Letters of Credit in International Business: Autonomy, Strict Compliance and Other Solutions
Introduction
The rises in international trade over the last few decades lead to the boost in popularity of Letters of credit as a payment instrument. The considerable time lag between when the goods leave the country of the seller and reach the country of the buyer meant that the traditional methods of payment used in the case of domestic transactions were unsuitable. Two critical features of the letters of credit, resulted in it being considered as the best alternative.
1. The principle of Autonomy of the Letter of Credit
2. The doctrine of Strict compliance
Doctrine of Strict Compliance
According to the doctrine of strict compliance, banks are bound to pay the beneficiary the amount due under the credit upon the presentation of documents as mentioned in the letter of credit.
Autonomy of the Letter of Credit
According to the principle of autonomy of credit, the letter of credit which is a contract entered into between the applicant and the issuing bank is a separate and independent transaction from the underlying contract of sale entered into between the buyer and the seller. This principle was first recognized in common law. For example it was stated by Jenkins L.J. in Hamzeh Malas & Sons v British Imex Industries Ltd. 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 ( conform ) are up to contract or not.”
Parties to a letter of credit often regard the principle of Autonomy of credit as a term of the credit, by expressly indicating in the text of the credit that it is subject to the rules of the UCP 600. The principle of Autonomy of Credit is confirmed by Article 4 of the UCP, which provides that, “a credit by its nature is a separate transaction from the sale or other contract on which it may be based”.
The efficacy of letters of
The rises in international trade over the last few decades lead to the boost in popularity of Letters of credit as a payment instrument. The considerable time lag between when the goods leave the country of the seller and reach the country of the buyer meant that the traditional methods of payment used in the case of domestic transactions were unsuitable. Two critical features of the letters of credit, resulted in it being considered as the best alternative.
1. The principle of Autonomy of the Letter of Credit
2. The doctrine of Strict compliance
Doctrine of Strict Compliance
According to the doctrine of strict compliance, banks are bound to pay the beneficiary the amount due under the credit upon the presentation of documents as mentioned in the letter of credit.
Autonomy of the Letter of Credit
According to the principle of autonomy of credit, the letter of credit which is a contract entered into between the applicant and the issuing bank is a separate and independent transaction from the underlying contract of sale entered into between the buyer and the seller. This principle was first recognized in common law. For example it was stated by Jenkins L.J. in Hamzeh Malas & Sons v British Imex Industries Ltd. 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 ( conform ) are up to contract or not.”
Parties to a letter of credit often regard the principle of Autonomy of credit as a term of the credit, by expressly indicating in the text of the credit that it is subject to the rules of the UCP 600. The principle of Autonomy of Credit is confirmed by Article 4 of the UCP, which provides that, “a credit by its nature is a separate transaction from the sale or other contract on which it may be based”.
The efficacy of letters of
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