to go behind the documents. If documents cannot be taken to mean what they say, the commercial foundation of letters of credit will vanish.147 Although it is not explicitly stated in every letter of credit that the documents should be genuine, it is logically recognised that there is an implied warranty by the beneficiary or the presenter that documents tendered are genuine.148

Thirdly, the principle of strict compliance in the law of letters of credit requires that documents tendered for payment must be in strict compliance with the terms of the credit. “Even a minor deviation from the terms of the credit having no commercial significance disentitles the beneficiary to payment except where it falls within the limits of tolerance provided by the UCP as incorporated in the credit”.149 If the letter of credit specifies, for example, that the bill of lading must evidence shipment on or before December 15, but the bill of lading tendered shows that the goods are shipped on December 16, the bank is bound to refuse to honour the letter of credit unless the discrepancy is waived, otherwise the buyer may refuse to reimburse it on the basis that the bank has not strictly obeyed its instructions. In United City Merchants, if the bills of lading had not been fraudulently antedated or the beneficiaries had tendered one bearing the true date of loading, the bank could have simply refused to honour their presentation, citing the principle of strict compliance, and the beneficiaries would not even have had a case to argue.150 Once the documents had been fraudulently antedated, the beneficiaries could come to the court and win the case, which has prompted commentators to cry:

It is disturbing that whilst a document stating the true loading date could have been rejected by the bank in the light of the doctrine of strict compliance, a document in which the loading date was fraudulently misrepresented by its maker constituted a valid tender in the beneficiary’s hands.151

Fourthly, letters of credit are instruments employed by contractual parties to reduce and allocate their risks in the underlying transaction. Genuine and valid documents are bargained for by the applicant and the issuer, who are expected to take risks in the normal course of business, but should not legally be required to take the risk of accepting falsified documents. The beneficiary “himself has a duty to tender documents which are in order, and that fact that he acted in good faith in tendering forged documents is thus irrelevant”.152 The state of mind of the beneficiary should not affect the issue.153 However, “[t]his fundamental point appears to have been overlooked by Mocatta J [and later by the House of Lords] in The American Accord when he held that the beneficiary was entitled to collect payment despite the insertion of a fraudulent shipping date on the bill of lading, since the fraud had been committed by the loading broker who was the agent of the carrier, not the seller/beneficiary.”154

Commercial policy justifies placing the risk of loss as a result of third party fraud on the beneficiary. The decision in United City Merchants was based on the theory that the fraud was committed by a third party without the knowledge of the beneficiaries: the beneficiaries were innocent. However, in the case, all the parties directly involved in the letter of credit transaction — the applicants, the beneficiaries and the banks — were innocent; only Mr Baker was guilty of fraud. Under such circumstances, who should suffer the resulting loss? Although contractual relationships with the loading agents were not discussed in the case, the facts indicate that the beneficiaries had a closer relationship with them than the banks or the applicants. In such circumstances, it is the beneficiaries “who put [the loading broker] in the position in which he made the bill, and made it fraudulently, and … it is they … who should pay”.155

Viewed from the pubic policy for the control of fraud, third party fraud also ought to be within the scope of the fraud rule and the beneficiary ought to be the party bearing any loss resulting from third party fraud. A rule of this kind would provide an incentive for the beneficiary, who normally receives documents from third parties and then submits them for payment, to exercise more diligence over them. The alternative view makes the beneficiary’s fraud easier to conceal as the beneficiary may well claim the fraud was perpetrated by a third party other than itself. Not surprisingly, as a result of the decision of the House of Lords, it has been commented:

English law … appears to protect shrewd sellers who utilise the services of third parties discreet enough to keep their fraudulent practices to themselves. The law in effect encourages sellers not to inquire into the details of the activities of third parties involved in their transactions so long as the bills of lading appear valid, for any knowledge of wrongdoing would jeopardise the sellers’ chances of being paid. A bank which receives firm evidence external to the documents of fraud by a third party does not even have the option of refusing to honour a credit governed by English law as stated in the American Accord.156

This is obviously not an ideal result. It will and has already led English courts in the wrong direction. The recent case of Montrod Ltd v Grundkotter Fleischvertriebs GmbH157 is an example.

The Case of Montrod

The facts of the case are novel. In Montrod, Grundkötter Fleischvertriebs GmbH (GK), a German company, and Ballaris, a Russian company, entered into a contract for the sales of frozen pork. Payment was to be made by a letter of credit issued by Standard Chartered Bank in London (SCB) in favour of GK through the advice of its German bank, Commerzbank, at the request of Fibi Bank (FB), which in turn was acting on the instructions of Montrod, a finance and investment company providing letters of credit to others in international trade. The credit, which named Montrod as the applicant, was subject to UCP 500 and payable 45 days after sight on presentation of specified documents, including inspection certificates signed by Montrod.

Montrod was not the buyer in the underlying contract as in most letter of credit transactions. It had no contact at all with Ballaris, the buyer, nor with GK, the seller. It was approached to provide the credit through an entity in Singapore. In the course of negotiations, GK dealt with Ballaris on the basis that Ballaris could speak on behalf of Montrod, and it was led to understand that one of its employees, Mr Wieler, should sign the inspection certificates on behalf of Montrod. However, unknown to GK, Ballaris were in fact not entitled to speak for Montrod as to the contents of the credit. Montrod required the signed certificates as a “locking clause” to ensure that, by withholding its signature, that the credit would not be operable until it had been put in funds by Ballaris.

GK despatched the goods by means of 20 lorry shipments to Ballaris and the inspection certificates for each truck load were signed by Mr Wieler on behalf of Montrod. By 22 March 2000 six sets of documents were presented to SCB and FB and accepted. On 27 March 2000, however, Montrod informed FB that the certificates of inspection were not issued by it and no payment was to be executed. On the same day FB informed SCB that the certificates of inspection presented were forgeries. By 6 April 2000, SCB received another fourteen sets of documents, which were accepted as conforming on their face to the terms of the credit.

On 11 April 2000, Montrod applied in the High Court for: (1) a declaration that no valid certificates of inspection had been issued by Montrod capable of satisfying requirements of the credit; and (2) an injunction restraining FB and SCB from making payment under the credit. But its claims were dismissed on 19 April 2000 by Judge Steele, who found that, upon the evidence before him, Montrod failed to establish a case of fraud on the part of GK, or of notice of such fraud on the part of SCB, while acknowledging the right of Montrod to renew the application before a commercial judge if and when further evidence became available.

On 7 June SCB made payment in the light of the failure of Montrod’s application before Judge Steel and the absence of any renewed application upon the basis of such further evidence which had become available. SCB sought reimbursement from FB, and FB sought summary judgment against Montrod if it were to be found liable to SCB. So when the case was before Judge Raymond Jack of the Queen’s Bench Division,158 the beneficiary had already been paid, the issuer, SCB, was out of money, and the buyer, Ballaris had disappeared.

The action was based on the following two grounds: (1) fraud by GK was clear to SCB when it made payment; and (2) the inspection certificates purporting to be signed with the authority of Montrod were nullities and non-conforming. But both of them were rejected. As to the first argument, Judge Jack found that the inspection certificates had been signed without Montrod’s authority but that GK had not been fraudulent, saying:

I am satisfied for reasons to which I will come that Grundkotter did not know at least until Montrod had served the witness statement of Mr Hoory dated 10 April 2000 that it had no authority from Montrod to sign the inspection certificates on Montrod’s behalf. Grundkotter had believed that it had that authority. Until then it had no knowledge of the actions and intentions of Montrod other than as appeared from the credit itself…. Grundkotter have not acted dishonestly. …

It follows that Montrod and Fibi Bank have fallen far short of establishing that there was clear evidence of fraud before Standard Chartered either when the documents were presented or when it paid. Subject to the nullity argument, Standard Chartered is therefore entitled to be reimbursed by Fibi Bank.159

As to the second point, Judge Jack found that the so-called “nullity exception” was not an exception recognised by English law to stop payment of a letter of credit when documents presented are conforming “on their face” with the terms of the credit. After citing the full passage of Lord Diplock in the case of United City Merchants as quoted above,160 he stated:

This is very slender support for the submission that there exists in parallel with the fraud exception a second exception covering documents which are nullities to the knowledge of the bank at time of payment though the beneficiary is innocent of any deception. There is, in my view, no other support that has been found in the reported cases.161

He further cited a number of articles of UCP 500 and observed that such an exception was not supported by the terms of the UCP by saying:

The one established exception is the fraud exception. So the comparison between the Articles cannot support the argument of Fibi Bank and Montrod for a second exception limited to nullity.

In my judgment the “nullity exception” should and does form no part of English law. It is unsupported by authority. It provides a further complication where simplicity and clarity are needed. There are problems in defining when a document is a nullity. The exception could have unfortunate consequences in relation to the rights of third parties.162

On appeal, Judge Jack’s finding that GK was innocent of fraud was not challenged. The appeal was focused on the so-called “nullity exception”, but it was dismissed by the Court of Appeal. First, in the view of the Court, the documents presented in the case were on their face complying with the terms of the letter of credit, so the issuer was obliged to pay the beneficiary in accordance with the provisions of UCP 500. Following the consideration of several articles from the UCP, Potter LJ observed:

The combination of the autonomy principle and the rule that the banks concerned deal in documents and not in goods (arts 3 and 4), together with the issuing bank’s undertaking of payment if the stipulated documents presented conform with the terms of the credit (see art 9) plainly entitled GK as beneficiary to obtain, and obliged SCB as issuing bank to make, payment against the documents presented, provided that they complied “on their face” with the requirements of the credit (see arts 13a, 14a, 14b and 14c). It has not been, and plainly could not be, argued on this appeal that the documents presented and, in particular, the inspection certificates were other than compliant on their face with the requirements of the credit. Leaving aside for a moment the exception of fraud on the part of the beneficiary (which the judge held not to exist) the liability of SCB to make payment under the UCP 500 terms is clear.163

Then, after considering some English cases, in particular, the case of United City Merchants, the Court of Appeal rejected the argument that a document conforming on its face with the terms of the credit was none the less of a character which disentitled the person making the demand to payment because it was fraudulent in itself independently of the knowledge and bona fides of the demanding party. Potter LJ stated:

The fraud exception to the autonomy principle recognised in English law has hitherto been restricted to, and it is in my view desirable that it should remain based upon, the fraud or knowledge of fraud on the part of the beneficiary or other party seeking payment under and in accordance with the terms of the letter of credit. It should not be avoided or extended by the argument that a document presented, which conforms on its face with the terms of the letter of the credit, is none the less of a character which disentitles the person making the demand to payment because it is fraudulent in itself, independently of the knowledge and bona fides of the demanding party. In my view, that is the clear import of Lord Diplock’s observations … While he left open the position in relation to a forged document where the effect of the forgery was to render the document a “nullity”, there is nothing to suggest that he would have recognised any nullity exception as extending to a document which was not forged (ie fraudulently produced) but was signed by the creator in honest error as to his authority; nor do I consider that such an exception should be recognised.164

In Montrod, the focus was the so-called “nullity exception”, but the facts of the case have shown that fraud was involved in the case: the fraudster was Ballaris. As Ballaris was neither the applicant nor the beneficiary of the letter of credit, it was a third party who was outside the credit transaction. Therefore, similarly to United City Merchants, Montrod is a case of third party fraud. However, due to the result of United City Merchants, the claimants had to formulate their arguments in such a novel way.

Montrod is legally the progeny of United City Merchants, but it has further narrowed the chances for the application of the fraud rule in the United Kingdom. In United City Merchants, the document was forged by a fraudulent employee of the loading brokers without the knowledge of the beneficiary, while in Montrod the forged document was the work of the innocent beneficiary itself, who was led to misunderstand the true situation by a fraudulent buyer. The combined effect of the two cases seems to be that now in the United Kingdom if the beneficiary or the party demanding payment in good faith presents documents which are on their face in compliance with the terms of the letter of credit but a forgery, the fraud rule will not apply, even though the forgery has been produced by the beneficiary itself provided the beneficiary does not realise they are producing a document that is forged or otherwise materially misrepresents the true state of affairs.

Based on the facts of Montrod, the decisions by Judge Jack and the Court of Appeal are supportable on the ground that the fraud rule could not be applied in the case because payment had already been made on 6 June 2000, well before the decision was made by either Judge Jack or the Court of Appeal. The paying bank is entitled to reimbursement when the documents tendered are on their face in compliance with the terms of the letter of credit even though there are allegations that fraud has been involved in the transaction. When payment has already been made, the fraud rule or the party who has committed fraud is irrelevant to the bank’s claim for reimbursement. What cannot be supported is the basis on which Judge Jack and the Court of Appeal denied the claim or the appeal of the applicant for the “nullity” argument.

In order to protect banks from being entangled in disputes between the parties to the underlying transaction, the UCP entitles them to pay against facially conforming documents and “assume no liability or responsibility for the form, sufficiency, accuracy, genuineness, falsification or legal effect of any document … or for the good faith or acts or omissions, solvency, performance or standing of … any other person whomsoever”.165 But the notion that the UCP also entitles beneficiaries to payment by presenting documents that are on their face conforming to the letter of credit but are in fact forgeries is incorrect.166 If this becomes the prevailing view or the law of letters of credit, the commercial utility of the letter of credit will be in doubt. The Court of Appeal took the view that recognising the “nullity exception” or third party fraud would unfairly jeopardise the interest of the beneficiary, saying:

[T]here are sound policy reasons for not extending the law by creation of a general nullity exception…. [S]uch an exception would be likely to act unfairly upon beneficiaries participating in a chain of contracts in cases where their good faith is not in question. Such a development would thus undermine the system of financing international trade by means of documentary credits.167

However, allowing forged documents to trigger payment under a letter of credit poses “an equally serious potential threat to the commercial utility of letter of credit”.168 The prevalence of the letter of credit lies in the fact that it can provide a fair balance of competing interests among the parties involved. The normal operation of the letter of credit not only provides the beneficiary with safe and rapid access to the purchase price or a sum of money when the applicant defaults, but also provides the applicant with credit and/or other commercial benefits and protects the applicant against improper calls on the credit by requiring the beneficiary to present genuine documents indicating that it has properly performed its obligations under the underlying transaction. If forged or fraudulent documents are allowed to trigger payment, the balance assumed in the letter of credit scheme will be undermined. Like the success of any commercial vehicle, the popularity of the letter of credit is based on the faith of its users. As put by Professor Kozolchyk:

The certainty of payment of a letter of credit is crucial for those who, as beneficiaries, supply their goods or services to applicants. … Yet what about the applicant? To leave the applicant without a remedy against fraud would equally frustrate the applicant’s expectations of the letter of credit. After all, why should a good faith applicant agree to procure the issuance of a letter of credit and reimburse the issuing bank if the letter of credit becomes an automatic and unstoppable vehicle for the perpetration of fraud? As is true with other commercial legal situations, an approach that favours one party at the expense of the other undermines the viability of the institution.169

As already stated, whether the fraud rule will be applied or not depends upon the nature of the document tendered, not upon the identity of the fraudulent party. Documents tendered under a letter of credit should not only conform on their face with the terms of the credit but also should be genuine and mean what they should mean. If the documents tendered are forged or fraudulent, although they are on their face complying with the terms of the credit, the fraud rule should apply, no matter by whom and in what circumstances they are produced.

In Montrod, it is not clear from the reports whether Commerzbank had paid the beneficiary before presenting to SCB; if it had, the fraud rule could not be invoked at all in the case, even before the issuer paid Commerzbank or when the case was before Judge Steel. However, if Commerzbank had not paid the beneficiary or had not become a real negotiation bank, it is submitted that the fraud rule should have been applied or an injunction should have been issued by Judge Steel.

As in United City Merchants, commercial policy justifies placing the risk of loss as a result of third party fraud on the beneficiary in the instant case. In Montrod, all the parties directly involved in the letter of credit transaction — the applicants, the beneficiaries and the banks — were innocent; only Ballaris was guilty of fraud. Who should suffer the resulting loss? The applicant, Montrod, had no direct contact at all with Ballaris. It was the beneficiary, the seller, who had a contractual relationship with it. Therefore, it is the beneficiaries who put Ballaris in the position to make the error they did, and it is the beneficiaries who should therefore bear the loss.

Material Misrepresentation

All these cases have demonstrated that there are great difficulties in coming within the fraud exception to the autonomy of credits in the United Kingdom. When no fraud is found to have been committed in a transaction, there is no need for a court to consider the standard of fraud relating to the application of the fraud rule. Since there have been only a limited number of cases in which the fraud rule has been applied, the discussion of what kind of fraud can invoke the fraud rule has also appeared just in a few cases.

