The autonomy Principle
The doctrine of autonomy is a principle in letters of credit transaction wherein the bank’s duty to pay is exclusively in irrespective of performance by the seller. In Article 4(a) of UCP 600 states that a credit by nature it is a separate transaction from the sale or other contract. It is the primary nature of the letter of credit is to create an abstract payment obligation for the bank to pay the beneficiary independent of the underlying contract between the beneficiary and the applicant even if an issuing bank knows that defective goods have been shipped in cases where the goods are shipped later than the specified time or that the preconditions as specified in the terms of the contract have not been met .
e. g. by shipment of goods which fail to correspond to the contract description, are of unsatisfactory quality or fall short of the contract quantity, does not entitle Buyer to withhold payment under the credit if the terms of the letter of credit have not been fully complied with. Issuing Bank cannot as a defense to a claim under the letter of credit, plead that it has a claim for damages or right of set-off against Buyer or it has not been put in funds by Buyer to meet the Credit. Seller as a beneficiary is not entitled to avail himself of the contract between Buyer and Issuing Bank.
In the autonomy of the credit the attempts by buyers to invoke breaches of the sale contract to prevent payment under a letter of credit have been blocked by the courts, whether the buyer’s line of attack has been an application for an injunction against the seller to restrain him from presenting the documents and collecting payment or against the bank to restrain him from presenting the documents and collecting payment or to restrain it from making payment under the credit. Even the illegality of the contract of sale does not affect the enforceability of the letter of credit. This autonomy principle is necessary because it helps the letters of credit to remain as good as cash.
In the case of Solo Industries UK Ltd v. Canara Bank it had been held that The bank is entitled to rescind a credit induced by a financial conspiracy or misrepresentation by Seller or his agent or to have the credit set aside for mistake, as where it has been issued to the wrong party who is aware that he has no right to it.
Also in the case of Hongkong and Shangai Banking Corp v Kloeckner & Co AG, It has been held that the bank may set off against the amount due to the beneficiary, Seller, a liquidated sum due from Seller to the bank” In the case of Hamzeh Malas & Sons v. British Imex Industries Ltd, the buyer claimed that the goods were defective and so applied for an injunction to prevent the bank from paying under the letter of credit. The court held that the injunction could not be granted. It laid that the opening of a letter of credit constituted a bargain between the banker and vendor of goods so imposing an absolute obligation to pay.
Fraud is the only exception to the absolute obligation of a bank to pay under a letter of credit in the principle of autonomy of credit. The essential element must be fraud on the part of the beneficiary or his agents in relation to the underlining contract of sale. However, a mere allegation of fraud is insufficient to affect the bank’s obligation to make payment under a credit , the documents must contain, expressly or by implication, material representations of facts that are untrue and further, the seller must fraudulently present the documents for drawing on the credit with the knowledge of such untruth.
In the case of Discount Records Ltd. v. Barclays Bank Ltd. , where the buyers, alleging fraud, sought an injunction to stop the bank from paying the sellers on the credit. It was held that mere allegation of fraud was insufficient to issue an injunction. Similarly, information that would lead a reasonable banker to infer fraud is insufficient. According to the courts, the fraud must be proven.
It is an essential requirement of fraud and knowledge of such fraud which the beneficiary and/or the bank must have for the fraud exception to be available. A seller, who is found innocent of fraud, is entitled to payment under the credit, and the issuing bank is entitled to reimbursement
fraud and as to the bank’s knowledge were held to be not only on the uncorroborated statement of the customer and the courts required strong corroborative evidence of allegation, usually in the form of contemporary documents, those emanating from the buyer for the evidence of fraud to be clear.
In Szteijn v. Henry Schroder Banking Corporation, it was held that “The principle of autonomy of credits did not apply in a case which involved not a breach of warranty but an intentional fraud on the part of the seller.
This distinction between a breach of warranty and fraud in US Case law has been described in Szteijn and in United Bank Ltd. v. Cambridge Sporting Goods Corp., which ruled that a bank could only be issued an injunction for not paying a Letter of credit when fraud is evident, and the bank has been informed of this before the documents had been presented.
