Lloyd's Maritime and Commercial Law Quarterly
The autonomy principle of letters of credit: an illegality exception?
Nelson Enonchong *
It is commonplace that the autonomy principle is fundamental to the law of letters of credit. Although a fraud exception to the principle has long been recognized in many jurisdictions, the question whether there should be an illegality exception has proved more controversial. Thus, whereas the American Uniform Commercial Code (UCC) does not make provision for an illegality exception, recent decisions of the English courts are in favour of the exception. This paper defends the view that the law should recognize an illegality exception provided that it is confined within a narrow scope. It explains the strict conditions that must be satisfied for the exception to apply and argues that fears that the exception would have a wide scope and therefore produce an unsettling effect on letter of credit transactions are exaggerated.
I. INTRODUCTION
Among the principles that are fundamental in the law of letters of credit is the principle of autonomy (also known as the independence principle).1
According to this principle, the letter of credit is separate from and independent of the underlying contract in respect of which it is issued.2
This means that claims or defences arising under the underlying contract do not affect the bank’s undertaking to pay.3
It is trite that the autonomy principle gives the letter of credit its unique attraction as a method of finance in international
* Barber Professor of Law, University of Birmingham. An earlier version of this paper was delivered as a lecture at the Law School, Doshisha University, Kyoto, Japan. The author is grateful to those concerned for making the funding available for that lecture.
1. See, eg, R Jack, A Malek and D Quest, Documentary Credits
, 3rd edn (Butterworths, London), para 1.41; B Wunnicke, D Wunnicke and P Turner, Standby and Commercial Letters of Credit
, 3rd edn (Aspen Law and Business, Gaithersburg), para 18.06.
2. See Art 3 of International Chamber of Commerce (ICC) Uniform Customs and Practice for Documentary Credits (UCP 500); Art 5-103(d) of the American Uniform Commercial Code (UCC), prepared under the joint sponsorship of the American Law Institute and the National Conference of Commissioners on Uniform State Laws.
3. Hamzeh Malas & Sons v. British Imex Industries Ltd [1958] 2 QB 127, 129; Edward Owen (Engineering) Ltd v. Barclays Bank International Ltd [1978] QB 159, 169; Power Curber International Ltd v. National Bank of Kuwait [1981] 2 WLR 1233, 1241. The principle is also well-established in Canada: Meridian Developments Inc v. Toronto Dominion Bank (1984) 32 Alta LR (2d) 150, 161; Morguard Bank of Canada v. Reigate Resources (Canada) Ltd and Canada Trust Co (1985) 40 Alta LR (2d) 77, 81; Bank of Nova Scotia v. Angelica-Whitewear [1987] SCR 59, 81; Morguard Trust Co v. Bank of Canada (1988) 10 ACWS (3d) 416, [56]; Fuji Bank Canada v. 1440 Ste Catherine Street Developments Inc [1997] OAC Uned 238 (CA), [56]; Royal Bank of Canada v. Gentra Canada Investments Inc (2000) 94 ACWS (3d) 724; Standard Trust Co v. Bank of Nova Scotia (2001) NFCA 27; and in India, Federal Bank Ltd v. VM Jog Engineering Ltd [2002] 4 LRI 204 (India SC).
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