In the case of United City Merchants, when considering the issue of third party fraud and rejecting the defendants’ claim, Lord Diplock touched on the issue of standard of fraud. The passage has already quoted above, that is:

To this general statement of principle [of independence] as to the contractual obligations of the confirming bank to the seller, there is one 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 fact that to his knowledge are untrue.170

According to Lord Diplock, material misrepresentation is the kind of fraud that can invoke the fraud rule under the English law. Jack, writing as a scholar rather than a judge, has interpreted material misrepresentation as follows. The word misrepresentation “is very close to a statement of the elements of fraudulent misrepresentation which constitute the tort of deceit”.171 The tort of deceit contains the following elements: “(1) knowing the representation to be false; (2) without belief in its truth; or (3) recklessly, careless whether it be true or false”.172 The word “material” means “material to the bank’s duty to pay, so that if the document stated the truth the bank would be obliged to reject the documents”,173 which is close to the interpretation of material fraud in Official Comment on Revised UCC Article 5, s 5-109 in the United States. However, Jack’s interpretation seems to be at odds with Lord Diplock’s own words:

[T]he answer to the question: “to what must the misstatement in the documents be material?” should be: “material to the price which the goods to which the documents relate would fetch on sale if, failing reimbursement by the buyer, the bank should be driven to realise its security.” But this would not justify the confirming bank’s refusal to honour the credit in the instant case; the realisable value on arrival at Callao of a glass fibre manufacturing plant made to the specification of the buyers could not be in any affected by having been loaded on board a ship at Felixstowe on December 16, instead of December 15, 1976.174

In accordance with Lord Diplock, the misrepresentation should be “material” to the real value of the goods. Predating the bill of lading in the case was not considered material because it did not affect the value of the goods. But according to Jack’s scholar’s interpretation, predating the bill of lading should be considered material because the bank would have been obliged to reject the documents if the bill of lading had stated the truth of the loading date. It is, with respect, submitted that Jack’s interpretation is a far better statement of principle (though not an accurate interpretation of Lord Diplock’s judgment) and Lord Diplock’s observation is out of step with the wider law and practice of letters of credit.

Lord Diplock’s observation in United City Merchants that material misrepresentation is the kind of fraud that can invoke the fraud rule has been accepted by subsequent English cases. In Themehelp Ltd v. West,175 the Court of Appeal followed the words of Lord Diplock quoted with respect to the standard of fraud and affirmed the trial court’s decision.

In Banco Santander SA v. Bayfern Ltd, 176 the confirmer discounted the obligation of a deferred payment letter of credit before its maturity. Shortly after the discounting, some of the documents presented were found to be fraudulent. Subsequently, the issuer refused to pay the confirmer. The confirmer brought the action against the issuer in the Queen’s Bench Division for reimbursement and sought summary judgment, claiming it should be immune from the fraud rule despite fraud. For trial of preliminary issues, fraud was assumed to have been established in the case. The trial court ruled for the issuer on the basis of established fraud. On appeal, the decision was upheld by the Court of Appeal. Both courts cited with approval Lord Diplock’s above passage relating to the standard of fraud.

“Material misrepresentation” thus appears to have been settled as the standard of fraud in the English law governing letters of credit. In language, the English position is close to that of the US in Revised UCC Article 5, s 5-109: “material fraud”. As both of them have not been sufficiently tested, it is too early to make a reasonable comparison. However, if a comparison has to be made, the difference between the two appears to be that the US position is enshrined in a statute, but English position is embodied in the common law. This may mean that courts in the US will “look more on the severity of the effect of the fraud on the transaction rather than the state of fraud of the beneficiary”,177 whilst English courts, at least if Jack be correct, will require proof of the state of the mind of the fraudster.

The Position in Canada

Canadian courts have generally focused on the standard of proof rather than the standard of fraud in their application of the fraud rule. When considering the kind of fraud that can invoke the fraud rule, Canadian courts, like their English counterparts, are likely to ask whether “clear or obvious” fraud or “a strong prima facie case of fraud” has been shown, not how serious the fraud was in the sense of the standard of fraud being discussed here. Canadian courts have also considered whether the application of the fraud rule should be confined to cases of forged or fraudulent documents or extend to fraud in the underlying transaction. This is well illustrated by the case of Bank of Nova Scotia v. Angelica-Whitewear Ltd.178

In Angelica-Whitewear, the court considered four issues with respect to the application of the fraud rule, but the standard of fraud under discussion was not among them. When the court was considering the alleged fraud in the case, that is, the inflation of the prices in the invoice by some $17.00 per dozen above those agreed to in the sales contract, it was not interested in how serious the fraud was, but whether the fraud (1) had been “sufficiently established to the knowledge of the Bank before payment of the draft to make it clear or obvious to the Bank”,179 and (2) could “be regarded as having made invoice 0014 a false document in so far as its representation of the applicable prices was concerned, or whether it be regarded as fraud in the performance of the underlying sales contract”.180 The court put the question simply, was this “fraud of the kind that comes within the fraud exception”,181 which seems to indicate that fraud is a simple concept, the meaning of which is known by everybody in Canada.

Due to the general approach of the Canadian courts towards the standard of fraud, the issue, even when it is mentioned in a Canadian case, has normally been addressed in a very simple way. For example, in CND Research & Development Ltd v. Bank of Nova Scotia,182 when issuing an injunction restraining the issuer from paying the demand, Galligan J stated:

It is my opinion, in this case, an injunction ought to be granted. In my view, it ought to be granted for at least two reasons. The first is that the plaintiff has made out a strong prima facie case that the demand made by the agent of the Ministry of War is fraudulent. Delivery has clearly been made and claim for a payment of a delivery guarantee necessarily implying that delivery was not made is clearly untrue and false.183

However, this issue has been said to have been “dealt with in some depth”184 in the case of Cineplex Odeon Corp v. 100 Bloor West General Partner Inc.185 In Cineplex, a limited partnership was formed to develop a multifunctional complex. The parties had entered into a number of agreements, according to which the plaintiff, Cineplex, provided a letter of credit to secure its obligations under certain agreements. Cineplex defaulted in its obligation to build the project, and the letter of credit was called upon. The plaintiff moved to enjoin payment, claiming that it was not in default in the obligation that the letter of credit was meant to guarantee, any draw by the defendants would be fraudulent and thus the fraud rule should be applied. After reviewing the facts and the principle of independence, before dismissing the plaintiff’s motion, Blair J pointed out:

I pause at this point to note, in passing, a factor which occasionally seems to be lost amidst the melee in these sorts of disputes, disputes which more and more are finding their way to the courts in times of economic stress: the exception is “fraud”, not something less than fraud. 186

Then he went on:

In the eyes of the party seeking to prevent payment on the letter of credit, almost any conduct or position of the beneficiary which does not accord with the aggrieved party’s view of the universe may appear to be fraud, and therefore justify non-payment. Such, of course, cannot be the case, given the recognized characteristics of a letter of credit. …

Fraud is a straightforward five-letter word, meaning just what it says: “fraud”. Fraud is not simply a legitimate dispute or disagreement over the interpretation of a contract, however one- sided that dispute may appear. While the notion of fraud may elude precise definition, it is a concept well-known to the law, and it must, in my view, import some aspect of impropriety, dishonesty or deceit.

In Washburn v. Wright (1913), 31 O.L.R. 138 (App. Div.), Mr. Justice Riddell said, at p. 147:

…. Fraud is not mistake, error in interpreting a contract; fraud is “something dishonest and morally wrong, and much mischief is … done, as well as much unnecessary pain inflicted, by its use where ‘illegality’ and ‘illegal’ are the really appropriate expressions:” Ex p. Watson (1888), 21 Q.B.D. 301, per Wills, J., at p. 309.

Cases where the demand on the letter of credit can be said to be “clearly untrue or false”, or “utterly without justification”, or where it is apparent there is “no right to payment”, all fall within the foregoing principles and must be read in the context of those “fraud” principles.187

If this can be taken as a summary or generalisation of the Canadian position on the standard of fraud, the Canadian position is somewhat confusing or contradictory. As can be seen, the quoted passage, on one hand, is saying that fraud in Canada means something of “dishonesty” or “deceit”, or “clearly untrue or false”, which is similar to common law fraud, requiring the intention of the fraudulent party. But on the other hand, it is saying that a call on the letter of credit that is “utterly without justification” or “where it is apparent there is ‘no right to payment’” can also mean fraud in Canada, which is similar to the American position, looking more to the sharpness of the fraudulent conduct. However, this may be the true reflection of the Canadian position: on one hand, being a country of English tradition, understandably the Canadian courts traditionally follow the approach of their English counterparts closely, adopting the standard of common law fraud; on the other hand, the influence of the US position in the area of letter of credit law, can be seen in everywhere in the world, and at least some of the Canadian courts, are also closely following the US approach on these issues.

The Position in Australia

In Australia, in the small number of cases that have considered the fraud rule, two kinds of standard of fraud have been suggested: intentional fraud and gross equitable fraud.

Intentional Fraud

The standard of intentional fraud was set forth in the case of Contronic Distributors Pty Ltd (Receiver & Manager Appointed) v. Bank of New South Wales.188 In the case, Contronic wished to purchase semi-conductors from GEC, to whom it was already indebted for earlier dealings. It suggested the use of a letter of credit, which would cover both the existing indebtedness and the purchase price of the goods that it wished to purchase. Contronic’s business had been financed from time to time by Balfour, which granted credit facilities to Contronic by way of applying for letters of credit from the Bank of New South Wales in favour of the suppliers. This transaction was also financed by Balfour in the same way, but the financier did not know the letter of credit would also cover the earlier debt. When the financier discovered the true state of affairs, it brought proceedings to restrain the bank from paying against the letter of credit, and GEC from presenting the documents. The Supreme Court of New South Wales granted the injunction. When issuing the injunction, Helsham J of the Court said:

It seems to me that the case could be decided on a simple basis of fraud. I think it is sufficient to enable … Balfour …, in any event to get relief in these proceedings, to establish an intention to obtain money by deceit on the part of GEC at the time that the letter of credit is to be presented by it for payment. GEC would then be obtaining money by the use of documents it knows to be false and which were brought into being by it with its connivance.189

Gross Equitable Fraud

The standard of gross equitable fraud was suggested in Hortico (Australia) Pty Ltd v. Energy Equipment Co (Australia) Pty Ltd,190 where Energy Australia had a contract with Hortico for the design, supply and installation of a boiler. Hortico arranged for the issuance of a bank guarantee in favour of Energy Australia. Later the contract was terminated by both parties and Energy Australia made a demand on the guarantee for damages. Hortico brought the action to enjoin the payment under the guarantee, alleging inter alia that the guarantee was contemplated only to be security for the performance of the contract by the plaintiff and not also for damages as the defendant claimed.

The plaintiff’s argument was dismissed by Young J of the Supreme Court of New South Wales. However, the respected judge said in obiter:

[W]ith commercial transactions such as the present, the courts have consistently taken a “hands off’ approach, and it does not seem to me that anything short of actual fraud would warrant this Court in intervening, though it may be in some cases (not this one), the unconscionable conduct may be so gross as to lead to exercise of the discretionary power.191

The view that gross equitable fraud might invoke the fraud rule was restated some ten years later by the same judge in the case of Inflatable Toy Co v. State Bank of NSW.192 In Inflatable, the plaintiff, the buyer, ordered from the seller inflatable plastic toys to be delivered in instalments and paid for by letters of credit. For one instalment, some discrepancies appeared between the documentation and the facts. The buyer accepted the discrepancies when the seller told it what had happened, but changed its mind later and brought an action to prevent the issuer from paying the accepted bill of exchange, alleging that the seller was guilty of fraud in presenting documents which it knew to be untrue. Young J rejected the buyer’s claim. But again as a passing dictum, after citing Sztejn, Hortico and other cases relating to the fraud rule, he stated, “I should note, in case what I said is read later too widely, that is still wise to keep open the possibility that unconscionable conduct may be an exception”.193

However, the idea that gross equitable fraud may invoke the fraud rule was rejected by Batt J of the Supreme Court of Victoria in Olex Focas Pty Ltd v. Skodaexport Co.194 In that case Olex Focas entered into a contract with Skodaexport for the supply and installation of telecommunications, telesupervisory and instrumentation systems in connection with the construction of an oil pipeline in India. Skodaexport was the head-contractor for the project, and Olex was one of the subcontractors engaged by Skodaexport.

Skodaexport agreed to pay Olex what were termed mobilisation/procurement advances for 15 percent of the contract price. As security for the repayment of the advances, Olex was required to provide independent guarantees to Skodaexport, known as mobilisation/procurement guarantees (mobilisation guarantees). In addition, Olex was required to provide another type of guarantee, known as performance guarantees, for 10 percent of the contract price, to secure the good performance of its obligations under the underlying contract. All the guarantees were payable “at sight forthwith on first demand … without protest or demur or proof”.195 Skodaexport was allowed to call upon part of the guarantees.

When disputes arose, Skodaexport allegedly threatened to call upon the full amount of the guarantees unless Olex would accept its terms for the settlement of the disputes.196 By this time, the advances secured by the mobilisation guarantees had largely been repaid. The plaintiffs also claimed that collectively 95% of the equipment had been supplied and 78% of the design, construction, integration and commissioning services had been provided. Olex sought interlocutory injunctions to prevent the independent guarantees from being paid on two grounds: (1) that Skodaexport, by threatening to make demand on the guarantees, was acting fraudulently, without a belief that it was entitled to the sums secured by the guarantees; and (2) that Skodaexport, by threatening to call up the guarantees, was committing unconscionable conduct within the meaning of s 51AA of the Trade Practices Act 1974.

Batt J, when considering the plaintiff’s first basis, followed the traditional line of English cases requiring a high standard of proof and, at the beginning of his analysis, stated:

Now in Victoria, as in England, the law is clear. The principle is clearly established that payment by a bank and a demand therefor by a beneficiary under an unconditional performance bond or guarantee, as under a confirmed irrevocable letter of credit, will not be restrained except in a clear case of fraud, of which the bank is clearly aware at the time of, probably, the proposed payment, or in the case of forgery of documents (which is probably applicable only to letters of credit) or, perhaps, in the case of illegality of the underlying contract197

Then the learned judge considered a number of English and Australian cases, cited long quotations from them to the effect that only clear fraud could activate the fraud rule198 and rejected the plaintiffs’ request for injunction on the basis of fraud. When considering the point espoused by Young J in Hortico that gross equitable fraud might invoke the fraud rule, the judge said:

In my view his Honour was speaking in very guarded terms, prefacing his mention of that concept by reference to the general “hands-off” approach taken by courts with respect to commercial transactions. … I would not with respect, having regard to all the other cases I have cited, treat gross unconscionability falling short of actual fraud as a ground for an injunction.199

Therefore, in Australia to date, while two kinds of misconduct that may invoke the fraud rule have been suggested, only “intentional fraud” has been applied. As for gross equitable fraud, it has been mentioned twice by the same judge in obiter in the Supreme Court of New South Wales, but has not been applied in any case. Moreover, it has been rejected by the Supreme Court of Victoria. Whether the standard of gross equitable fraud can become a real ground for the application of the fraud rule in Australia remains to be seen.

The Position under the UN Convention

The United Nations Convention on Independent Guarantees and Standby Letters of Credit (UN Convention) has taken a different approach to fraud from that of Revised UCC Article 5. While the latter has provided a general standard of fraud for the application of the fraud rule — material fraud — the former has avoided “terms ‘fraud’ and ‘abuse of right’”200 and adumbrated in Article 19 three substantive grounds to invoke the fraud rule:

  1. Any document is not genuine or has been falsified;
  2. No payment is due on the basis asserted in the demand and the supporting documents; or
  3. Judging by the type and purpose of the undertaking, the demand has no conceivable basis.

As for demands that have “no conceivable basis”, Article 19(2) of the Convention further refined this as follows:

  1. The contingency or risk against which the undertaking was designed to secure the beneficiary has undoubtedly not materialised;
  2. The undertaking obligation of the principal/applicant has been declared invalid by a court or arbitral tribunal, unless the undertaking indicates that such contingency falls within the risk to be covered by the undertaking;
  3. The underlying obligation has undoubtedly been fulfilled to the satisfaction of the beneficiary;
  4. Fulfilment of the underlying obligation has clearly been prevented by wilful misconduct of the beneficiary; or
  5. In the case of a demand under a counter-guarantee, the beneficiary of the counter-guarantee has made payment in bad faith as guarantor/issuer of the undertaking to which the counter-guarantee relates.

This list may not be exhaustive, but it is an impressive and encouraging way in which to define the kind of misconduct that may invoke the fraud rule. It undoubtedly stands as the most detailed provision so far with respect to clarification of the misconduct that may bring the fraud rule into play. These provisions are “clear and narrow in scope and provide an excellent international standard”.201 They will undoubtedly provide good guidance for courts to enhance their application of the fraud rule.