A dissenting opinion has been given forward by the courts in Dynamics Corp. of America v. Citizens and Southern National Bank an equitable and broad definition of fraud was given and the injunction was granted even when fraud had not been clearly established since the beneficiary was not guilty of the fraud. Also in cases where the bank has paid against forged or fraudulent documents, it may sue for damages from the beneficiary under the tort of deceit or claim the proceeds back as money paid out through a mistake of fact.
The doctrine of strict compliance
The doctrine of strict compliance has been relaxed by the provisions introduced by the UCP 600. It is stated in Article 14(d), UCP 600. The document itself and international standard banking practice, need not be identical to, but must not conflict with, data in that document, any other stipulated documents or credit. “The above provision eliminates the narrow provision of Article 13(a) of the UCP 500, which stated that documents which are”inconsistent with one another,” will be treated as non-compliant.
The introduction of the new provision by the UCP 600 reduces the complexity presented by the strict compliance principle. It signifies that as long as the contents of the documents are not contrary to the LC, the bank will accept documents as in compliance. Accordingly by the UCP 600 will be able to minimise the volume of discrepancies in documents presented by the seller as the requirement for compliance becomes simpler and easier to perform. It gives the bankers a greater degree of flexibility that should result in fewer discrepancies and rejections. Another provision in the UCP 600 that comforts the seller is Article14(e) which allows the goods in all documents to be described in general and not be in conflict with LC requirements of the goods in a commercial invoice.
In Equitable Trust Co of New York v Dawson Partners Ltd, it was laid down that It is both common ground and common good and common sense that in both the transaction the accepting bank can only claim indemnity if the conditions on which it is authorized to accept are in a matter of the accompanying documents strictly observed.
In Bank Melli Iran v. Barclays Bank DCO, it was held that the bank was wrong to accept documents because they were inconsistent with each other. So is well settled that before the beneficiary can enforce his claim against the issuing bank there must be strict compliance with the conditions expressly set forth in the letter of credit.
The fact that the discrepancy is minor or that stipulations in the letter of credit might appear to the bank to serve no useful purpose is irrelevant. In Seaconsar Far East Ltd v. Bank Markazi Jomhouri Islami Iran the courts laid down the rule as to the specificity of documents for the credit, however trivial they might appear. It was held that the bank was entitled to reject the documents as the credit number and the name of the buyer could not be treated as trivial since they are specifically required”.
Uniform Customs and Practices for Documentary Credits, eUCP and International Standard Banking Practice (ISBP). In international trade, most documentary credits are expressed to be subject to the UCP published by the International Chamber of Commerce.
The eUCP are concerned not with the electronic issue of letters of credit, for which there is a well-established practice, but with a presentation of electronic records either alone or with paper-based records. This system of electronic presentation will have a number of advantages, allowing the beneficiary conveniently to present documents directly to the issuing bank instead of to an advising bank or confirming bank, and providing an automated system for the checking of documents, which is currently a laborious manual process, so saving labour and reducing the currently high percentage of discrepancies.
A documentary credit is held together by a series of interconnected contractual relationships. Firstly it consists of the underlying contract between the buyer and the seller. Secondly, the contract which comes into existence is an issuing bank agrees to act on the instructions of the buyer. The third type is that of when a correspondent bank agrees to act as per the issuing bank’s instructions and advises or confirms a credit. The last type is that when the payment undertaking was given to the seller by the issuing and confirming bank and its correspondent the contract of Sale.Particulars as for the insurance required may also be stated, with a requirement that the drafts must show on their face that they are drawn under this letter of credit of the issuing bank, identifying it by its number. The credit, if irrevocable, then ends with substantially the following clause.
The application of UCP 600
First of all, as stated in Article 1 under UCP 600, it is not automatically applicable to the letters of credit. The traders in an international transaction have the freedom to choose to derogate or amend the articles only by expressly indicating between the parties. The set of rules in the new version of UCP would take effect by contractual incorporation and so the validity and enforcement of UCP 600 rely heavily on the will of the parties and national laws.
