The “Fraud Exception” exists when the beneficiary, for the purpose of drawing on the letter of credit, fraudulently presents to the confirming bank documents that contain, expressly or by implication, material representations of fact that to his knowledge are untrue. There is, however, an exception to the doctrine of independence. In short, it assures the beneficiary of certainty and promptness of payment, independent of any breach of the main contract.
The Independence Principle liberates the issuing bank from the duty of ascertaining compliance by the parties in the main contract.
Thus, as long as the proper documents are presented by the beneficiary, the issuing bank has the obligation to pay. Under this doctrine, letters of credit are independent of the underlying transaction. Unlike accessory contracts, such as a surety or guarantee, letters of credit are distinct because they are governed by the Doctrine of Independence, or the Independence Principle.
Letter of credit applicant vs accountee code#
Letters of credit are commercial transactions which are governed, first and foremost, by their own provisions, by the Code of Commerce and laws specifically applicable to them, and by usage and custom. This is governed by the terms of the application for the letter of credit The applicant obliges himself to reimburse the bank upon receipt of the documents of title. Between the applicant and the issuing bank. This is governed by the terms of the letters of credit.ģ. The issuing bank issues the letter of credit and undertakes to pay the beneficiary upon the latter’s strict compliance with the requirements in the letter of credit. Between the beneficiary and the issuing bank. This contract is governed by the law on sales for a commercial letter of credit, or the law on obligations for a standby letter of credit.Ģ. The applicant procures the letter of credit, while the beneficiary undertakes to deliver the goods to the buyer and the documents of title to the bank in order to receive payment.
Between the applicant or the buyer and the beneficiary or the seller.
Thus, there are three distinct but intertwined contracts in a letter of credit transaction.ġ. There are three parties to a letter of credit: the applicant, the issuing bank, and the beneficiary. The Supreme Court has defined it as “a financial device developed by merchants as a convenient and relatively safe mode of dealing with sales of goods to satisfy the seemingly irreconcilable interests of a seller, who refuses to part with his goods before he is paid, and a buyer, who wants to have control of the goods before paying.” Generally, a commercial letter of credit involves the payment of money under a contract of sale, while a standby letter of credit involves non-sale transactions to secure the fulfillment of the applicant’s obligations. Today, the letter of credit is facilitated through the banking system, and while it may operate differently from its centuries-old predecessor, it still fulfills the same purpose of assuring reliability and certainty of payment.Ī letter of credit is any arrangement whereby a bank, acting upon the request of its client or on its own behalf, agrees to pay another against stipulated documents, provided that the terms of the credit are complied with. This arrangement has endured throughout history because of its hallmark reliability. Back then, a letter of credit was exchanged between merchants, whereby the issuer of the letter promises payment and becomes liable to the addressee to enable the person named in the letter to procure goods or receive money in a commercial transaction. The use of letters of credit (LC) has supported commercial transactions as far back as centuries ago. Published 20 July 2020, The Daily Tribune
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