Letters of Credit in International Business: Autonomy, Strict Compliance and Other Solutions

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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 credit relies on the combination of the doctrine of strict compliance and the principle of autonomy of credit for the purpose of providing security to the beneficiary of the instrument against default by its counterparty under a contract and for the purpose of protecting a beneficiary from carrying credit risk during the course of a dispute under the underlying contract, or in order to support the obligation of the account party to pay a sum of money to the beneficiary.

Exception to the Principle of Autonomy of Credit
Fraud as an exception to the principle of autonomy of credit, although has been considered by the judicial systems of various jurisdictions, the Judges have been reluctant to intrude on the working of the instrument on any basis. The perspective of the Judiciary has been that any interference would hamper the efficacy of the process, and as a result sole purpose the letters of credit was designed to serve would be lost. This is seen in the first English case to consider fraud as an exception to the principle of autonomy, which was Discount Records Ltd v Barclays Bank Ltd [1975] Lloyd’s Rep 444 where it was held that a mere allegation of fraud was insufficient to issue an injunction. However, with time Judicial systems have attempted to strike a balance between on the one hand safeguarding the efficient working of letters of credit as an instrument of payment, and on the other ensuring that no one benefits at a cost to another, through the commission of acts of fraud, or engaging in conduct which is considered to be unconscionable by the wider society, and/or provisions of statute in some jurisdictions. Following is an analysis of the changing attitudes of Judges and the legislatures of a few key territories.

Position in the United States
The position in the United States is laid down in Article 5-109 of the Uniform Commercial Code, which provides that: 1. If ... a required document is forged or materially fraudulent, or honor of...
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