The Issuing Bank's Liability To Honor The Presentation Under Letters Of Credit

The principle of autonomy of letter of credit and the principle of facially strict compliance are general fundamentals of the law of letter of credit. As far as banks in the operation of letter of credit are concerned, their undertakings under letters of credit shall not be influenced by the performance of underlying contracts, and they shall not intervene with those contracts, either.The operation of letter of credit is composed of a series of contracts. The contract between the applicant and the issuing bank is mandatory, while that between the issuing bank and the beneficiary is another contract in the form of letter of credit. The latter is the foundation of the issuer's liability to honor the documents presented by the beneficiary, provided that those documents are facially compliance with the terms of the letter of credit.The principle of strict compliance sets down the standards of bank's examination of documents. According to this principle, bank will check the documents rendered by the beneficiary in the face, but not materially. And the standard of strict compliance is flexible but not absolute.Due to the particular natures of letter of credit, bank's liabilities of breaching the undertakings of paying are different from the breaching liabilities under contract law. When the letter of credit is unduly paid, the applicant can only claim for direct loses and the interests. When the honor of the letter of credit is refused by the issuing bank, the beneficiary's claim is confined to the sum of letter of credit and the interests, while the profits lost in the underlying contract is not included.The fraud rule develops in order to close si loophole of the letter of credit law and prevent fraudulent beneficiaries from cheating the issuing bank and the applicant. The fraud rule does not appear in UCP 500, which is definitely regrettable. It is hoped that the next revision of UCP 500 will consider this problem and establish clear rules to guide the practice of letter of credit. The future fraud rules shall be based on the related provisions of UCC and the UNCITRAL Convention.