The Autonomy Principle - Essay Example

This also stands to be true in a scenario when the transaction is backed by a letter of credit that does not actually take place. On the one side, the letters of credit extension to the sellers the assurance of a guaranteed payment, while on the other side they safeguard the interests of the buyers by necessitating the presentation of the right documents that to a large extent ensure performance. Such documents may be the like of insurance forms, transportation documents and quality-related certificates.

The underlying dogma supporting the autonomy principles associated with letters of credit is that the transaction backed by a letter of credit stands to be autonomous of the sales deed formalized by the buyer and the beneficiary. To put it simply, the two essentially contractual arrangements mentioned above are regarded as being independent of each other. In other words, the utility of letters of credit is pragmatically solemnized by the severance of services and documents. It is this principle that is the legal ground on the basis of which banks agree to such transactions.

As already mentioned, a letter of credit is the legal and financial instrument, which extends to the beneficiary the security of getting the payment due to one. Yet, this bolstering of security to the beneficiary in a way dilutes the security against risk or loss to the account party. Thus, in the letters of credit, the balance of risk is tilted more in favour of the seller. Though the autonomy principle practically assures the expected commercial results in business transactions, this principle stands to be defective and inequitable when the underlying transaction is vitiated by fraud.

Under such circumstances, the autonomy principle gets limited by the fraud exception. In the United States, in Maurice O’Meara Co v National Park Bank, the court of law simply denied the possibility of invoking a fraud exception. The New York Court of Appeal ruled that that the primary concern of the bank should be pertaining to the veracity of the drafts and the accompanying documents, and not the associate transaction of goods.
Also in New York Life Insurance Co v Hartford National Bank and Trust Co, the court ruled that the inquiry of fraud by a bank needs to be limited to the establishment of the compliance of the documents with the letter of credit. Hence, the Uniform Commercial Code in the US allows the fraud exception only in case of fraud in the complying documents.

Besides as per Article 5-109(a) of the Uniform Commercial Code, even if a seller has committed fraud in the complying documents, the bank is still required to honour a letter of credit in a situation where the claim for payment has been transferred to a third party. The American approach actually safeguards the interests of innocent third parties, by allowing for a waiver of the fraud exception.  In Edward Owen Engineering Ltd v Barclays Bank International Ltd, the court ruled that a bank is not required to honour a credit obligation if the complying documents are forged or the presented request for payment is fraudulent and devoid of any right to payment.

Hence, in the UK, the fraud exception is applicable to both the scenarios that are while the presentation of the forged complying documents and a fraud committed in the contract backed by the letter of credit under consideration, in a scenario when the beneficiary is aware of such a fraud while presenting the complying documents. In a way, the English approach to fraud exception is more broad-based and holistic and is not unwarrantedly tilted in favour of the seller.

The US approach gives more consideration and importance to the hassle-free conduct and transfer of claims and is unnecessarily supportive of the financial well being of the innocent third parties to which the claims are transferred. Such an approach towards the fraud exception pertaining to the letters of credit tends to favour the sellers over the buyers and extends to the sellers the incentive to commit fraud. This provision gives the fraudulent sellers more manoeuvrability and space to operate and allows them to achieve their motives by collaborating with vested interests posing as innocent third parties. This is contrary to the very basics of trade that involves a just and honest exchange of value. In contrast, the English approach is more balanced and above board. It is in no way extends to the sellers the incentive to commit fraud and ensures free and fair commercial transactions by regulating the conduct of the sellers. This approach also protects the interests of the buyers and the issuers. The English approach is perfectly in tandem with the fundamental ethics of trade and commerce and adequately protects the interest of most of the parties engaged in a commercial arrangement by nipping the evil in the bud.