The Importance of the Letter of Credit

One of the most distinctive features of this means of payment is that the payment obligation attached to it is abstract and it is independent of the underlying contract of sale or the transaction. The obligation of the bank to honor or to pay the letters of credit is defined in the terms of credit alone and not on any other conditions that the seller and buyer may agree upon. According to the UCP 500 and the recent UCP 600, under the letters of credit, the banks deal with the documents only and they are not concerned with the goods or services that the seller is supposed to deliver to the buyer as part of the consideration. In other words, the letters of credit are considered as an autonomous document and the bank from which it is drawn is bound to act in accordance with the terms attached to the letters of credit.
Since the bank is bound to the terms and conditions stipulated in the letters of credit, it must adhere to the strict compliance rule. Strict interpretation of the terms and conditions of the letters of credit means that whatever is not stipulated in the document is deemed excluded and whenever the beneficiary is able to meet the requirements set forth in the terms and conditions of the letters of credit, the bank is bound to pay the beneficiary (see Gian Singh v Banque de LIndochine1).
Although the principles of autonomy and strict compliance as applied to letters of credit are important in safeguarding the entities involved in international transactions, these principles may prove to be contentious in some instances. Note that since the bank is affected by rights and obligations of the buyer and the seller, there is always a chance that the bank will render payment even though the transaction did not fall through or is frustrated (see Gian Singh v Banque de LIndochine2). To give us a clearer picture of the effect of autonomy and strict compliance rules, let us discuss these principles one by&
II. The Principle of Autonomy