While the Convention requires “manifest and clear” evidence to invoke the fraud rule, it does not mention that the wrongdoer’s intention should be proven. Reading the text, the Convention, like Revised UCC Article 5, seems to emphasise more the nature of the misconduct rather than the fraudster’s state of mind. However, having rules is one thing, properly implementing them is another, because implementation of the rules is in the hands of individual courts. As courts may still apply the standard of proof of some English judgments, the real value of these rules remains to be seen.

Conclusion

The fraud rule is “the most controversial and confused area”202 in the law governing letters of credit, mainly because the standard of fraud is hard to define. The divergent views expressed by courts and commentators with respect to the essence of the standard of fraud reflect the tension between two different policy considerations:

the importance to international commerce of maintaining the principle of the autonomy of documentary credits …; and the importance of discouraging or suppressing fraud in the letter of credit transaction.203

On the one hand, if fraud is defined too widely or the standard of fraud is set too low, the fraud rule may be abused by an applicant who does not want the issuer to pay the credit simply because it will not profit from the underlying transaction. If obstruction of payment of a letter of credit is permitted too often, business confidence in letters of credit as effective performance assurances will be destroyed.204

On the other hand, if fraud is defined too narrowly or the standard of fraud is set too high, the effectiveness of the fraud rule will be compromised. A very rigid standard of fraud may encourage the growth of fraudulent conduct by beneficiaries, discourage the use of letters of credit by applicants and ultimately harm the commercial utility of letters of credit.205

A proper standard of fraud therefore should be one reflecting a sensible compromise between the competing interests. Legally, it should serve the purpose of the fraud rule and be workable for the courts. Commercially, it should facilitate the utility of letters of credit. Based on these considerations, extreme concepts or standards of fraud, such as egregious fraud, which may be too rigid, and constructive fraud, which may lead to the fraud rule being abused, should be avoided, and a proper and practical standard of fraud should be adopted.

A combination of the provisions of Revised UCC Article 5, s 5-109, and those of Article 19 of the UN Convention, provides the best solution, yet devised, to defining the limits of the fraud exception. Under Revised UCC Article 5, s 5-109, “material fraud” may invoke the fraud rule. As considered above, the standard of material fraud has not only avoided extreme ideas such as egregious fraud and constructive fraud but also has reflected the unique nature of letters of credit. However, because “material” is a general term, the implementation of the standard of material fraud provided in Article 5 remains uncertain despite some guidance provided by the case law, because different courts may interpret it divergently, as they have interpreted Sztejn. However, this uncertainty may to some extent be reduced by recourse to the provisions of Article 19 of the UN Convention, where a detailed list of the types of misconduct that constitute material fraud has been adumbrated. The misconduct listed in the Convention provides substantial practical guidance to courts and letter of credit users. Accordingly, if the fraud rule can be formulated in a way that combines the standard of material fraud embodied in s 5-109, as a general standard, with the provisions of Article 19 of the UN Convention as detailed examples, the predicability of the rule will be greatly enhanced.

The best place for the fraud rule to be so formulated is in the terms of the Uniform Customs and Practice for Documentary Credits206 — the influential rules for letters of credit that are incorporated by reference into virtually all credits issued worldwide. The publisher of the UCP, the International Chamber of Commerce, is the most qualified body to prescribe the fraud rule as it has the greatest expertise in letters of credit matters.207

As the UCP is, in form, merely a set of contractual terms whatever provisions it might include regarding fraud would be subordinate to local law on the issue.208 However, there is no reason to expect that courts would not give to UCP provisions on fraud the same weight they have given to its other provisions. After all the UCP prescribes the doctrine of autonomy209 so why should it not also prescribe the exception and limits to the doctrine?

It is hoped that in the next revision of the UCP, the revision committee chooses to deal with the issue of fraud, and in doing so takes its lead from the UCC and the UN Convention. If the UCP embraces the law on fraud as set forth in Section 5-109 of the UCC, as amplified by the definition of fraud from Article 19 of the UN Convention, the result will be a highly workable jurisprudence that will serve to enhance the commercial utility of letters of credit and limit their use to perpetrate fraud.

Footnotes

# An earlier version of this article was published in the Duke Journal of Comparative & International Law Vol 13 (Spring 2003) 293. This version is substantially revised and expanded. Our thanks to the anonymous referees for the Oxford University Comparative Law Forum whose comments so assisted in that process. All responsibility is ours.

* Judge, the Supreme People’s Court of the People’s Republic of China; Senior Fellow, Tim Fischer Centre for Global Trade and Finance, Bond University, Australia.

** Professor and Executive Director, Tim Fischer Centre for Global Trade and Finance, Bond University, Australia. Our thanks to our able research assistant, James Walsh, for his assistance with the footnotes.

1 The policy tension behind the fraud rule was well expressed by Le Dain J in the leading Canadian case of Bank of Nova Scotia v. Angelica-Whitewear Ltd, 36 DLR 4th 161 (Can. Sup. Ct. 1987), in these terms:

The potential scope of the fraud exception must not be a means of creating serious uncertainty and lack of confidence in the operation of letter of credit transactions; at the same time the application of the principle of autonomy must not serve to encourage or facilitate fraud in such transactions. (at 168)

2 G T McLaughlin, ‘Letters Of Credit and Illegal Contracts: The Limits of the Independence Principle’, 49 Ohio State L J 1197, 1203 (1989).

3 McLaughlin, id. For example, in a commercial letter of credit transaction, “[i]t is not always easy to determine whether an alleged discrepancy between the description of the goods in the documents and their actual nature is indicative of a fraud. Unless there is a blatant fraud, the banker cannot assert the deficiency of the goods against the seller.” Anthony G. Guest, Benjamin’s Sale of Goods 1716 (5th ed. 1997).

4 G A Fellinger, ‘Letters of Credit: The Autonomy Principle and the Fraud Exception’, 1 J Banking & Finance L & Practice 4, 22 (1990).

5 The terms of The Uniform Customs and Practice for Documentary Credits (ICC Publication No. 500, 1994) are not addressed as they are silent on the issue of fraud.

6 The Uniform Commercial Code (“UCC”) is a collection of model statutes drafted and recommended by the National Conference of Commissioners of Uniform State Laws and the American Law Institute for enactment by the legislatures of the states of the United States. It consists of 11 different Articles, each covering a different aspect of commercial law. Article 5 of the UCC is a uniform statutory scheme governing letters of credit. It was first drafted in the 1950s (“Prior UCC Article 5”) and thoroughly revised in 1995 (“Revised UCC Article 5”). The Revised UCC Article 5 has been adopted by most of the jurisdictions in the US. For a list of the jurisdictions that have adopted Revised UCC Article 5, see UCC Article 5 – Letters of Credit at .

7 31 N.Y.S.2d 631 (1941). For detailed discussion of the case, see infra notes 1727 and accompanying text.

8 146 N.E. 636 (1925).

9 Id. at 639.

10 Ibid.

11 Id. at 641.

12 Fellinger has suggested that “Justice Cardozo’s dissenting opinion … envisions a scenario where there is a total lack of consideration in the underlying sales contract”. Fellinger, supra note 4, at 11. See also Graham & Benjamin Geva, ‘Standby Credits in Canada’, 9 Canadian Business L J 180, 197 (1984).

13 Phillip W. Thayer, ‘Irrevocable Credits in International Commerce: Their Legal Effects’, 36 Columbia L Rev 1327, 1336 (1936).

14 M C Campbell, Guaranties and Suretyship Aspects of Letters of Credit, 85 U Pennsylvania L Rev 261, 275 (1937).

15 E L Symons, Letter of Credit: Fraud Good Faith and the Basis for Injunctive Relief, 54 Tulane L Rev 338, 340 (1980).

16 (1941) 31 NYS 2d 631, 633.

17 Ibid.

18 Id, 634. Emphasis added, citations omitted.

19 Ibid. Emphasis added.

20 Symons, supra note 15, at 361.

21 Fellinger, supra note 4, at 12; Henry Harfield, ‘Enjoining Letter of Credit Transactions’, 95 Business L J 596, 603 (1978).

22 H A Getz, ‘Enjoining the International Standby Letter of Credit: The Iranian Letter of Credit Cases’, 21 Harvard Int’l L J 189, 206 (1980).

23 M Megrah, ‘Risk Aspects of the Irrevocable Documentary Credit’, 24 Arizona L Rev 255, 258 (1982).

24 35 N.Y.S.2d 985 (1942).

25 J F Dolan, The Law Of Letters Of Credit: Commercial And Standby Credits 7-45 (rev ed. 1996); Symons, supra note 15, at 362 et seq.

26 Supra note 24, at 988-989. Citations omitted, emphasis added. It should be noted that Sztejn was among the authorities mentioned by the judge.

27 Prior UCC Article 5, ss 5-114(1) and 5-114(3), emphasised the principle of independence and the issuer’s entitlement for reimbursement after honour, reading respectively:

(1) An issuer must honor a draft or demand for payment which complies with the terms of the relevant credit regardless of whether the goods or documents conform to the underlying contract for sale or other contract between the customer and the beneficiary. The issuer is not excused from honor of such a draft or demand by reason of an additional general term that all documents must be satisfactory to the issuer, but an issuer may require that specified documents must be satisfactory to it.

(3) Unless otherwise agreed an issuer which has duly honored a draft or demand for payment is entitled to immediate reimbursement of any payment made under the credit and to be put in effectively available funds not later than the day before maturity of any acceptance made under the credit.

28 West Virginia Housing Development Fund v. Sroka, 415 F. Supp. 1107, 1114 (1976). But cf, Symons, supra note 15, at 340: “A careful review of Sztejn and other pre-Code cases, the wording and cross references in section 5-114, and the pervasive standard of good faith in the UCC — defined in section 1-201(19) as ‘honesty in fact’ — reveal that the middle ground standard, intentional fraud, is the proper interpretation of the pre-Code cases and the UCC”.

29 Symons, id. at 346. Symons did a LEXIS search of “egregious fraud” on 4 June 1979 in both the General Federal and All States libraries. Two cases were found in the former library and three were found in the latter. Symons, id. This author did the same search on 29 July 1998 and altogether ten cases were found. On 4 June 2002, the author did another search using “letters of credit and egregious fraud” in the library of “Federal & State Cases Law”, only 13 items were found.

30 E.g. Harfield, supra note 21; J B Justice, ‘Letters of Credit: Expectations and Frustrations (Pts 1 & 2)’, 94 Business L J 424 & 493 (1977).

31 Harfield, id. at 602. But in the same article Harfield also used the phrase “actual and intentional fraud” to define the “egregious” fraud he was discussing. Id. at 604.

32 Symons, supra note 15, at 347.

33 Id.

34 K L Macintosh, ‘Letters of Credit: Dishonour When a Required Document Fails to Conform to the Section 7-507(b) Warranty’, 6 J L & Commerce 1, 6 (1986).

35 336 A.2d 316 (1975).

36 Id. at 321.

37 Id. at 324-25, citing Dynamics Corp of America v. Citizens & Southern Nat’l Bank 356 F.Supp. 991, 999 (1973). Emphasis added.

38 378 A.2d 562 (1977).

39 Id. at 567, citing Intraworld, supra note 35, at 324-325. Emphasis added.

40 Justice, supra note 30, at Pt 1, 424.

41 14 UCC Rep. Serv. 1427 (1974).

42 Id. Emphasis added. Taken away from the facts of the case, this paragraph is sound and well reasoned. However, against the factual background of the case, the result of the case is disappointing as “the dispute between the customer and the beneficiary appears to have been a classic case involving breach of warranty, and it is clear that an injunction should not be granted in such a case.” Justice, supra note 30, at pt 2, 502-503.

43 474 F. Supp. 420 (1979). For special treatment of the case, see P C Reed, ‘A Reconsideration Of American Bell International Inc v. Islamic Republic Of Iran’, 19 Columbia J Trans’l L 301 (1981).

44 474 F. Supp. 420, 425 (1979). Emphasis added.

45 Derry v. Peek, 14 App. Cas. 337, 347, (1889) (Lord Herschell).

46 It has been said that “[i]ntentional fraud could be shown by establishing the common law elements of fraud”. Aetna Life & Casualty Co v. Huntington National Bank, 934 F.2d 695, 698 (1991). On 4 June 2002, the day when the search for “egregious fraud” was done, this author also did searches in the same library for the other standards of fraud discussed here using the following phrases: “letters of credit and intentional fraud”, “letters of credit and common law fraud”, “letters of credit and letter of credit fraud”, “letters of credit and flexible fraud”, and “letters of credit and constructive fraud”, and found 61, 284, 42, 8 and 93 items respectively. Although these figures could not necessarily reflect what standards of fraud courts actually had applied in the cases and might reflect only the frequency courts had used the terms in their discussions, they could serve as a kind of indication showing what kind of terms and standards courts are more likely to use in the US.

47 R P Buckley, ‘The 1993 Revision of the Uniform Customs and Practice for Documentary Credits’, 6 J Banking & Finance L & Practice 77, 97, note 278 (1995).

48 If the intention of the beneficiary to defraud had not been proven, NMC Enterprises might have been well treated as “a breach of warranty matter”. See Report of the Task Force on the Study of UCC Article 5, ‘An Examination of UCC Article 5 (Letters of Credit)’, 45 Business L 1521, 1614 (1990) (Task Force Report).

49 757 F.2d 399 (1985).

50 Id. at 402.

51 Id. at 405. Emphasis added.

52 392 N.Y.S.2d 265 (1976).

53 Id. 268.

54 Id. 271. Emphasis added.

55 See Note, ‘Letters of Credit: Injunction As a Remedy for Fraud in UCC Section 5-114’, 63 Minnesota L Rev 487, 500, (1979).

56 The Task Force noted that “[m]ost of the cases favouring a flexible standard have nonetheless been supported by a showing of serious misconduct equivalent to the shipment of rubbish”. Task Force Report, supra note 48, 1614. However, this result might be affected by the fact that Prior UCC Article 5 was silent with respect to the standard of fraud. Whenever the “flexible standard” was quoted, it was read together with the facts of Cambridge Sporting Goods. If the term “flexible standard” was used in a statute and courts had applied it without reading the facts of Cambridge Sporting Goods, the situation might have been different.

57 356 F. Supp. 991 (1973).

58 Id. at 998-99, citing SEC v. Capital Gains Research Bureau Inc, 375 U.S. 180, 193-94 (1963). Emphasis added. Because of this statement, Dynamics becomes the oft-quoted case for the standard of “constructive fraud” (e.g. Fellinger, supra note 4, at 13; H P Kee, ‘The Fraud Rule in Letters of Credit Transactions’, in C Chinkin (ed.), Current Problems of International Trade Financing 235, 246 (1983)) or “ordinary breach of contract” (e.g. United Trading Co v. Allied Arab Bank 1985(2) Lloyd’s Rep. 554, 561 (Ackner LJ)). However, it should be noted that, because the court of Dynamics also made the statement that “the court views its task in this case as merely guaranteeing that India [the beneficiary] not be allowed to take unconscientious advantage of the situation and run off with plaintiff’s money on a pro forma declaration which has absolutely no basis in fact”, a statement cited in many cases for the standard of “egregious fraud”, this case has occasionally been classified as a case of “egregious fraud”. See Symons, supra note 15 , at 373-374.

59 R Bertrams, Bank Guarantees in International Trade 257 (2nd ed. 1996). Illegality can be another one, but cases are scarce in this respect. E.g. United City Merchants v. Royal Bank of Canada 1979(1) Lloyd’s Rep. 267; 1981(1) Lloyd’s Rep. 604; 1983 A.C. 168. For discussion about the illegality defence, see McLaughlin, supra note 2. In Australia, another defence, unconscionable conduct within the meaning of s 51AA of the Trade Practices Act 1974, has unfortunately become available since the case of Olex Focas Pty Ltd v. Skodaexport Co, 134 F.L.R. 331 (1996). For a discussion about Olex, see infra notes 120-125 and accompanying text.

60 Bertrams, id. According to Professor Kozolchyk, during the last twenty years, with the increasing abuse by beneficiaries of their power to demand payment of letters of credit whose “literal tenor could not be read to support such demands, courts and commentators had to reassess the meaning of strictness in the letter of credit law. The judicial dilemma was frequently perceived to be as serious as choosing between formalism and assumed certainty of the law on the one hand and equity and uncertainty on the other”. B Kozolchyk, Preface, 24 Arizona L Rev 235, 235 (1982).

