The appellant bank issued an irrevocable letter of credit in favour of a foreign supplier at the request of the respondent.
The respondent alleged that the supplier fraudulently inflated prices and that the documents accompanying the draft did not strictly comply with the letter of credit.
The Supreme Court of Canada recognized the fraud exception to the autonomy of documentary credits, extending it to fraud in the underlying transaction, provided the fraud is clearly established to the bank's knowledge before payment.
However, the Court found the bank lacked sufficient knowledge of the fraud.
Nevertheless, the Court held the bank improperly paid the draft because the bills of lading failed to strictly comply with the prepaid freight requirement of the letter of credit.
The appeal was dismissed.
