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Chhina, Ramandeep Kaur, Standby Letters of Credit in International Trade, International Banking and Law Series Vol. 19, 2013

Chhina, Ramandeep Kaur, Standby Letters of Credit in International Trade, International Banking and Law Series Vol. 19, 2013
Table of Contents

Chapter 1 Introduction

In the above quote, Lord Denning draws an analogy between performance guarantees (or standby letters of credit)2 and commercial letters of credit and asserts that they should both be governed by the same principle of autonomy. He observes that, exactly like commercial letters of credit, standby letters of credit are autonomous from the underlying transaction, so that a bank is only concerned with the documents presented under the credit and will pay only against conforming documents without any regard to external events. Both standby letters of credit and commercial letters of credit are abstract payment undertakings which, in the words of Roy Goode, are 'conditioned only by the terms of the documents in which [they are] contained'.3
The only recognized exception to the principle of autonomy is, as Lord Denning says, the fraud exception which forms the subject matter of this book. The central question which is going to be asked is whether it is indeed correct to treat commercial credits and standby credits on the same footing when it comes to the application of the exception — in other words: are standby credits quite as autonomous as commercial credits when it comes to fraud?

§2.02 Standby Letters of Credit and other Abstract Payment Undertakings

[A] Standby Letters of Credit Compared with Commercial Letters of Credit

Second, another characteristic shared by standby letters of credit and commercial credits is their autonomous nature. Both instruments are independent from the underlying contract between the applicant and the beneficiary. Under both instruments, the bank’s duty, in principle, is to pay against conforming documents without having any regard to whether, in the case of commercial credits, the beneficiary has


duly performed its obligations under the underlying contract and, in the case of standby credits, whether there has been a default by the applicant in performing its obligations.8 This principle of autonomy is widely recognized and applied by the courts worldwide and also enshrined in Articles 4 and 5 of the UCP600,9
to both commercial credits and standby letters of credit.

2This study argues that standby letters of credit and performance guarantees are legally and conceptually the same; therefore, the two terms have been used interchangeably in this book. However, these two instruments are compared with each other in detail in Chapter 2.
3Roy Goode, Essays in Patrick Atiyah, 211 (Peter Cane & Jane Stapleton eds., OUP 1991).
8Goode, Abstract Payment Undertakings in International Transactions, 22 Brook J. Int'l. L. 1, 3 (1997).
9Art. 4 of the UCP600 provides that: ‘A credit by its nature is a separate transaction from the sale or other contract on which it may be based. Banks are in no way concerned with or bound by such contract, even if any reference whatsoever to it is included in the credit. Consequently, the undertaking of a bank to honour, to negotiate or to fulfil any other obligation under the credit is not subject to claims or defences by the applicant resulting from its relationships with the issuing bank or the beneficiary.’ Art. 5 UCP 600 further provides that: 'Banks deal with documents and not with goods, services or performance to which the documents may relate.'

Referring Principles
A project of CENTRAL, University of Cologne.