61 Kee, supra note 58, 242. Kee mentioned four kinds of standard without the standard of “letter of credit fraud”.

62 For a list of US cases, see Getz, supra note 22, 248-252. Besides litigation, other channels were created for US companies to block payments under standby letters of credit. On November 14, 1979, the President of the United States issued an executive order to block the transfer of “the property and interests in property of the Government of Iran, its instrumentalities and controlled entities and the Central Bank of Iran”. Executive Order No 12170, 44 Fed Reg 65,729 (1979), quoted in Touche Ross & Co v. Manufacturers Hanover Trust Co, 434 N.Y.S.2d 575, 576 (1980). To implement the Order, the US Treasury promulgated the Iranian Assets Control Regulations, which at first allowed American issuing banks to discharge their liabilities under their standby letters of credit by paying into blocked accounts of the Iranian beneficiaries, but later directly blocked payment of the standby letters of credit themselves. See M P Zimmett, ‘Standby Letters of Credit in the Iran Litigation: Two Hundred Problems in Search of a Solution’, 16 L & Policy Int’l Business 927, 941 (1984). On January 19, 1981, as part of the agreement to release the American hostages, the United States and Iran agreed to establish the Iran-US Claims Tribunal at the Hague, for claims and counterclaims of nationals of the United States against Iran and claims of Iranian nationals against the United States. For a detailed treatment of the Tribunal, see Symposium, ‘On The Iran-United States Claims Tribunal’, 16 L & Policy Int’l Business 667 et seq. (1984). For some articles about the Iranian cases, see J D Becker, ‘Standby Letters of Credit and Iranian Cases: Will the Independence of Credit Survive?’, 13 UCC L J 335 (1981); Comment, ‘Fraud in the Transaction: Enjoining Letters of Credit during the Iranian Revolution’, 93 Harvard L Rev 992 (1980); R J Driscoll, ‘The Role Of Standby Letter Of Credit In International Commerce: Reflections After Iran’, 20 Virginia J Int’l L 459 (1980); Getz, id; Kimball & Sanders, ‘Preventing Wrongful Payment of Guaranty Letters of Credit–Lessons from Iran’, 39 Business L 417 (1984); Reed, supra note 43 ; Weisz & Blackman, ‘Standby Letters of Credit after Iran: Remedies of the Applicant’, 1982 U Illinios L Rev 355; Zimmett, id.

63 Driscoll, id. at 459.

64 Zimmett, supra note 62, at 930.

65 Id. at 937. The two cases were John Carl Warnecke & Assocs v. Bank of America Nat’l Trust & Savings Ass’n, No. 749626 (N.D. Cal. April 17, 1979) and KMW International v. Chase Manhattan Bank N A, No. 79 Civ. 1067 (S.D.N.Y. Mar. 29, 1979), payment injunction vacated 606 F.2d 10 (1979).

66 Zimmett, supra note 62, at 937. Notice injunctions were widely used in the Iranian cases. They were injunctions under which plaintiffs were not seeking injunction of the payment, but only that they be given notice prior to payment by the issuer so that they could investigate the facts and determine whether the demand for payment was fraud or not. Id. at 938.

67 474 F. Supp. 420 (1979).

68 Driscoll, supra note 62, at 475.

69 For another pre-hostage case with a similar view, see KMW International v. Chase Manhattan Bank NA, 606 F.2d 10 (1979).

70 434 N.Y.S.2d 575 (1980).

71 It is not clear why the issue of force majeure was not raised in the pre-hostage cases. However, it is inconceivable that there were no such clauses in them because the amount of money involved was huge and the parties involved were sophisticated multinational corporations.

72 The report is relatively brief and many aspects of the case are not clear.

73 Supra note 70, at 577-578 (Schwartz J). Reading the word “guaranty” in the report, it can be concluded that it is merely another word used for the term “independent guarantee” under discussion.

74 Cf, A Loke, ‘Standby Letters of Credit and Performance Bonds: The Lesson of the Iranian Experience’, in C Chinkin (ed.), Current Problems of International Trade Financing 283, 289 (1983). For circumstances where payment of a counter-guarantee may be stopped, see Article 19(2)(e) of the UN Convention.

75 Bertrams noted that, in the post-hostage Iranian cases, not only the standard of fraud was lowered, but all the other requirements for equitable relief such as the likelihood of success were not as stringent as they should have been. See Bertrams, supra note 59, 270-271, notes 58-61 and accompanying text.

76 Zimmett, supra note 62, 946. See also F von Marschall, ‘Recent Developments in the Fields of Standby Letters of Credit and Performance Bonds’, in C Chinkin (ed), Current Problems of International Trade Financing 260, 282 (1983): “the Iranian experience seems to be a good illustration of saying that hard cases make bad law. Cases deciding problems arising out of the Iranian revolution should be examined carefully and it should always be asked whether their reasoning is generally acceptable or whether the judge may have acted with a mind influenced by a recent television-picture of a commercially irresponsible Ayatollah”. Footnote omitted.

77 Task Force Report, supra note 35, 1613, citing Intraworld Industries Inc v. Girard Trust Bank, 336 A.2d 316, 324 (1975).

78 Id. at 1614. Citations omitted.

79 Id. at 1613.

80 Id. at 1614.

81 Id. at 1615.

82 Id.

83 Id. at 1614.

84 Id. at 1615.

85 R S Rendell, ‘Fraud and Injunctive Relief’, 56 Brooklyn L Rev 111, 113 (1990).

86 Task Force Report, supra note 48, at 1615.

87 Id.

88 Emphasis added.

89 See also P S Turner, ‘Revised UCC Article 5: The New US Uniform Law on Letters of Credit’, 11 Banking & Finance L Rev 205, 225 (1996).

90 Official Comment to Article 5 of the Uniform Commercial Code 1, 2nd para.

91 Id.

92 Id. at 3rd para, 1st sentence. Emphasis added.

93 Id. quoting Ground Air Transfer v. Westate’s Airlines, 899 F.2d 1269, 1272-1273 (1990).

94 Buckley, supra note 47, at 97. See also Task Report, supra note 48 , at 1615.

95 Dolan, supra note 25, at 7-47.

96 899 F.2d 1269 (1990).

97 Id. at 1274.

98 Id.

99 There may be a number of reasons for this. The main reason is that most of the cases tried until recently were still applying Prior UCC Article 5 because letters of credit involved in those cases were issued before Revised UCC Article 5 was adopted. Another reason may be that “[t]he number of reported cases involving fraud declined significantly” following the promulgation of Revised UCC Article 5. J G Barnes & J E Byrne, ‘Letters of Credit: 1995 Cases’, 51 Business L 1417, 1425 (1996). According to the two authors, the decline was one of the “signs of the impact of the … revised UCC Article 5”. Id. at 1418. This may be a reasonable observation because, by setting forth the standard of material fraud, s 5-109 has provided courts some guidance in dealing with cases of this kind, and has showed letters of credit users that litigation reasons such as “constructive fraud” will not be supported. As a result, parties who might have used such reasons prior to the promulgation of Revised UCC Article 5 may have stopped doing so. The authors searched the LEXIS library “Federal and State Cases” a number of times, the last on 5 June 2002. Only three cases were found: Mid-America Tire v. PTZ Trading Ltd. Import and Export Agents 2000 Ohio App. LEXIS 5402; 43 UCC Rep. Serv. 2d (Callaghan) 964 (2000); New Orleans Brass v. Whitney National Bank and the Louisiana Stadium and Exposition District, La. App. LEXIS 1764 (2002); and Western Surety Co v. Bank of Southern Oregon, 257 F.3d 933 (1999); 2001 U.S. App. LEXIS 15565; 44 U.C.C. Rep. Serv. 2d (Callaghan) 1239 (2001).

100 257 F.3d 933; aff’d 2001 U.S. App. LEXIS 15565; 44 U.C.C. Rep. Serv. 2d (Callaghan) 1239 (2001).

101 Id. Citations omitted and emphasis added.

102 La. App. LEXIS 1764 (2002).

103 See supra note 93 and accompanying text.

104 2000 Ohio App. LEXIS 5402; 43 U.C.C. Rep. Serv. 2d (Callaghan) 964 (2000) (Young PJ; Walsh J concurred, Valen J dissented).

105 Id.

106 Id. Citing Roman Ceramics Corp. v. People’s Natl. Bank, 714 F.2d 1207, 1212 footnote 12 (C.A.3, 1983), which was in turn quoting Intraworld Industries, Inc. v. Girard Trust Bank, 461 Pa. 343, 359, 336 A.2d 316, 324-325 (1975), as quoted in the text above accompanying footnote 26.

107 Id.

108 Id.

109 J G Barnes & J E Byrne, ‘Letters of Credit: 2000 Cases’, 56 Business L 4 (2001), reprinted in Annual Survey of Letter of Credit Law & Practice 13, 18 (2002).

110 Id.

111 [1979] 1 Lloyd’s Rep 267, [1981] 1 Lloyd’s Rep 604, [1983] AC 168.

112 [1983] AC 168, 183, per Lord Diplock.

113 R Jack et al, Documentary Credits (3rd edn 2001), 260.

114 [1958] 2 QB 127.

115 Id, 129.

116 [1977] 2 All ER 862.

117 Id, 870. Emphasis added.

118 [1975] 1 All ER 1071.

119 Id, 1073.

120 Id, 1074. Citations omitted, emphasis added.

121 [1979] 1 Lloyd’s Rep 267, [1981] 1 Lloyd’s Rep 604, [1983] AC 168.

122 [2001] EWCA Civ 1954, [2002] 3 All ER 697, [2002] 1 All ER (Comm) 257, [2002] 1 WLR 1975.

123 For a more discussion of the case, see Xiang Gao, ‘The Identity of the Fraudulent Party under the Fraud Rule in the Law of Letters of Credit’, (2001) 24 U New South Wales L J 119, at 128 et seq. This case involves another important issue regarding the law of letters of credit: whether payment of a letter of credit should be enforced if the underlying contract is illegal. Vitro, the buyers, requested, and GFE, the sellers, agreed, to double the purchase price of their contract in the related documents and transfer the excess amount to a draw-down account in favour of an American company in Miami closely associated with Vitro. The reason for this was to avoid the Peruvian foreign exchange control regulations, under which it was prohibited to withdraw money from Peru and then transfer it to the US. It was therefore argued that the underlying contract between GFE and Vitro was illegal and/or unenforceable, as its enforcement would be in violation of Peru’s exchange control regulations and the Bretton Woods Agreement Order 1946. This argument was successful in the first instance, and partly successful on appeal in the sense that part of the letter of credit was allowed to be paid, and part was enjoined. The trial court found that the sales contract between GFE and Vitro was an exchange contract because it was a monetary transaction in disguise, and payment made under the letter of credit would give effect to an exchange contract in violation of Peruvian law and the Bretton Woods Agreement Order 1946. So it held that the letter of credit transaction was unenforceable. The Court of Appeal agreed that the sales contract was a “monetary transaction in disguise” and held that the letter of credit was “part and parcel” of the scheme to evade the Peruvian foreign exchange regulations. However, it would enforce part of the sales contract which was not contrary to the Peruvian law by allowing the plaintiffs to recover the sales price of the equipment. The House of Lords upheld the decision of the Court of Appeal on this point. As this is outside the scope of this article, it will not be discussed further. For a detailed discussion of the point, see, eg, L C Cansler ‘International Letters Of Credit – The American Accord Case – Fraud Exception Limited’ (1982) 17 Texas Int’l L J 229, 241; G T McLaughlin ‘Letters Of Credit and Illegal Contracts: The Limits of the Independence Principle’ (1989) 49 Ohio State L J 1197.

124 [1979] 1 Lloyd’s Rep 267, 278.

125 [1979] 1 Lloyd’s Rep 267, 278.

126 [1981]1 Lloyd’s Rep 604, 628-9.

127 Id, 620.

128 Id, 628. Citations omitted.

129 Ibid, per Griffith LJ. Citations omitted, and the word Dec. in abbreviation has been changed to December.

130 Lords Fraser, Russell, Scarman and Bridge concurred.

131 [1983] AC 168, 184. Because of the name of the ship involved, this case is often known as the case of American Accord.

132 [1983] AC 168, 184.

133 Id, 187-188.

134 See also C M Schmitthoff (1981) J Business L 381, 383: “[t]he decision of the Court of Appeal represents sound commercial sense. In particular, its decision that a bank should not honour a letter of credit if, to its knowledge, a fraudulent bill of lading is tendered, is correct, and it is immaterial in this connection whether the seller was a party to the fraud or the fraud was committed by a third party without the knowledge of the seller. Banking business could not be carried on with the necessary expedition if the bank were compelled to make detailed inquiries into the nature of the fraud.”

135 Article 4 of the UCP.

136 Cf, R Goode Commercial Law (2nd edn 1995),1008.

137 [1981]1 Lloyd’s Rep 604, 620. A G Davis The Law Relating to Commercial Letters of Credit 3rd (1963), 149: “If the documents are forged, then obviously they are not valid. The buyers’ instructions to the banker must be construed as requiring the acceptance of valid documents only, and the bankers’ promise to the seller must be similarly construed. Any other construction would defeat the whole intention behind letter of credit transactions.” M Megrah “Risk Aspects of the Irrevocable Documentary Credit” (1982) 24 Ariz L Rev 255, 257: “The implicit obligation of the banker is to pay against ‘genuine’ conforming documents; otherwise credits would be a sham and open to all sorts of chicanery.”

138 For the details of the provision, see supra note 88 and accompanying text. For further analysis of the provision, see, Xiang Gao, ‘The Identity of the Fraudulent Party under the Fraud Rule in the Law of Letters of Credit, (2001) 24 U New South Wales L J 119, 123-124.

139 For the details of the provision, see infra note 200 and accompanying text. For further analysis, see, Gao, ibid 124-125.

140 [1978] 1 All ER 976.

141 Id, 982.

142 [1979] 1 Lloyd’s Rep 445.

143 Id, 447, per Lord Denning MR. Emphasis added.

144 (1924) 297 F 152.

145 Id, 158. Emphasis added.

146 31 NYS 2d 631, 634. Emphasis added.

147 Cf, R Goode, ‘Abstract Payment Undertakings’ in P Cane and J Stapleton (ed.), Essays for Patrick Atiyah (1992), 209, 230-231.

148 See, eg, Benjamin’s Sale of Goods 5th ed (1997), 1715; H Harfield, Bank Credits And Acceptances 5th ed (1974), 80; R H Ryan ‘Who Should Be Immune from the ‘Fraud in the Transaction’ Defense in a Letter of Credit Transaction’ (1990) 56 Brooklyn L Rev 119, 126; G W Smith ‘Irrevocable Letters of Credit and Third Party Fraud: The American Accord’ (1983) 24 Virginia J Int’l L 55, 58

149 Goode, supra note 147, 228.

150 Cf, Griffith LJ in United City Merchants v Royal Bank of Canada [1981]1 Lloyd’s Rep 604, 632,

151 Benjamin’s Sale of Goods 5th ed (1997), 1715. See also, Cansler, supra note 123, 240:

“The House of Lords decision leaves banks in an anomalous position. Under a documentary credit, a confirming bank has a duty to honour conforming documents. After American Accord, banks must honour a credit and accept fraudulently completed documents, unless they were fraudulently completed by the beneficiary.”

152 Goode, supra note 147, 294. See also Smith, id, 62.

153 Smith, ibid.

154 Goode, supra note 147, 294. Footnote omitted.

155 United City Merchants v Royal Bank of Canada [1981] 1 Lloyd’s Rep 604, 623, per Stephenson LJ.

156 Smith, supra note 148, 58, 70.

157 [2001] EWCA Civ 1954, [2002] 3 All ER 697, [2002] 1 All ER (Comm) 257, [2002] 1 WLR 1975.

158 According to the report, Judge Jack heard and decided the case on 28 November 2000.

159 [2001] 1 All ER (Comm) 368.

160 See supra note 133 and accompanying text.

161 [2001] 1 All ER (Comm) 368.

162 [2001] 1 All ER (Comm) 368, 381.

163 [2001] EWCA Civ 1954, [2002] 3 All ER 697, [2002] 1 All ER (Comm) 257, [2002] 1 WLR 1975, Emphasis added.

164 Ibid.

165 Ibid.

166 Cf, Goode, supra note 147, 229-230; see also Davis, supra note 137 , 150.

167 [2001] EWCA Civ 1954, [2002] 3 All ER 697, [2002] 1 All ER (Comm) 257, [2002] 1 WLR 1975. Citations omitted.

168 Smith, supra note 148, 96.

169 B Kozolchyk ‘The Immunisation of Fraudulently Procured Letter of Credit Acceptances: All Services Exportacao Importacao Comercio SA v Banco Bamerindus Do Brazil SA’ (1992) 58 Brooklyn L Rev 369, 370. For comments to the similar effect, see also A G Givray ‘Letters of Credit’ (1989) 44 Business L 1567, 1618: “If issuers were always bound by the face of presented papers, even when seemingly clean in form but fouled by forgery or other fraud, then letters of credit would be so prone to abuse as to become useless.” J E Byrne ‘Critical Issues in the International and Domestic Harmonisation of Letter of Credit Law and Practice’ in Commercial L Annual (1995) 389, 397: “If the credit becomes a vehicle unduly favouring one side or another, it will lose its primary attraction as a balanced safeguard for both interests of applicant and beneficiary.”