In other word, traders in international letters of credit transaction are voluntary refer to the provisions of UCP 600, which are devised by the ICC for express incorporation into letters of credit. As a contractual stipulation, the UCP 600 has to be expressly included in an agreement by reference.
As for the individual article of UCP 600, it is admissible to exclude the individual article when opening a letter of credit. As stated by Article 1 under UCP 600: “They are binding on all parties thereto unless expressly modified or excluded by the credit”. An example of this exception is Article 23 c (i) of UCP 600.
Another issue was addressed in UCP 600 with regards to the standby letters of credit. Although the individual article is applicable for standby letters of credit, the majority of articles under UCP 600 are not applicable to standby letters of credit since standby letters of credit are not deemed as a payment instrument whereas UCP 600 is designed to serve in the payment for goods and service between a buyer and a seller. As Roy Goode observed that the UCP 600, which issued by trade and professional organizations could contribute to the development of uniform transactional rules to a considerable extent by establishing usages, which transcend the codes themselves.
Article 2 of UCP 600 introduces new definition section the meaning of “Honour”. which are divided into three categories: letters of credit are available by sight payment, deferred payment, and acceptance. according to Article 12 (b) of UCP 600, which is a new clause, prepayment before maturity also evolved in the nomination from the issuing bank. it is unnecessary to classify the definition of “honor”.
Revocable letters of credit vs. irrevocable letters of credit
The provisions regarding the irrevocable letters of credit address two points of concerns. there are no rules apply when letters of credit under UCP 600 stated that it is revocable although the UCP 600 is in favor of irrevocable letters of credit. The traders in international transactions may face the conflict that the applicant or an issuing bank has the freedom to choose to open a revocable letter of credit, however, new UCP applies in terms only to irrevocable letters of credit. it is necessary to general principle to balance the practical freedom of choice of revocable and the fact of the UCP 600, which is a set of terms available for contractual incorporation.
in Article 2 of UCP 600, which will be violated by the incorporation of UCP600 into a revocable letter of credit. Yet it deems that regarding this point, the incorporation of UCP600 should adopt a narrow approach, i. e. it is not permitted to apply the rules to a revocable letter of credit.
UCP 600 contains fewer articles than its predecessor, UCP500, the number being reduced from 49 to 38.On the other hand, it is arguable that the omission of the “reasonable time” may cause a new issue. The new provision under UCP 600 attempts to give each bank involved in the letters of credit a fixed time to examine the documents. According to Article 14 (b), it only provides the bank the capability five days to examine the documents where it is needed. The bank is entitled to pay without risk of liability towards the buyer on the day if the documents comply.
while according to Article 15 under UCP 600 the bank must honor or negotiate. The possible consequence of this is that the bank would be in breach of its duty to pay the beneficiary and would be liable towards the beneficiary.
Although the functions of UCP600 cannot be denied in the banking practice, still they are several issues cannot be solved well. It is argued that there is no reference to money laundering rules in the UCP600, which is concerned as a weakness of these rules. However, it deems that to include the requirements of criminal money laundering offences with the rules of banking practice which are voluntarily incorporated by parties could be somewhat odd. There are two problems deserved to be critically discussed in exception of fraud and the principle in the Santander decision. It deems that the occurrence of these situations mainly results from the nature of UCP600 that they are not the definite legislative rules.Among its changes are the introduction of separate articles covering definitions and interpretations, with the object of making the UCP easier to understand and use, as well as the elimination of phrases such as “reasonable time” and “on its face”.
Europe and the United States of America are concerned, the courts of law would treat the Uniform Customs, where they are not contradictory to its terms, as read into a documentary credit contract ‘between banker and banker or banker and buyer. Shortly, the Uniform Customs is not law; if included in credit contracts expressly or by reason of the general adherence to them of parties to the contract they are sputtery and binding on them. They would be so regarded by a United Kingdom court if they were adopted by the British banks.The traditional view in England is that the UCP is simply a set of standard rules having no legal force except so far as incorporated by reference into the contract between the parties concerned.