The Autonomy Principle of Letters of Credit

Abstract

This article explores the erosion that the autonomy principle has suffered in documentary credit transactions. When a seller and a buyer encounter too many hurdles to reach an understanding, the parties decide to ask banks to accept the liability and thus solve the difficulties. The appeal of letters of credit as instruments of payment in international transactions lies in substituting an often unreliable promise of payment from an unknown buyer with the very certain promise from one or more banks. The complexity of a letter of credit arises from the fact that it protects not only the issuing bank and the applicant under a doctrine of strict compliance, but also the beneficiary under the autonomy principle. Through a discussion of recent cases where courts have argued in favour of overcoming the autonomy principle, this article suggests that fraud is not the only exception to this principle of the letter of credit, rather there are other exceptions that could question its autonomy. This article argues that if courts around the world keep interfering with letters of credit turning them into ancillary obligations, soon beneficiaries will be forced to accept exclusively letters of credit issued or confirmed by banks within those jurisdictions whose courts are prone to respect the autonomy of an independent undertaking.