170 See also supra note 111. Emphasis added.

171 R Jack et al., Documentary Credits (3rd edn. 2001), 66.

172 Id. at 267.

173 Id. at 266.

174 1983 A.C. 168, 186.

175 1995(4) All E.R. 215.

176 1999 Lloyd’s Rep. Bank 239; aff’d in 2000 Lloyd’s Rep. Bank. 165.

177 Buckley, supra note 47, at 97.

178 36 D.L.R. 4th 161 (1987).

179 36 D.L.R. 4th 161, 178 (1987).

180 Id.

181 Id.

182 18 C.P.C. 62 (1980).

183 Id. at 65. Emphasis added.

184 S. P Jeffery, ‘Standby Letters of Credit: A Review of the Law in Canada’, 14 Banking & Finance L Rev 505, 528 (1999).

185 1993 A.C.W.S.J. LEXIS 43709; 1993 A.C.W.S.J. 576951; 37 A.C.W.S. (3d) 1132 (1993).

186 Id. at para 29.

187 Id. at paras. 30-32. Some of the citations omitted.

188 1984(3) N.S.W.L.R. 110.

189 Id. at 114. Emphasis added. For more discussion of the case, see notes 87-90.

190 1985(1) N.S.W.L.R. 545.

191 Id. at 554. Emphasis added.

192 34 N.S.W.L.R. 243 (1994).

193 Id. at 251. Emphasis added.

194 134 F.L.R. 331 (1996).

195 Id. at 340 (for mobilisation guarantees) and 342 (for performance guarantees).

196 In fact Skodaexpert instructed its bank, the Czechoslovakian Commercial Bank, to call up all of the guarantees, and the bank did so. Id. at 345. For more information on proceedings in the case and a detailed summary of the beneficiary’s call on the guarantees, see R P Buckley, ‘Sections 51AA and 51AC of the Trade Practices Act 1974: The Need for Reform’, 8 Trade Practices L J 5, 6, note 6 (2000).

197 134 F.L.R. 331, 348 (1996). Emphasis added. For a special comment for this passage, see A L Tyree, ‘Performance Bonds and Section 51AA of the Trade Practices Act’, 8 J Banking & Finance L & Practice 338, 339 (1997).

198 E.g. Edward Owen Engineering Ltd v. Barclays Bank Int Ltd, 1978(1) All E.R. 976; and Bolivinter Oil S.A. v. Chase Manhattan Bank, 1984(1) Lloyd’s Rep. 251.

199 134 F.L.R. 331, 354 (1996). Emphasis added. Remarkably, Batt J enjoined the payment of the mobilisation guarantees on the basis of the plaintiffs’ second argument: Skodaexport’s calling up the guarantees was committing unconscionable conduct within the meaning of s 51AA of the Trade Practices Act 1974. This ruling has “surprised most commentators and criticism of it has been direct and frequent”: Buckley, supra note 196, at 6. By and large, criticism so far has focused on the point that the decision has misapplied 51AA of the Trade Practices Act (Cth) which provides that “[a] corporation shall not, in trade or commerce, engage in conduct that is unconscionable within the meaning of the unwritten law, from time to time, of the States and Territories”; and “the accepted scope of the section may have been broadened considerably”: R P Buckley, ‘Unconscionability Amok, or Two Readily Distinguishable Cases?, 26 Australian Business L R 323, 326 (1998). However, this approach also represents an undesirable development in the law of letters of credit, because it appears to have created another basis for the interference with the payment of letters of credit and independent guarantees at least in Australia: statutory unconscionable conduct, which may severely affect the commercial utility of letters of credit because “[t]he effect of the statute, applying as it does to international trade and commerce, is to work a substantial inroad into the well-established common law autonomy of letters of credit and performance bonds and other bank guarantees”: Olex Focus Pty Ltd v. Skodaexpert Co Ltd, 134 F.L.R. 331, 358 (1996). More alarmingly, this decision may have opened in Australia a “Pandora’s box” and led to more “exceptions” to the letter of credit payment system. For example, other sections of the Trade Practices Act, such as s 52, dealing with misleading and deceptive conduct, and s 53 dealing with false or misleading representations, may also be applied in future to letters of credit and independent guarantees. If this happens, the commercial utility of letters of credit and independent guarantees will be seriously eroded. For a series of articles criticising this ruling, see Robert Baxt, ‘Are Bank Guarantees Safe from the Unconscionable Conduct Provisions of the Trade Practices Act?’, 1997 The Australian Banker 62; R Baxt, ‘A Bombshell on Unconscionable Conduct’, 25 Australian Business L Rev 227 (1997); R Baxt, ‘Unconscionability Taken One Step Too Far?’, 25 Australian Business L Rev 301 (1997); R Baxt, ‘Unconscionable Conduct under Trade Practices Act’, 71 Australian L J 432 (1997); R Baxt and J Mahemoff, ‘Unconscionable Conduct Under the Trade Practices Act – An Unfair Response By the Government: A Preliminary View’, 26 Australian Business L Rev 5, 13-15 (1998); J Browne, ‘The Fraud Exception to Standby Letters of Credit in Australia: Does it Embrace Statutory Unconscionability?’, 1999 Bond L R 98; R P Buckley, ‘Sections 51AA and 51AC of the Trade Practices Act 1974: The Need for Reform’, 8 Trade Practices L J 5 (2000); A Tyree, ‘Performance Bonds and Section 51AA of the Trade Practices Act’, 8 J Banking & Finance L & Practice 338 (1997); W Pengilley, ‘Unconscionability: Are the Litigation Floodgates Opening in Relation to Commercial Transactions?’, 13 Australia & New Zealand Trade Practices L Bulletin 11 (1997); and B Zillmann, ‘A Further Erosion Into the Autonomy of Bank Guarantees’, 13 Building & Construction L 354, 357 (1997).

200 E E Bergsten, ‘A New Regime For International Independent Guarantees And Stand-By Letters Of Credit: The UNCITRAL Draft Convention On Guaranty Letters’, 27 Int’l L 859, 872 (1993).

201 Comment, Litigation Digest: Agritrade International Pte Ltd v. Industrial and Commercial Bank of China [1998] 3 SLR [Singapore], 4, 3 Documentary Credit World 8, 13 (2000).

202 Comment, supra note 62, at 995.

203 Bank of Nova Scotia v. Angelica-Whitewear Ltd, 36 D.L.R.4th 161, 168 (1987). For a typical view favouring a stringent rule, see H Harfield, ‘Identity Crisis In Letter Of Credit Law’, 24 Arizona L Rev 239, 239 (1982): “The rigid rules that govern letters of credit are structural. If they are subordinated to more pliable precepts appropriate to equitable resolution of disputes, the very existence of the letter of credit as a useful business device can be destroyed as surely as a wisteria vine can strangle an oak”.

204 R. J. Gavigan, ‘Wysko Investment Company v. Great American Bank: A New Attack on the Usefulness of Letters of Credit’, 14 Northwestern J Int’l L & Business 184, 202 (1993).

205 Cf. S. J. Leacock, ‘Fraud in the International Transaction: Enjoining Payment of Letters of Credit in International Transactions’, 17 Vanderbilt J Transnat’l L 855, 899 (1984).

206 ICC Publication No 500, supra note . The UCP is essentially a set of standard terms for banks drafted by bankers. The Working Group that prepared the latest revision was the first to include members other than bankers, in this case some bank lawyers and two law professors. The parties documentary credits serve, exporters and importers, are not directly represented in the drafting process. See J. Andrew Spanogle Jr, ‘The Arrival of International Private Law’, 25 George Washington J Int’l L & Economics 447, 492 (1992).

207 Courts in most jurisdictions outside the US are inexperienced with letters of credit, and the litigation of fraud under letters of credit is rare outside the US. Accordingly, there has been no opportunity elsewhere to develop a sophisticated and coherent body of case law on the issue of fraud in letters of credit. England has a sophisticated and well developed jurisprudence on letter of credit law in general, but not on the fraud issue in particular.

208 R Wight and A Ward, ‘The Liability of Banks in Documentary Credit Transactions under English Law’, 1998 J Int’l Business L 387, 390.

209 Articles 3 & 4 of the Uniform Customs and Practice for Documentary Credits, 1993 Revision, International Chamber of Commerce Publication No. 500.

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The Many Realms of Chinese Labour Law. Theory and Implementation of PRC Labour Law Reform

by Orlan Lee*

(2003) Oxford U Comparative L Forum 2 at ouclf.iuscomp.org | How to cite this article this article

Table of contents

Introduction

“Law, in particular its actual functioning in any given society, is above all a part of the culture of that society,”1 Jianfu Chen retorts. He articulates far better than many other Chinese students, scholars, and members of the literate public, their recurring alienation at the seemingly invidious comparison of the divergence between letter and practice in Chinese law with the supposed continuity in Western legal culture. “[T]o understand Chinese law, its nature and developments,” he says, “we need to examine the Chinese legal traditions, the prevailing political and economic situations, Party policies on economic reform and tolerance towards political liberalisation, and scholarly discussions and debate.”

There was a time 30 years ago when the Western legal practitioner or scholar observer had to attempt to assemble a legal anthropologist’s picture of normative values having the force of law in order to describe Chinese legal institutions at all. Thus, in his groundbreaking work on Chinese international trade law, Weggel hesitated:

The concept of a practice arising out of norms cuts two ways and needs some justification. It could be, for example, that in a particular area there were legal norms that were only unknown to the Western observer. In this case, the particular forms that had arisen in practice would not be sources of law, but rather simply the consequences of legal norms, which fell under [the rubric of character of Chinese law in general]. A variety of symptoms lead to the supposition that in many cases real “gaps in the law” are revealed, which can be filled in only through the “trial and error” of daily practice. In domestic law, for example, one is struck by the kaleidoscope of multiple forms and legal observances of local organisations.2

That bewilderment was justified in a society then just emerging from the throes of communist revolution, that had abrogated the laws of the republican period, and had lived in virtual isolation from the rest of the world for 25 years. But now, 25 years later, there have been widespread efforts at codification3 and the experience of many years’ practice. Why then the enduring reproach?

“In my Father’s house there are many mansions,” are words they attribute to Jesus of Nazareth, for creating an all-encompassing institution that means many things to many different people. The linguists prefer to say “abodes” to “mansions” today. But perhaps it is “realms” that they really mean. The house of Chinese law is also like a church where believers of many different leanings pray. You are obliged to deal with each one of them in their own “realms”.

Their perspectives may range from the bare patriarchal communitarian, to the socialist doctrinal, from black-letter regulatory administrators to those whose notion of a labour contract is anything you can get a labourer, who must be on contract terms, to put his name to,4 or to those who strive to make the system on paper work for the individual labourer. All of these perspectives and practices, law graduates of this century realize, may have some validity as a form of “living law” for different purposes — but each one leaves a great deal to be desired if taken alone to be the whole picture of law in China today.

Take a particular field such as labour law, the concern of this essay, and attempt to ascertain the current status of the institutions laid down in the PRC Labour Law Reform of 1994, for example. Despite all that has occurred since the law came into force, the haunting questions remain, “To what extent does the law on the books have relevance outside the panoply of administrative regulatory and licensing offices?”, and, “To what extent does it afford meaningful opportunity for the common labourer to go to law?”

I. Meaning in Terms of Complying with International Expectations

When reading the Peoples’ Republic of China’s (the PRC’s) Labour Law of 1994, one is struck with the extent to which the statute displays values shared with those in the forefront of the labour movement in developed countries. The new law admirably follows models of International Labour Organisation (ILO) Conventions — both those which have been ratified by China,5 and at least one which has not been.6 The reform law was codified from earlier attempts, and new provisions were enacted by the National People’s Congress (NPC) in July, 1994,7 and came into effect on January 1, 1995.8

However, to read that China has enacted laws in keeping with the highest ideals of the labour movement is not to say that China has, thereby, implemented all of those values, or is even able to do so very easily. One must remember as well that what is progressive for labour in a capitalist society, may also be reactionary in a society committed to Marxist socialism.9

The new Code (which for practical economic reasons — “applies to all enterprises and individual economic organizations” [Sec. 2]) proudly proclaims, for example, the labourer’s “right to … choose occupations” (Sec. 3).10 This is naturally a significant departure from the practice of assigned employment in the previous planned economy. However, the new rhetoric should not be confused with the concept of a “right to work” in the understanding so long cherished in the socialist heritage.

The “right to work”, the expectation that everyone fit to work, or desiring to work, should be able to claim a suitable job was historically a basic premise of socialism. In the PRC after 1949, it meant that the “work unit” (the danwei) would detail a person to his or her work assignment. There was not much choice involved in those days. Depending on the size and means of the enterprise, a worker also expected to be provided with housing, schools or day care for his or her children, medical care, and pension or welfare benefits — at least at the level the state owned enterprise (SOE) was able to provide.

The so-called “right to choose occupations” would free the worker from assigned employment by the “work unit”, though that may not necessarily be the result in all cases — until the “labour contract” employment has completely replaced the prior system. Yet, practically speaking, this signifies a gradual end to the system whereby SOEs provide social benefits. There is no guaranty that one may be hired by an employer one chooses. But that was never promised in the socialist dream.

The new law emphasizes that “a labour contract shall be concluded where a labour relationship is to be established” (Sec. 16). The same section defines that relationship: “A labour contract is the agreement reached between a labourer and an employing unit for the establishment of the labour relationship and the definition of the rights, interests and obligations of each party.” This may sound progressive in an unbridled capitalist society where employment is solely “at the pleasure” of the employer. Yet, if one expects specific job entitlements in this new employment relationship, they are generally not going to exceed those foreseen in the statutory guaranties of the labour law itself.

Left unspoken is that the labourer’s benefits in the socialist planned economy were not bargained for. Socialist doctrine has always emphasized that individual labourers could never attain sufficient bargaining power to obtain these on their own. Practically speaking, that means that not only must the labourer now provide for his or her own social benefits, but also that he or she will be employed only for as long as the contract runs or is in force.

However, the statute also provides that:

The staff and workers of an enterprise as one party may conclude a collective contract with the enterprise on matters relating to labour remuneration, working hours, rest and vacations, occupational safety and health, and insurance and welfare. The draft collective contract shall be submitted to the congress of the staff and workers or to all the staff and workers for discussion and adoption.

A collective contract shall be concluded by the trade union on behalf of the staff and workers with the enterprise; in enterprise[s] where the trade union has not yet been set up such contract shall be also concluded by the representatives elected by the staff and workers with the enterprise. (Sec. 33)

Collective bargaining” may operate, as herein foreseen, among the older SOEs, where any new proposed work contract could conceivably be put before an already organised in-house trade union, or staff and workers representatives. However, this is not likely in the situation where a new private or “foreign-invested” enterprise (an FIE) is just being set up.

In the latter case, the employer can be assumed to be looking for staff and labourers of choice. Furthermore, prospective employees will be offered a take-it-or-leave-it employment contract. On the assumption that multinationals or FIEs are offering higher wages — and that jobs are not easy to get — one can hardly expect that the individual staff member or labourer will do much negotiation on his or her own. Where manual labourers have come great distances in order to take advantage of any employment opportunity at all, with a small FIE, say in one of the special economic zones, they may not even be given the opportunity to read the contract before signing11 — if they are able to read and/or understand it themselves at all.

An employment contract also has the negative meaning that one is bound to an employer during the full course of the contract but has no assurance that a contract will be renewed if one remains for the whole term. That is, the worker cannot leave to accept a better offer, and may find that he or she has no work at the end of the contract. Notification of termination or non-renewal may not be given until the last day, but must be given at that time (Sec. 23).12 In that sense, “employment at will” — with statutory protection against termination without notice — puts the employee in a better position. In Hong Kong, where we also enjoy the sometimes illusory socially progressive protection of an employment contract, typically, professional people now expect that they may have to buy their way out of a contract if they do not give due contractual notice in resigning, as, for example, to accept better terms that will not wait.

The new Labour Law of the PRC expresses precisely that employer friendly expectation:

Labourers who revoke labour contracts in violation of the conditions specified in this Law … and thus have caused economic losses to the employing unit shall be liable for compensation … (Sec. 102);

and similarly:

The employing unit that recruits labourers whose labour contracts have not yet been revoked shall, according to law, assume joint responsibility for compensation if economic losses have been caused to the original employing unit of the labourer. (Sec. 99)

Surprisingly, the legal literature of this theoretically Marxist-Leninist state omits mention that the “economic loss” of the employee who is unable to take advantage of an occasionally more favourable job opportunity can be far more damaging than the potential inconvenience of loss of an employee to the work unit. Surprise may, of course, be diminished if one acknowledges that both arch conservative and Marxist social theory promote collectivist interests (whether of the state or the employer) over individual benefit.

