THE AUTONOMY OF LETTERS OF CREDIT PRINCIPLE: HOW ABSOLUTE OR SACROSANCT?

Abstract

International trade involves business transactions which transcend boundaries of
countries. Parties are often a great distance apart and most often may prefer a
more secure mode of payment for the goods which are the subject of their sale
contract. The letter of credit offers a more secure payment option where a
financial institution stands in place of the buyer to effect payment for the goods,
on presentation of documents which conform to the stipulations in the letter of
credit. A key feature of the letter of credit is its documentary nature- the banks are
only concerned with the set of documents presented to it for payment and not the
performance of the contract of sale. Once conforming documents are presented,
the bank is entitled and obligated to pay and must not concern its self with the
underlying contract. This is the autonomy or independence principle of letters of
credit and it is considered sacrosanct. This article considers the extent of the
sacrosanctity of letters of credit. It finds that this principle, as with all general
rules, have limits of operation. In an event of an occurrence of an established
limiting factor- fraud and illegality- the independence of the letter of credit is set
aside and the underlying contract is examined to determine whether payment is to
be made under the credit.