On Independence Principle Of L/C

The letter of credit has become an indispensable tool for financing in the international commercial transaction since 1970. It has successfully replaced commercial credit with bank credit and thus solved the contradiction of mutual distrust between the buyer and seller in international trade. It keeps the international trade developing in a safe and stable way, so praised as the lifeline of international commerce.The great facility of letter of credit depends on its special independence principle, which is the foundation of L/C system. The independence principle posits that the contract of the sale of goods between buyer and seller is conceptually and actually independent from the letter of credit contract. In essence, the letter of credit arrangement is a documentary sale, not a sale of goods. Since no system or principle could be designed absolutely perfect, the independence principle of L/C has its inherent limitation. In practice, it is sometimes unduly utilized in L/C fraud. In order to assure a stable and honest circumstance for international trade, fraud exception was introduced to be a remedy.Fraud exception is the only one exception to independent principle, which is widely regarded as foundation to the entire letter of credit system. Although they are completely opposite, they both contribute to L/C system. Fraud exception means if the beneficially is proved to be fraudulent, an injunction will be given to prohibit the issuing bank from paying or honoring the draft. Thus shuns the application of independence principle and avoids losses. Since fraud exception directly opposes the independence principle, its application should be strictly limited. Otherwise, the L/C system would be seriously breached and fail to play its important role in international settlements.With our country's being a member of WTO, there will be more and more conflicts concerning L/C, which requires great improvement of domestic laws and regulations guiding L/C performance. In the past, due to the incongruent standards of fraud exception and neglect of independence principle, the international reports of our courts and banks were not appreciated. In order to change this status, we should take some experience from the advanced country for reference, making progress in both legislation and judicature, so as to provide a favorable legal environment for the rapid development of our nation's international trade.