Therefore, if one wonders whose values this new law protects first, one is bound to be confronted with the preferred status of the employer. Contrary to Marx, who saw labour as the source of economic value, this legislator sees the employment unit, public or private, as the vehicle of collective economic development.13 Those who drafted the law surely knew what course they were taking. The policy makers surely knew what obstacles they would encounter as workers were told that:

  • Yes, they would have “choice of occupation”; but,
  • No, they would not have the continued guaranty of their welfare benefits.

Obviously the “reform” was made in an effort to assist uneconomical industries to reorganize — but also to enable them to shed the vast expense of social welfare benefits. That may allow some enterprises to become more profitable. But, it also means that many labourers and their families will have to provide for themselves for the first time, with no assurance that they will be able to manage.

Theoretically, the PRC Labour Law reform of 1994 represents, aside from the sensitive area of labour union organisation, and the abandonment of the social welfare society, a major step in the direction of conforming with the aspirations of “progressive” international labour law. Hilary Josephs has written:

The 1994 Labor Law represented significant advances in protections for the rights of Chinese workers while maintaining previous anti-democratic attitudes to independent labor organizing …14

Social reality is, however, more what Malcolm Warner describes: “ongoing reforms of the management of human resources” and “ongoing moves towards greater use of labour markets” dating from the 1980s. But, as he says, “there is frequently a gap between intent and practice.”15

To summarize the statutory provisions briefly the “rights” and protections afforded the labourer under the 1994 Labour Law, include, the rights:

  • to be paid;
  • to have rest days and holidays;
  • to protective measures in the workplace;
  • to training to improve skills;
  • to guaranties against discrimination on the basis of race, national group, sex, or religion;
  • to a minimum wage set by the local government;
  • to a contract setting out work and pay conditions;
  • to a work week limited to 44 hours and six days;
  • to an eight-hour work day; and
  • to overtime that is limited and compensated for at a set rate.

There are also special provisions:

  • to prohibit child labour below the age of 16;
  • for the protection of women, including pregnancy leave and 90 days leave after childbirth;
  • for dispute committees to be set up in the workplace to include both employers and workers; and
  • to cover social security, health insurance, workers’ compensation, and pensions.

Shortcomings of the law should not be ignored simply out of regard for its advances, however. The basic Marxist features of the existing socialist system remain:

  • no express right to strike;
  • no right to organise independent trade unions;
  • no freedom of political persuasion; and, now,
  • limited employment security; and
  • no automatic provision of welfare benefits by the employer. 16

Nevertheless, the enactment of the Labour Law demonstrates that the government has not simply been sitting idly by in the face of deteriorating labour conditions in uneconomical industrial organisations. But the official view of what is accomplished here is sometimes a little rosier than practical experience warrants. In a review of the new situation in the Beijing Review, we are told, for example:

According to an official in the Labor Relations Bureau of the Labor Ministry, the Chinese labor force is now split into two groups because of the job selection priorities—those who value higher pay go into foreign or private businesses, whereas those who place importance on welfare (including housing, health care, and pension) stay in the public sector. He said “This is sometimes a dilemma since most wish they could have the best of both.”17

In reality, of course, most workers have no such choice. True, there are now private and “foreign-invested” enterprises in the economy. But the former are often the last resort small vendor stands run by labourers who have lost everything else, who are retired, or who are better classified as simply “unemployed”.18

II. Consequences for Foreign Multinationals

Large foreign multinational corporations are big targets.19 Naturally, they have to treat seriously any new piece of legislation that purports to affect how they do business. They must make every effort to conform with the law of the land — even if the human resources policies that they are required to adopt may apply practically only in their own “realm”.

There is a sizable professional literature, written from the point of view of the legal and management consulting professional, to guide them in this effort. This includes the highly instructive legal practitioners’ and business managers’ handbooks edited by Dr. Andreas Lauffs, labour law partner in the largest international law firm in the China practice.20 Practically speaking, however, the multinationals must employ these Western firms to organize their personnel policy, and then hire an additional local firm to “sponsor” their efforts before the official licensing agencies.

Enforcement in this “realm” consists of compliance by the multinational with respect to its organisation, terms of employment, etc., and/or any effort by the applicable state authority to bring the documentation of the multinational into compliance. Since employment in this “realm” is likely to be the most sought after, the need for or occurrence of labourer claims is not high.

That is the point, however. Unless the labourer brings a complaint the administrative, regulatory agency has no way of knowing of non-compliance — because the multinational will have gone to great lengths to register its compliance. In China today — as in ancient times — documentation tends to speak for itself. In the language of the statute:

A labour contract once concluded in accordance with the law shall possess legal binding force. The parties involved must fulfil the obligations stipulated in the labour contract. (Sec. 17)

The danger here is that, in a part of the world where “law” and “contract” tend to be given very rigid literal reading by administrative agency personnel, agents of the official labour union, and the human resources office of the employer, the potential career advantage of an employee, or wage advantage of a worker plays no role. And there is no doctrine of “involuntary personal servitude”.

Similarly, if the same administrative agency or administrative personnel are unsympathetic in their reading of a contract, or perceive a provision to be invalid, again, the statute appears to speak for itself:

An invalid labour contract shall have no legal binding force from the very beginning of its conclusion. (Sec. 18)

The danger here is that the agency which administers the statute, and is probably not out of line in claiming to know best the policy of interpretation, tends to leave no room for discussion. There appears to them to be no need for independent review, where the statutory prohibition already appears to contain the apparent self-executing judgment as well.21

This is a cultural phenomenon wherever “law” tends to be understood as a very literal reading of statute, only — or of agency favourable provisions, only. In Hong Kong, for example, we do have the theoretical opportunity of going to judicial review of an agency determination. But, in the face of agency tenacity, at public cost, and a loser pays rule, in a jurisdiction with a tremendously high cost of litigation, the insitutional difference with the PRC can appear to be totally illusory. For the average citizen in Hong Kong, litigation with any better funded party is tantamount to playing Russian roulette with bankruptcy.22 On the other hand, there have been notable successes for those on legal aid, who had nothing to lose23, or those with unlimited resources who could afford to gamble out of sheer stubbornness.24

In the case of “invalid provisions”, cited above, however, sections of the contract which are valid and those which are invalid are separable, and “invalidity” “shall be confirmed by a labour dispute arbitration committee or a people’s court”. But the agency that set the whole process of compliance in motion has nothing to do with enforcing it. The employee must litigate at risk of losing his employment or at best spoiling the relationship with the employer. The agency is above the fray.

Whether or not the labourer — or better said, “the employee” — brings a complaint, depends, generally, more on how high his or her wages are, whether or not the job is replaceable, and whether he or she is willing to risk being known as a troublemaker, than on the degree of violation of the statute and of the rights of the employee. This is not just idle speculation. But more will be said about this problem at Section V below.

III. Consequences for SOEs

For the state owned enterprises (SOEs), the new statutory contract-based labour system, where in force, effectively does away with 50 years of the institutional social compact of the socialist state. The labourer may have had very little to say about assignment to a job in the previously existing system. Yet, for 50 years, housing, schools, medical facilities, and pensions were all organised around the state owned workplace.

It is this entire social welfare institutional structure that non profitable SOEs aspire to cast off in order to convert uneconomical enterprises into economically viable ones.25 It is also at this point that takeover or merger proposals with other local enterprises, or foreign investors, who believe they can breathe new life into what may be inherently viable underlying enterprises, falter. As one such M&A venture capital consultant put it: “We were interested in the underlying steel business. But we did not want to take over 150,000 employees”, which would have included the nursery and school teachers, medical personnel, housing authority, estates maintenance, etc. A business enterprise, even in a social market economy, is not a social welfare institution.

The term “downsizing” was not invented for the vocabulary of the socialist state. Nevertheless, the attractions of this process have not been lost on Chinese management. In the long run, such added “flexibility” in the employment market, and entry into the World Trade Organization may ultimately, though not at present, turn the economy around.

However, as figures begin to come in, we see just how bad the employment situation in China can be. The BBC has reported variously: “About 11 million workers were laid off in 1997 and nine million lost their jobs in 1998.”26 In the year 2000, the BBC reported that “in eastern China …, large and medium state firms cut their losses by nearly 25%, but in the west they managed a reduction of only just over 3%.” However, “many state firms are struggling to keep afloat, and at least seven million redundancies are predicted this year.”27 In May, 2000, they quoted Reuters: “unemployment in the worst-hit city of Liaoning was running as high as 90%.”28 In June, 2000, they reported, “more than six million workers had been laid off in the first five months of the year” with the possibility that the figure could reach 12 million by the end of the year.29 In March, 2002, the BBC quoted Prime Minister Zhu Rongzhi, to the effect that urban unemployment is one of the country’s most pressing problems and that:

Increased foreign competition brought by China’s entry into the World Trade Organisation could lead to a doubling of the official urban unemployment rate over the next few years from 3.5% to 7% or about 30 million people.30

On the other hand, if recourse to the Labour Reform’s system of labour arbitration and labour tribunals works anywhere in the Chinese economy, the somewhat unsystematic case reporting manuals seem to indicate that they enjoy more vitality in the SOE “realm”. For it is practically only in the SOEs that labourers retain sufficient personal economic independence, and/or social cohesiveness, to confront their employers, either individually, or as groups, over the employer’s non-adhesion to the new protections offered to labour.

An individual labourer, or organised groups of labourers, who have a home and a social support system, can take a stand that would be potentially suicidal to contract labour totally dependent on the employer enterprise — as in many a “foreign-invested” small enterprise (the FIEs), for example.

But even a labour arbitration and labour tribunal system that functions fairly well in good times, cannot sustain itself in an economy so damaged that it cannot enforce its decisions — or where officials are so complacent or pre-occupied that they do not realise that the entire judicial and social system may be at risk. Thus the BBC reports:

…the contradictory system of struggling state firms being responsible for paying unemployment benefits to the same workers they have just laid-off is clearly breaking down in some parts of the country.

Such problems have provoked a series of protests – this month [March, 2002] up to 50,000 laid-off workers have demonstrated in Daqing in north-eastern China, demanding unpaid benefits and pensions.

And 30,000 workers in another north-eastern town, Liaoyang, have staged two weeks of protest against non-payment of wages and official corruption.31

During the demonstrations at Shenyang in May of 2000, it was reported that a thousand workers surrounded the mayor’s office, calling on him to listen to their demands for back pay and for release of three detained workers:

One official confirmed that around 2,000 staff had not been paid for up to 16 months, while a similar number of retired and laid-off workers had received no benefits for up to six months.32

In March 2002, the BBC reported:

About 200 retired workers [of the Beijing Automobile Works] have staged a protest in the Chinese capital Beijing to demand unpaid pension benefits.

An official at the company told the BBC the firm had not paid the workers their health care fees since 1998, and their retirement pensions since 1999. She said the factory, which has stopped production, simply did not have enough money.

She said the company’s manager had been away at a meeting, but the workers were planning to return on Thursday in the hope of seeing him.33

In other words, the problem of non-enforcement in the SOEs is similar to the problem in the multinationals. Law and power tend to reside under one roof in China. And power, even when it is close by, is far away in its concerns. Even the manager of a bankrupt company is “away at a meeting”. Armed police and “para-military” troops34 were deployed in Liaoyang and Daqing although no violence was reported. Peaceful assembly for redress of grievances has never been counted among “Asian values”, but is certainly not tolerated in the PRC. From experience of the Russian Revolution, it would not have mattered if demonstrators were singing “God save the Czar” — if no one is listening.

Unfortunately, there are not many below the rank of Prime Minister Zhu Rongzhi willing or able to take on the plight. A year ago, there were reports of a design for a new social security and unemployment insurance scheme expected, eventually, to cover 200 million people. To cover employees, or “labourers”, that is. 800 million people in agriculture would not be covered. The Minister of Labour and Social Security, Zhang Zuoji, is reported to have said: “In rural areas … the main form of insurance is still provided by families, which completely conforms to the national condition and ethics of China.”35 In other words, in China, families look out for themselves.

IV. Consequences for Capitalist Small Enterprise

Many of the “foreign-invested” companies (FIEs), now fill the important roles of out-sourcing suppliers and distributors for multinational consumer goods and heavy equipment manufacturers. The FIEs are where they are because these foreign investors have recognised a niche in the market. Therefore, if they are in business, they tend to be doing well.

Investors in this branch have to know the local areas where they operate. Therefore, this “realm” tends to attract overseas Chinese. However, especially in the case of the Taiwan, Hong Kong, Macau, and Korean small enterprises, FIEs are often abusive sweatshops. They tend to cluster around the larger seacoast towns, and are, therefore, often a long distance from the home villages of workers attracted to them from the interior because of lack of work in their own areas.

These primarily “foreign-invested” small enterprises frequently prefer to hire compliant teenage girls, who come looking for temporary extra income for their village families, rather than hiring male heads of households seeking steady and reliable sources of income for their families,and  who are more volatile if they become excited.

Conditions do vary — often between “foreign-invested” enterprises set almost side by side. The author has also visited modern and much more congenial workplaces among the smaller FIEs. In one Pudong venture, for example, conditions seemed comparable to the best in similar enterprises in Hong Kong, office personnel were better dressed than is usual even in his home university.

This may also correspond to how much human resources policy a large multinational buyer or investor exerts on the local supplier or agent. There have been extensive campaigns by Hong Kong and overseas Chinese labour groups aimed at consumers in Western countries intended to force multinational consumer goods producers to exert influence on their out-sourcing suppliers. In many cases the multinationals have adopted policies and even source inspection junkets. However, these yield mixed results.36

Moreover, the picture is not complete without considering the corruption, both in the form of squeeze that local officials can put on the small foreign entrepreneurs for setting-up approvals (especially in the Special Economic Zones [SEZs]),37 and on the migrant workers looking for opportunities beyond their home villages. Reports tell us that migrant peasant workers in the heartland who make the “choice” to find work in the coastal enterprise zones are under pressure to hand over “as much as a year’s salary,” to local cadres for the privilege of relocating to the coastal enterprise zones, where yet another payoff may be required by the local labour bureau for permission to take a job there.38

If, however, workers stay just beyond the limits of the SEZs — as for example, in Baoan County in Guangdong Province, which lies just outside the Shenzhen SEZ across the border from Hong Kong — there is theoretically no legal barrier to relocating to the area. But, there, wages are substantially lower (recently wage levels in Shenzhen were two to five times higher than in Baoan), and work safety standards and labour law guaranties may be ignored by the local authorities.39 As one plant manager in this region put it: “the reforms are not 100% observed.”

Yet, concern in the early days that the reforms might, indeed, be enforced — adding the increased costs of the minimum wage, regulated working hours, mandatory leave and rest days, unemployment insurance, social security tax, medical insurance, and workers compensation — led to widespread fear in particular among overseas Chinese small investors that China might be pricing itself out of the market. There was immediately concern — before the Asian economic crisis — about whether it would not be more profitable to move investments to such places as Indonesia or Vietnam:

According to Taiwan estimates, the cost of their investments in China would increase by between 9 per cent and 13 per cent. If the scheduled labour law rights and responsibilities are implemented, they believe the cost to (other) foreign investors will increase at a rate of at least 20 per cent …

Not only will the costs to foreign investors increase, but also the enterprises in China and joint venture partners will have increased costs because, under the labour regulations enterprises, whether invested in from outside China or from abroad, big, medium-sized, or small, all will increase their costs. The direct and indirect reasons for these increases are as follows … the eight-hour day, the average 44-hour week … compared with common practices of 8-10 hour day, the six-day week, at least … 48 working hours a week. Shortened working hours will require employing more workers and increased labour costs.40

Conditions in FIEs are not universally bad, as observed above. An outspoken branch manager at a particularly desirable Pudong installation pointed out to the author that since they needed the extra hours, they included a waiver in the work contract for “business meetings” on Saturdays. Because, here, conditions and compensation are also more attractive, there has not been any complaint.

The statute also provides that:

The employing unit may extend working hours due to the requirements of its production or business after consultation with the trade union and labourers, but the extended working hour[s] for a day shall generally not exceed one hour; if such extension is called for due to special reasons, the extended hours shall not exceed three hours a day under the condition that health of labourers is guaranteed. However, the total extension in a month shall not exceed 36 hours. (Sec. 41)

Complaints echoed by the China Labour Bulletin are, however, that, particularly in the outsourcing factories in the Pearl River delta region, hours range well beyond that permitted by statute, labourers are induced to sign “contracts” that they may not be able to read even if given the chance, and that they are uninformed about their statutory rights including to representation by a plant union.41

V. Are All Expectations of the Labour Law Reform Attainable?

In the days when it seemed the Cold War would go on indefinitely, the author and a delegation of student colleagues made a visit to East Germany on a student exchange. As we were shown the achievements of the socialist state a friend whispered: “If we had been born here, we would have no choice but to be revolutionaries.” “I doubt it,” I replied, “we would probably be trying to make the system work!”

