Lloyd's Maritime and Commercial Law Quarterly
SHOULD THERE BE A NEGLIGENCE EXCEPTION TO THE AUTONOMY PRINCIPLE FOR LETTERS OF CREDIT?
Leung Liwen *
Fraud is the only widely accepted exception to the autonomy principle applicable to letters of credit. However, a recent decision of the Singapore High Court, Bank of China v BP Singapore, appears to support the possibility of a further exception: the negligence exception. Other lawsuits pending before the Singaporean courts also implicitly refer to (and plead) such a possibility. This paper argues that the negligence exception should be rejected.
I. INTRODUCTION
The Singapore High Court decision BOC
1 revived the possibility of a negligence exception to the autonomy (or independence) principle of letters of credit (“LCs”). This principle isolates the LC from disputes arising out of the contract underlying the LC (typically a sale contract). A bank cannot rely on such disputes to avoid paying the beneficiary of the LC (typically the seller). Courts are loath to interfere with the payment flow under LCs. Fraud aside, they take a hands-off approach and leave such disputes to be resolved between the parties of the underlying contract (and not the bank). Other exceptions to the autonomy principle are not widely accepted. Thus, any negligence exception faces a high barrier to entry.
The one and only widely accepted exception is fraud committed by the beneficiary.2 Outside North America, this is a narrow exception: there must be a material falsity in
* Research Associate, Centre for Maritime Law, Faculty of Law, National University of Singapore. I am grateful to Associate Professor Paul Myburgh, Associate Professor Christopher Hare, Wong Weitao and the anonymous referee for their comments and suggestions on earlier drafts of this paper. The usual disclaimer applies.
1. Bank of China Ltd, Singapore Branch v BP Singapore Pte Ltd [2021] SGHC 120; [2021] 5 SLR 738 (hereafter “BOC”); noted in D Neo, “Banking Law” (2021) 22 SAL Ann Rev 128, [5.6–5.9].
2. United City Merchants (Investments) Ltd v Royal Bank of Canada (The American Accord)
[1982] 2 Lloyd’s Rep 1; [1983] 1 AC 168 (HL); Brody, White and Co Inc v Chemet Handel Trading (S) Pte Ltd [1992] SGCA 66; [1992] 3 SLR(R) 146 (hereafter “Brody”), [20]. Cf RJA Hooley, “Bills of Exchange and Banking”, ch 36 of HG Beale (ed), Chitty on Contracts, 34th edn (London, 2021), vol 2, [36.514–36.516] (illegality exception); Beam Technology (Mfg) Pte Ltd v Standard Chartered Bank [2002] SGCA 53; [2003] 1 SLR(R) 597, [31–36] (limited nullity exception); W Day, Key Ideas in Commercial Law (Oxford, 2023), 15–17 (five exceptions: fraud, nullity, unconscionability, illegality and “contrary terms”). Another recent Singapore first instance decision has left open the issue of whether unconscionability should be a ground for resisting payment under a letter of credit: Winson Oil Trading Pte Ltd v Oversea-Chinese Banking Corp Ltd [2023] SGHC 220 (hereafter “Winson Oil”), [183–184]. Singaporean courts have gone beyond fraud and recognised unconscionability as a ground for resisting payment in the context of payment guarantees (also known as performance bonds): Winson Oil [2023] SGHC 220, [183–184]; Chian Teck Realty Pte Ltd v SDK Consortium [2023] SGHC 210, [1–3]. However, this extension by the Singaporean courts has hardly been accepted elsewhere and has been criticised: see N Enonchong, The Independence Principle of Letters of Credit and Demand Guarantees (Oxford, 2011), ch 7 and D Horowitz, Letters of Credit and Demand Guarantees (Oxford, 2010), ch 6.
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