Striking the balance between the considerations of certainty and fairness in the law governing letters of credit
Given that Commercial Law tries to balance considerations of certainty and fairness, it follows that the law relating to letters of credit, as part of the general body of Commercial Law, involves a similar balancing exercise. This thesis argues that this balance should employ five basic principles, namely: (1) party autonomy (freedom and sanctity of contract); (2) certainty; (3) flexibility; (4) fairness; and (5) good faith. The thesis begins with a brief introduction to the objectives of the study. Chapter one introduces readers to the basis of letters of credit and the historical background. The five basic principles and the tensions between them are examined in chapter two. Chapter three discusses briefly how these five basic principles are applied to the law regulating letters of credit. Chapter four focuses on disputes arising between the issuing bank and the beneficiary, evaluating in particular the principle of independency and the fraud exception. The most important doctrine in the law of letters of credit, the doctrine of strict compliance is explored in chapter five. Disputes between the issuing bank and the applicant are examined in chapter six and the standard of compliance governing the reimbursement agreement (whether strict compliance or bifurcated compliance) is evaluated in the light of the basic principles. Chapter seven, deals with disputes between the applicant (buyer) and the beneficiary (seller), evaluating the law on the nature of payment (whether absolute-conditional) in the light of the basic principles. The concluding chapter draws on the key points of the thesis to put forward an overview as to the adequacy of the law. Essentially, the law founds itself on two cornerstone principles, the independency principle and the doctrine of strict compliance. Whereas the former protects the interests of sellers, the latter protects the interests of buyers. In each case, however, the principle designed for protection (and certainty) can be turned into a principle licensing unfairness-in one case, shielding fraudulent sellers, and in the other case shielding bad faith buyers. In the modern law, the central problem is to find the right way of addressing and balancing these competing considerations. The main proposals offered in the thesis recommend that the qualified strict compliance test be adopted and where actual fraud has taken place or is suspected on reasonable grounds by the bank, the fraud exception should operate. In addition, and with a view to striking the right balance between certainty and fairness, it is suggested that punitive damages be awarded exceptionally in cases where good faith and gross negligence have taken place, that the bifurcated compliance standard should be adopted where the issuer has been considered to have acted in good faith and without harming the customer, and that conditional payment be adopted in relation to payment under documentary credit. It should be emphasised that the position argued for in this thesis is that there should be some marginal adjustment to the ruling doctrines. No modification should be considered, however, where the essential certainty of the law would be jeopardised.