The problem is, how do you make the system work when you believe in the need for the benefits that would exist in an ideal socialist society, and you also recognise that the economy requires basic market economy reforms? In some ways, the 1994 PRC Labour Law Reform is such an attempt to make the system work. On the other hand, the admittedly progressive reform comes as a kind of death blow to the socialist law labour constitution.

A vital concern with the advent of such far-reaching new labour legislation is the question: how realistic are the more grandiose of these expectations? There are inherent obstacles to realisation of the most progressive changes in Chinese society, whether in Hong Kong or on the mainland. The PRC Labour Law Reform guaranties a maximum 44-hour week and eight-hour day with one hour overtime (normally) compensated at time and a half, for example. We do not have such liberal statutory guaranties in Hong Kong — where, in normal times, there is a much more vibrant economy.

We do have a relatively progressive labour constitution in Hong Kong.42 Progressive, that is, from a capitalist point of view. We do have the assurance of six day work week (five and a half days is now more common), a number of statutory public holidays, and two sick leave days a month the first year of employment and four days a month after that. But there is nothing so progressive, in Hong Kong, as a limit to the number of hours worked per week. A university appointment letter, like other employment contracts in Hong Kong, envisages 38 hours a week of regular office hours (assuming you eat lunch on your own time). But that is a minimum. There is no limit to how long you may be asked to, or expected to, or feel driven to work beyond that.

Academic people do not keep track of overtime — or expect to be paid for it. Our former students do keep track. A 10-12, at times 12-16, hour day is not uncommon for us both. No one stands at the door to keep us in. Colleagues who have worked in Wall Street law firms can guess how office discipline works in some multinationals in Hong Kong. People watch each other — and watch themselves. But our BBA graduates submit to it for only a fraction of the pay.

Our graduates do harbour the thought of being paid overtime, however — and their employment contracts generally do call for it, although not the statute. Yet none of them would be so bold as to demand compensation — beyond what their employers occasionally actually provide as a substitute. (Frequently only compensatory leave time — if there is ever a slack period to collect it.) This applies not only to local Chinese firms — it applies to multinationals as well.

The framers of the PRC labour reform law have foreseen the eventuality that some employers may seek to defeat not only favourable provisions of contract, but also of the statute — as, for example, in ignoring statutory work hours:43

Conclusion and modification of a labour contract shall follow the principles of equality, voluntariness and unanimity through consultation, and shall not run counter to the stipulations of laws, administrative rules and regulations. (Sec. 17)

An invalid labour contract shall have no legal binding force from the very beginning of its conclusion. (Sec. 18)

Easily said, but how does it look in practice? Here the author must rely on reports of our Business School graduates with the Big 4 multinational accounting firms who are regularly sent to the mainland on assignment. They report that whereas in Hong Kong they may be expected to work 10-12 hours a day, and in busy periods, 12-16 hours a day, in the PRC, they regularly expect to work 12-16 hours a day or longer.

Obviously, a person following such a routine soon reaches a level of diminishing return. In that case, if the point of physical exhaustion is reached, in China the employee may simply put his head down on the desk. (Our graduates come back amazed at the fact that their mainland colleagues bring in their folding cots and take a nap during their two-hour lunch breaks.) But our Hong Kong graduates know that the job must get done during the mainland assignment period. If they leave “early” one day, they expect to work longer hours the next.

How then to justify the disparity they see in working hours and tempo with their mainland colleagues? Local management does not question it — nor do local colleagues: “The Hong Kong people are paid twice as much and no one questions that they work twice as hard,” our people conclude about how they are seen. Of course, Hong Kong graduates would not be sent to the mainland in the first place, if the firm believed that they had adequately trained people on the spot. Mainland colleagues, for the most part (although they also earn perhaps twice as much as they would in SOEs), take a different view. They mutter in Chinese business Chinglish: “You pay what, you get what.”

One could, of course, argue that these Hong Kong business school graduates are not “labourers”, they are “professionals”. For university professors in Hong Kong, maybe there is some theoretical parallel with the business managers and partners of major firms. For our BBA accounting graduates, however, that parallel is very strained. For at least the first half of their careers, they are employees.

Yet, why are even Hong Kong academic people driven by the same silent Chinese work ethic as big business and industry? In university, just as in business and industry, we combine a somewhat demeaning American corporate HR (i.e., “human resources”) language with Chinese submissiveness. Anyone beyond clerk accepts it silently as the fate of the working man or woman.

What I suggest is that even in Hong Kong, the labour constitution aspires to conditions that our social reality does not achieve. The stress and anxiety of middle management in Hong Kong is legend. But how hard is the pressure on “working class” labour? In Hong Kong, this class does watch the clock — if they work in the public sector. (In the public sector, especially, point 5:00 o’clock is the end of the working day for non professional staff.)

Until the introduction of “contract employment” in the civil service, as a result of the Asian financial crisis, there were expectations of both management and labour being protected in their jobs. My impression is that today labour is as unprotected as middle management in the private sector. But Hong Kong is also China. That is how we work here.

The above reasons have also led to a considerable amount of job hopping in middle management in the private sector among the younger generation.

VI. Consequences for Enforcement of Rights

Recently, the author and a colleague attempted to explore the record of reported cases under the 1994 Labour Reform Law in order to get an impression of the extent of efforts to enforce workers’ rights through the labour tribunals and the courts. Case reporting in China follows a different concept from either typical common law or civil law case reports.44 In the labour law area, we found a number of “manuals” containing discussions of cases that had arisen in particular geographical areas in the previous year. These obviously were intended to advise practitioners and/or legal officers on appropriate means of interpreting statutes and regulations — not to record legal argument or bases of reaching a reasoned decision. We summarized a number of such typical guidance cases collected in one of these manuals45 for that year, together with our impressions about the kinds of matters arising in litigation, the ostensible sources of conflict, and the style of treatment by the tribunals and the reporters.46

All of these cases appear somewhat disembodied from name, time, or place. One cannot tell from the reports whether the parties were represented or advised by counsel. The cases appear to have been chosen not as examples of problem solving, but rather as examples of applicability or non-applicability of the statute and regulations. Since most illustrations are of applicability, they give the impression that on the whole the law, or the tribunals, favour the labourer over the employer. It is common for Chinese judges to discuss cases in progress. This form of case writing seems to offer the distilled advice on what is likely to arise under the statute.

While few might challenge the employer over hours, pay, and many other working conditions, there are fundamental expectations in modern civilised society and developed economies, such as workers’ compensation. That is not always the case in the mainland, however. One does expect workers’ compensation to be paid in solvent SOEs. The labour disturbances in the PRC referred to above have arisen from non-payment of pension and welfare benefits in those parts of the country where formerly leading industries had become insolvent. (That problem arises from putting the social insurance scheme at risk by dependence on economic performance of the employer industry.) The challenge to enforcement of the worker’s compensation provision in the small private enterprise FIE “realm”, on the other hand, appears to stem from non-payment of insurance premiums.47

Reporting on such matters is not widespread in China. Therefore, an article by a freelance journalist about a successful workers’ compensation lawyer in Shenzhen aroused considerable notice in Hong Kong.48 According to the newspaper report, this self-trained lawyer had, from 1997-2000, sued a hundred factories on behalf of over a hundred claimants injured in industrial accidents, claiming a 90% success rate. It was also reported therein that the manager of a Taiwan-invested metal factory refused to comply with an award of RMB 192,081 to a worker who had lost his right arm in an industrial accident, and that he and managers of nine other Taiwan-invested factories had protested to the Shenzhen government that “accidents are part of industry” and that “[the heralded lawyer’s] existence is negatively affecting Shenzhen’s investment environment.”

It is extremely difficult to collect more than anecdotal case material of this kind. However, this man’s notoriety apparently led to his being eventually expelled from Shenzhen.49

Clearly, if there were basic efforts by government agencies to enforce the statutory universal workers compensation insurance scheme, it should be possible for mainland officials to bring about a reasonably orderly claims settlement system. While it is conceivable that local management on behalf of overseas Chinese invested enterprises do express sentiments as primitive in their attitudes towards workers’ welfare as those described in the article cited above, there should never be a need for litigation in the worker’s compensation area, if workers compensation insurance is in place as mandated by statute.50

That kind of incident suggests laxity on the part of local administration. Such incidents could hardly happen if the same thoroughness of the licensing procedure was applied in the small capitalist FIE “realm” as it is to major foreign multinationals as outlined in section II above.

VII. In-House Labour Organisation

The principle followed in the codification of the Labour Law was similar to that applied in the enactment of the Trade Union Law, which was adopted and came into effect in April, 1992.51 Although the Labour Law was largely drawn from a number of separate statutes, rules, and decisions, which had until then been applicable variously to state-owned, collective, private, and so-called foreign-invested enterprises, there are also some notable changes in the law as codified.

Formation of labour unions is governed by the 1992 Trade Union Law. This legislation calls for formation of “mass organisations of the voluntary unity of the working class”. It calls for trade unions to “educate workers to apply a good attitude towards their work, and to take good care of state properties”. As such the legislation retains the spirit of the Marxist collectivist social ambitions of the past, without much concession to the notions of the proclaimed social market economy of the present.

Aside from the continuing resistance to the recognition of independent trade unions in China, there can be little doubt that — at the theoretical level — the legislative advances incorporated in the PRC Labour Law Reform of 1994 begin to approach labour’s social aspirations in a social democratic society. From the point of view of the social promises of a socialist state, however, they necessarily represent a considerable loss of social welfare benefits.52

Just as in the case of the Labour Law, however, the laws affecting Labour Unions also operate in different “realms”. To say that, however, does not ease the pain of having to guess how the law is expected to operate in one’s own “realm”.

Thus, when it was announced that recent amendments to the Labour Law required that union representatives “must attend” all meetings of foreign invested enterprises (FIEs), this had to create immediate alarm among multinationals and potential foreign investors in Hong Kong.53 “What exactly is a ‘meeting’?”, it must be asked. Presumably formal meetings of the board of directors are intended to be covered. But what about weekly or even daily management meetings? Indeed how many persons must be present before any management discussion or instruction becomes a meeting?

As always, the greatest impact on compliance occurs in the “realm” of the large multinationals operating in China. It is tell-tale that the reporter from the South China Morning Post, who released this news, cites as her source Dr. Andreas Lauffs, the above-mentioned author and editor of the manuals for compliance, which are directed at the human resources departments of all multinationals.

Doubtless, concern in this “realm” is precisely what those who formulated this new provision had in mind. If law in practice operated only in this theoretical “realm”, labour, at least, would benefit far more from the Labour Law Reform. The tragedy of the labouring class in China is that all this takes place far above their heads. A chief complaint of would be labour organisers is that the average working man and woman in the Hong Kong, Taiwan, and other overseas Chinese FIEs surrounding Hong Kong, and along the China coast, may not even be aware that they are entitled to a local union.

Clearly, the central government — and the ordinary labourer — has to be concerned about possible decisions of the company affecting downsizing, or involving loss of jobs, for example. Does that mean that no conversation can take place without a union representative screening it for labourers’ concerns?

But, who exactly are union representatives? The Labour Union Law does not provide for independent labour unions or for senior officers elected directly by the membership. Concern of the rank and file membership has, therefore, been that the official union may be too close to management. In one rather desirable urban FIE, for example, the HR manager at first could not remember whether there was a workplace labour organisation. Later she recalled that, indeed, there was one, but that it had not been active for some time. The organisation leader had been the accountant, someone rather close to management, who was no longer with the company, and both positions had remained vacant for some time.

VIII. Conclusion

If the foregoing offers any lessons in the area of PRC labour law, or, dare I say, in the area of the concept of law itself, it seems to be that “law”, or better, “order” in China, is primarily a concern for those who draft the law and the legislators who implement policy. The agency of government charged with administration of the statute, or set up to enforce formalities of licensing, to carry out the formalities of compliance, particularly with managers of multinational firms, also operates at a highly bureaucratic level.

This part of the system is an edifice that seems to hang in the air. Enforcement effort by the agencies appears to be largely satisfied by on paper transactions. This does not mean that workers have no recourse whatsoever. It may be true that in the “realm” of the SOEs labourers are less hesitant to bring complaints. But if labourers are in the multinational “realm” that is already better off, they hesitate to disturb the way things are. Workers at the lower economic level of small FIEs tend to have come great distances to obtain work, presumably also at a higher wage scale. For them, too, being better off implies that they will not disturb the way things are. Social guaranties for the better off, therefore, tend to be as illusory as those for the less privileged. But the administration tends to take the calm as contentment. If, then, distress or disturbances do arise, as in the reports mentioned above, plant managers tend to be “away at a meeting” and mayors, who protesters seek out next, call out armed police.

This is not to say that individual questions of access to benefits, or even corrections of incidents of maladministration are never successful. Certainly individual labourers are not totally unable to pursue their rights in the PRC. Doubtless the foreboding that those with grievances could take them higher, and might do so, must have an inhibiting effect on those charged with compliance in management and enforcement. Nevertheless, the picture of “law in practice” which the system discloses is far more one of a bureaucratic machine, than one where occasional aberrations are closely followed up. As in all systems, the labourer may grumble. Yet, we see little evidence of active pursuit of corrective measures by the authorities — except or until scandal or disaster raises its head.54 And then the city, the province, or the central government itself must act.55

ADDENDUM: Matching Legislative Zeal with Socialist Roots

Citing the PRC Constitution and Legislative Enactments Since the 1970ies

I. Despite Legislative Reforms the PRC Remains a Socialist State

The People’s Republic of China is a socialist state under the people’s democratic dictatorship led by the working class and based on the alliance of workers and peasants.

Constitution of the PRC (1982), Art. 1.1

II. NPC enacts 320 laws since the 1970ies

The National Peoples’ Congress (NPC) has enacted more than 320 laws and decrees since the late 1970s when China launched its reform and opening up policy. Among them, 83 were promulgated by the Ninth NPC during the past four years.

This year, the Ninth NPC is expected to put the final touches on over 20 laws and decrees it has formulated or amended.

Since late 1999, China has begun to review its laws and regulations to make sure they comply with WTO requirements.

It has completed revision of seven laws, such as the Patent Law, and laws on Sino-foreign cooperative ventures and solely foreign-funded ventures, as part of its commitment to the WTO.

The State Council also promises to enact and amend 30 administrative regulations, of which 25 have been finished.

In addition, it abolished 12 administrative regulations that contradict WTO requirements. The number of rules and policies amended and annulled by ministries and commissions in line with the WTO spirit amount to more than 100.

(China Daily, Hong Kong Edition, Tues., March 5, 2002, p. 1)

III. Wrapping up the Legal System: Deputies Plan to Complete Target on Honing Laws by End of Tenure

… Zeng [Jianhui, spokesman for the Ninth NPC] said China has established the Constitution and Constitution-related laws, basic laws covering all social and economic areas, and related regulations since starting the opening-up process in the late 1970s, paving the way for the formation of the primary legal system. Zeng said the complete legal system is expected to be in place by 2010.

… Yesterday, Zeng reiterated that China would continue to formulate new laws and revise and repeal existing laws to keep them in line with the rules of the World Trade Organization (WTO), which China joined late last year. “During the three year phase-in period, we will beef up several existing laws including the Insurance Law, and draft the Anti-Monopoly Law,” Zeng said.

(China Daily, Hong Kong Edition, Tues., March 5, 2002, p. 1)

Endnotes

*A.B. (hons.) Harvard; M.A., Yale; Dr.jur.utr. (scl) Freiburg i. Br.; JurisDr., Pennsylvania; LL.M., Virginia; Adjunct Professor of Law, School of Business and Management, Hong Kong University of Science & Technology, and Visiting Fellow, Clare Hall, Cambridge.

Acknowledgements: This paper was originally presented at the international Conference on “Political Practice in Modern China,” at the East Asia Institute of the University of Cambridge, 25-27 June, 2002. The author is grateful for a grant from the Universities’ China Committee in London, that made attendance at the Cambridge conference possible. Research in this area was supported in part by a Competitive Earmarked Research Grant and a Direct Allocation Grant of the University Grants Committee (Hong Kong), and by the opportunity for research and reflection provided by Clare Hall, the College of Advanced Studies, of the University of Cambridge.

The author is indebted to Professor Malcolm Warner of Wolfson College / Judge Institute of Management Studies of the University of Cambridge for his encouragement, and the model of his own pioneering work in the area. He would also like to thank Jonty Lim, Esq. (Shearman & Sterling, New York), Wild Chang, Esq. (of the New York and Massachusetts Bars), and Mr. Jackie Chan, and Mr. Steve Ng (KPMG, Hong Kong) for their assistance in research and comment and criticism.

1 Jianfu Chen (1999), Chinese Law: Towards an Understanding of Chinese Law, its Nature and Developments, London-Leiden series on law administration and development, Vol.3 (The Hague; Boston, Kluwer Law International).

