Banks Deal with Documents and Not with Goods or Services to Which the Documents May Relate - Coursework Example

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This essay seeks to analyze the role of banks in issuing letters of credit when the beneficiary demands payment. The limitations of the bank’s role in dealing with documents without exceeding these limits in the light of judiciary’s view will be discussed…
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Banks Deal with Documents and Not with Goods or Services to Which the Documents May Relate
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Download file to see previous pages This paper is divided into three sections: the principle of independence in the bank’s role in complying with the documents, analyzing the doctrine of strict compliance and the position of the bank in interpreting the doctrine and the bank’s duty in relation to the exceptions to the above doctrines.

2. The Principle of Independence
2.1 General overview
As Goode highlights, the principle of independence, or the principle of autonomy, is the most essential principle of a document of credit (DC).5 It is not an exaggeration to say that the true benefits of the LC go hand-in-hand with this principle. It is the “cornerstone of the law relating to a letter of credit”. This means that an LC is separate and independent from underlying contracts between the credit’s parties. In Nareerux Import Co. vs. Canadian Imperial Bank of Commerce, the Court of Appeal stated:
“A letter of credit thus exists in the context of three separate and distinct agreements: (i) the underlying contract between the buyer and seller; (ii) the contract between the buyer and the bank and (iii) the contract between the bank and the beneficiary…these contracts are separate and independent from each other”. In fact, the main purpose of the credit document is to create an ‘abstract payment’ commitment. Therefore, the rights and obligations resulting from the DC do not depend on the relationship between the seller and the buyer, with the former fulfilling his contractual obligations towards the latter. Generally, not carrying out some or all of these obligations does not give the buyer the right to ask the bank to withhold payment to the seller as long as the documents presented by the beneficiary are compatible ‘on their face’ with the LC. This is true unless it does not fall into any of the exceptions that will be discussed in Section 3 of this essay. Therefore, the commitments of both the confirming bank and the issuing bank are considered in regards to the documents and not the goods. This has been confirmed in the Sztejn vs. Henry Schroeder Banking Corporation case, where the court stated that: “It is well-established that a letter of credit is independent of the primary contract of sale between the buyer and the seller. The issuing bank agrees to pay upon presentation of documents, and not the goods. This rule is necessary to preserve the efficiency of the letter of credit as an instrument for the financing of trade.” Moreover, Act 4(a) the UCP 600 states that a credit is a separate transaction from any other underlying contract, and banks are not bound to such contracts. Therefore, the role of the bank is to honor, negotiate or fulfill obligations under the credit. However, the bank, as a plaintiff or defendant, in the case regarding the LC, does not have the right to plead its relationship with the other bank or with the buyer. This is true even in the case when the buyer does not pay for the LC. ...Download file to see next pagesRead More
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