2 Oskar Weggel (1976), Das Außenhandelsrecht der Volksrepublik China (Baden-Baden: Nomos), p. 156.

3 The China Daily counts “more than 320 laws and decrees [enacted] since the late 1970s” with 20 more now before the 9th National Peoples’ Congress (NPC). See: China Daily, Hong Kong Edition, Tues., March 5, 2002, p 1, quoted in the addendum to this article.

4 China Labour Bulletin (CLB), reports that many new hires in the sweatshop FIEs (i.e., “foreign invested enterprises”) are obliged to sign contracts which they have neither read nor understood. See: e.g., Reform, Corruption and Livelihood, (CLB, October, 1998) (Vol. 1 of a compilation of telephone discussions between CLB chief co-ordinator, Han Dongfang and working people in Mainland China), Chapter 14 (Part 1), “Women Workers: First In, First Out”, and Chapter 14 (Part 2), “A Taiwanese Investor in Shenzhen”, online version at http://www.china-labour.org.hk/iso/article.adp?article_id=1008.

5 ILO Convention, No. 14 (1921), which requires that workers be given one day of rest per week (ratified, 1934); ILO Convention, No. 26 (1928), which seeks to set a minimum wage (ratified, 1950); ILO Convention, No. 100 (1950), which seeks equal pay for equal work (ratified, 1990).

6 ILO Convention, No. 47 (1935), which requires a 40 hour work week (not ratified by China).

7 For a brief history of the scope of drafting, see: Lin Feng (1997), “Labour Law,” in: Wang Chenguang and Zhang Xianchu, eds. (1997), Introduction to Chinese Law, (Hong Kong; Singapore: Sweet & Maxwell).

8 The text was published in Renmin Ribao at the time. A translation was included with a summary as Appendix 2 in Malcolm Warner (1995), The Management of Human Resources in Chinese Industry, (London: Macmillan; New York: St. Martin’s Press). The codification has also been used as a model for six additional laws covering social insurance, work safety, and labour supervision. See: “New Laws Gear Up Legislative Procession,” Beijing Review, January 16-22, 1995, p.6.

9 See also: O. Lee (1997), What Ever Became of Socialist Law? Back to the Industrial Revolution in China’s Joint Ventures, in: Sally Stewart and Anne Carver, eds., Coming of Age: Developments in Sino-Foreign Joint Ventures, Vol. 5 of Advances in Chinese Industrial Studies, (Greenwich, Conn.: JAI Press).

10 The translation of the version dated 5 July, 1994, is from China Daily , 6 July, 1994, p.2, as cited by ILO’s Natlex at http://natlex.ilo.org/txt/E94CHN01.htm .

11 See China Labour Bulletin, at http://www.china-labour.org.hk/iso/article.adp?article_id=1008.

12 Cases where the worker was sued for trying to leave (or for moonlighting) before his contract had run, and where a worker refused to leave, and sued when he was not renewed, are cited in O. Lee and J. Lim (2001), Progressive Capitalism or Reactionary Socialism? Progressive Labour Policy, Ageing Marxism, and Unrepentant early Capitalism in the Chinese Industrial Revolution, 10.2 Business Ethics 97, at 100-1. In Hong Kong, where we have similar employment contracts, there is generally a provision allowing the employee to leave on payment of a penalty and forfeiture of benefits. This is a concern at the professional and mid-management level. Typically, employment contracts are not really negotiated either in Hong Kong or on the mainland. However, the PRC statute obviously favours the market economy employer, as policy formerly favoured the state owned enterprise. As mentioned, the PRC statute does allow for “collective bargaining”. But that concept traditionally requires both arms length negotiation on the part of the labour representatives, and also an interest in securing flexibility in job changing and/or renewal terms. This cannot be assumed where both the FIEs and the SOEs offer take-it-or-leave-it contracts.

13 Marx was revolutionary in a capitalist economy. This law is conceived of as reformist in a Marxist society. Paradoxes must arise if a Marxist society pursues what would theoretically seem to be a reactionary course of action for practical reasons.

14 Hilary Josephs (1996), “Labor Law Reflects New Realities,” China Law Forum, fall; also: http://gb.hrichina.org/gate/gb/iso.hrichina.org/old_site/crf/english/96fall/e9.html. In the meantime, see also Hilary Josephs (2003) Labour Law in China (Huntington NY, Juris Publ.)

15 See the first discussion of the 1994 reform law in M. Warner (1995), The Management of Human Resources in Chinese Industry (London: Macmillan; New York: St. Martins Pr.) at p. 214.

16 See particularly the early discussions in China Labour Bulletin, No 6, August, 1994, p. 7; and also in No. 7, September, 1994, pp. 1-4.

17 See: “A New Problem—Labor Relations in Foreign Enterprises,” Beijing Review, May 15-21, 1995, pp. 6ff., at p. 19.

18 Since the early 1980s regulations have been relaxed to allow individuals to go into business for themselves. However, such persons, and their employees, were also required to leave the work unit and relinquish attendant claims on housing, health insurance, and pensions. In an article in China Business Review, “New Kids on the block,” May-June, 1994, pp. 36ff., Susan McEwen, summarizes the steps necessary to register as a small business entrepreneur: “Once these preliminary steps are completed [i.e., police, heath, safety, and licensing checks] the geti bu or siying qiye [i.e., businesses limited to seven employees or to eight or more] must register with the local bureau of industry and commerce. Entrepreneurs must submit proof of residence, a declaration of the scope and location of the business, a description of the equipment to be used, and proof of sufficient capital. Depending on the specific industry sector, siying qiye must also fulfill certain capital requirements. All private enterprise owners must prove their work status when registering. To do this, the owner must present a former identification card, unemployment or retirement certification, or a certificate of approval from his former danwei [work unit]” (p. 36).

19 “Provisional Regulations for the Establishment of Investment Enterprises by Foreign Business Entities” (1995), taken as the basis for a legal memorandum provided to the author for review at the time, called for the foreign investor seeking to set up a holding company in the PRC to demonstrate a total asset base of at least US$400M with at least one established joint venture already established having in excess of US$10M in paid up contribution, with at least three more projects underway, or the foreign investor must have had at least 10 manufacturing joint ventures with a total paid up capital contribution in excess of US$30M.

20 Lauffs, Andreas, gen. ed. (1997), China Staff Employment Manual (Hong Kong: Asia Law & Practice, Lauffs, Andreas, gen. ed. (1995a), China Employment Manual , 2nd ed. (Hong Kong: Asia Law & Practice); Lauffs, Andreas, hon. ed. (1995b), China Update: The PRC Labour Law , (Hong Kong: Asia Law & Practice).

21 Han Dongfang, editor of the China Labour Bulletin (CLB), expresses similar frustration over failure to implement even legislation favourable to labour. He cites reports in the Workers’ Daily about either outright conflicts of interest, or self-serving misconstruction of statute by officials of plant branches of the national union, who are often officials of both the company and the union. Although the Trade Union Law calls for election of officers by “members’ meeting”, “representatives’ meeting”, or “primary trade union committee”, it is reported that many workers are harassed or illegally rejected for election to union office in favor of hand picked candidates. Similarly, whereas “any worker” has the right to join the union, a temporary worker who had had union dues deducted from her pay, was, erroneously, informed that, as a “temporary worker”, she could not be a member of the union when she sought to draw minimal benefits that she had previously received. See CLB article of 12 March, 2003, online at: http://www.china-labour.org.hk/iso/article.adp?article_id=4089&category_name=Labour%20Laws.

22 This crucial dilemma in access to the courts in Hong Kong is treated in the Postscript to: O. Lee (2000), “Media Alarm and the Handover: the ‘Right of Abode’ Cases and Constitutional Crisis in Hong Kong,” Humboldt-Forum-Recht, HFR 10-2000, http://www.humboldt-forum-recht.de/10-2000.

23 As in the case of the last of the Vietnam boat people, who won asylum after 25 years, or the illegal immigrants seeking “right of abode” who won in the Court of Final Appeal — although, on petition of the Hong Kong Government, the Standing Committee of the National People’s Congress found error in the decision. Ibid.

24 E.g., in Attorney General of Hong Kong and Humphreys Estate, [1987] 2 W.L.R. 343 (PC). Here the richest developer in Hong Kong exchanged properties with the Government. The Government totally restored, and the developer destroyed, the buildings on their respective sites. But the developer changed its mind and withdrew after three years. Although both parties appeared to have changed circumstances completely, the case was decided on literal reading of the original written offer. It was held that, although the Government had relied to its detriment, because they had initially reserved a right to withdraw until a formal signing (which had not occurred), that right applied by mutuality to the developer, which, despite its requesting permission to destroy the building on the site for its own purposes, receiving permission to destroy the building, and destroying the building, among other things, had not given indication of its intent to give up its right to withdraw.

25 See, esp. the work of Malcolm Warner, (1995). The Management of Human Resources in Chinese Industry (London: Macmillan; New York: St. Martins Press); (1996) “Chinese enterprise reform, human resources and the 1994 labour law”, International Journal of Human Resource Management, 7: 779-796; and M. Warner [ed] (1999). Beyond the Iron Rice-Bowl, London: Macmillan; New York: St. Martins Press.

26 BBC News, “Six million lose jobs in China,” World: Asia-Pacific, Wednesday, 28 June, 2000, 13:57 GMT, http://news.bbc.co.uk/hi/english/world/asia-pacific/newsid_810000810014.stm.

27 BBC News, “China’s state industries cut losses,” World-Asia-Pacific, Monday, 3 July, 2000, 16:26 GMT, http://news.bbc.co.uk/hi/english/world/asia-pacific/newsid_817000/817623.stm.

28 BBC News, “Mass labour protest in China,” World: Asia-Pacific, Tuesday, 16 May, 2000, 15:58 GMT, http://news.bbc.co.uk/hi/english/world/asia-pacifid/newsid_750000/750641.stm.

29 BBC News, “Six million lose jobs in China,” World: Asia-Pacific, Wednesday, 28 June, 2000, 13:57 GMT, http://news.bbc.co.uk/hi/english/world/asia-pacific/newsid_810000810014.stm.

30 BBC News, “China’s unemployment challenge,” Business, Tuesday, 19 March, 2002, 14:34 GMT, http://news.bbc.co.uk/hi/english/business/newsid_1881000/1881153.stm.

31 Ibid.

32 See BBC News report in n. 20 above.

33 See: BBC News, “Beijing protesters block traffic,” World: Asia-Pacific, Wednesday, 27 March, 2002, 09:33 GMT, http://news.bbc.co.uk/hi/english/world/asia-pacific/newsid_1895000/1895970.stm.

34 See BBC News, “China labour protest suspended,” World: Asia-Pacific, Friday 22 March, 2002, 08:48 GMT, http://news.bbc.co.uk/hi/english/world/asia-pacific/newsid_1886000/1886977.stm.

35 See: BBC News, “China unveils huge welfare plan,” World: Aisa-Pacific, Sunday, 11 March, 2001, 03:57 GMT, http://news.bbc.co.uk/hi/english/world/asia-pacific/newsid_1213000/1213973.stm.

36 See, for example, the fliers by P.K. Shek in the series Change published by the Hong Kong Christian Industrial Committee: “Reebok, don’t do empty talk with Human Rights” (Feb., 1996); and “Mourn for the Deaths. Fight for the Lives!” (Apr., 1996).

37 See, esp., Brewer Stone, “Sino-Foreign Joint Ventures and Governmental Corruption,” in: Sally Stewart, ed., Joint Ventures in the People’s Republic of China: in Advances in Chinese Industrial Studies, Vol. 4 (Greenwich, Conn.: JAI Press, 1994), pp. 29ff.

38 See: e.g., “No Workers’ Paradise: Labour Activists Make Little Headway in Shenzhen,” Far Eastern Economic Review, June 14, 1994, pp. 35f.

39 See: e.g., “The Sweatshops Nearby,” Far Eastern Economic Review, May 14, 1992, pp. 56ff. The situation may have improved in Baoan itself since this report was written in 1992. At that time, it was expected that the Shenzhen SEZ might be expanded to include Baoan, which would have had the intial effect of depressing wages in the SEZ by doubling the size of the labour pool. It would also have applied the labour protection rules in force in Shenzhen to Baoan. The Labour Law which came into effect in January 1995 has done that in any case, whether or not there is the will or local capability to enforce it.

40 Wang You-chin (consultant, Dunstan Styles & Co., Hong Kong, and Law Consultant, Shenzhen District People’s Government, and Xiamen District People’s Government), “Difficulties with the Implementation of the Labour Law” (in Chinese), Hua Nan Ching Chi Hsin Wen [South China Economic News] (Hong Kong, January 26, 1995), p. 12.

41 See: China Labour Bulletin, at: http://www.china-labour.org.hk/iso/article.adp?article_id=1008.

42 See: esp. Employment Ordinance, Cap. 57; Labour Tribunal Ordinance, Cap 25; and Employees’ Compensation Ordinance, Cap. 282, Laws of Hong Kong, also: http://www.justice.gov.hk/Home.htm. See also the instructive surveys by H.A. Turner, Patricia Fok, and Ng Sek Hong (1991), Between Two Societies: Hong Kong Labour in Transition (Hong Kong: Centre of Asian Studies, Univ. of Hong Kong), and Ng Sek Hong and Victor Fung Shuen Sit (1989), Labour Relations and Labour Conditions in Hong Kong (Macmillan).

43 There is no statutory limit on working hours in Hong Kong. However, there are other dubious human resources (HR) practices such as treating “downsizing” as “counselling-out”. The employee is asked to resign in lieu of an unfavourable assessment (which has not actually been given, so it cannot be reviewed). By this means the firm avoids both contractual and statutory provisions for severance and/or long-service pay. Confidentiality is limited in the closed business society — so the benefit to the employee appears to be only a negative one: “He did not make trouble…”

44 See, e.g.: Liu Nanping (1991), “‘Legal Precedents’ with Chinese Characteristics, published cases in the Gazette of the Supreme People’s Court,” 5 Journal of Chinese Law 107ff.

45 Laodong Fazhi Peitao Fagui: Anlie Qingshu, 1996 (1997), (Labour Law and Accompanying Regulations: a Selection of Cases (1996), (Beijing: Industrial Management Publications).

46 See: O. Lee and Jonty Lim (2001), “Progressive Capitalism or Reactionary Socialism?” 10.2 Business Ethics: A European Review (Cambridge), pp. 97ff.

47 See: Part 2, “Failure to Pay Labour Insurance,” in “CLB Analysis of the New Trade Union Law,” China Labour Bulletin, 3/28/02, p.3 http://www.china-labour.org.hk/iso/article.adp?/article_id1956.

48 Lin Gu (2000), “One man’s bid for workers’ justice: migrant labourers crippled in Shenzhen factories find an angel in crusading lawyer,” South China Morning Post (SCMP) (Hong Kong), March 26, 2000, p.1

49 AP, December 28, 2001, “China labor rights lawyer ordered to close,” CNN.com./World , http://asia.cnn.com/2001/WORLD/asiapcf/east/12/28/china.lawyer.ap/, last seen, March, 2002. See also Craig Smith, “China Tells Lawyer Who Aids Injured Workers to Close His Office”, at http://www.sweatshopwatch.org/swatch/headlines/2002/china_jan02.html; in Chinese: http://cn.geocities.com/zhoulitai.

50 See the China Labour Bulletin’s survey of the problem of long-standing failure of management in various places to pay for workers’ compensation insurance: 28 March, 2002, p. 3, http://iso.china-labour.org.hk/iso/article.adp?article_id=1956.

51 A translation of the latter is also included in Warner (1995), as Appendix 1.

52 See: O. Lee and Jonty Lim (2001), Progressive Capitalism or Reactionary Socialism?, above n. 12. See also: O. Lee (1997), What Ever Became of Socialist Law?. above n. 9.

53 See: Vanessa Gould, “Unions gain veto on management decisions,” South China Morning Post (SCMP), Sat., 26 Jan., 2002.

54 Authorities have been repeatedly obliged to take notice of situations where labourers who were confined to dormitories on factory premises were unable to escape when fire broke out, and when punishment for petty theft was deemed unduly humiliating, as in the case of a woman confined to a dog cage with a pair of allegedly stolen shoes tied around her neck. Even then, it seems, the labour movement — particularly in Hong Kong — has been greatly concerned to demonstrate the degree to which foreign management negligence has been involved in industrial fatalities and illness. A number of these cases were discussed by the present author in: What Ever Became of Socialist law?, above n. 9.

55 Notable among incidents of this type in the past year were an explosion in a grammar school in Jiangsi Province where schoolchildren were engaged in making fireworks on school premises. This involved not only a violation of the prohibition on hiring children under 16 (Labour Law, Sec. 58), but also the apparent need to exploit eight year old pupils to supplement the school budget. See: BBC News, “Rising child labour in China,” World: Asia-Pacific, Wednesday, 7 March, 2001, 17:00 GMT, http://news.bbc.co.uk/hi/english/world/asia-pacific/newsid_1207000/1207349.stm.

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