Beneficiary’s Rights to Payment under a Letter of Credit (LoC) Governed by English Law

Abstract

A letter of credit is the most common and essential payment mechanism for goods in international commerce, making it a primary instrument for financial international trade. Under both UCP600 and Common Law, letters of credit are based on two important principles, namely the autonomy of the letter of credit and the doctrine of strict compliance. The main purpose of this research is to investigate the beneficiary’s right to payment under a letter of credit and the position of the beneficiary when they present the document for payment without knowledge that it contains fraudulent material. Also, this research looks into the impact of the autonomy doctrine on the beneficiary’s right to payment and the bank’s position to reject any faulty documents at the time of making payment. This research uses the doctrine of legal research methodology, which is a qualitative method that focuses on secondary data related to law that has already been published. This research finds that the autonomy doctrine supports the beneficiary’s right to payment whereby, it is the bank’s obligation to honour credit against the presented documents, which is fundamental in both the UK Common Law Regime and the UCP600. However, there are exceptions to the autonomy principle when the bank is not aware that the documents presented under the letter of credit are forged but it still honours the credit. Under the doctrine of strict compliance, a bank that ignores the doctrine of strict compliance must bear the loss. However, the principle of autonomy states that a dispute between buyer and seller does not impact the rights of the bank. At the same time, if the bank is aware of the discrepancies or forged documents, then it should not pay the credit as forgery makes documents invalid in the law. The bank can even recover payments made by mistake, as held in Balfour Beatty Civil Engineering Ltd v Technical & General Guarantee Co. Finally, this research suggests a few recommendations for customers (applicants), sellers (beneficiaries) and banks such as: 1) the UCP 600 need to be incorporate fraud provision; 2) use of financial technology (FinTech) in letter of credit transactions; 3) the beneficiary’s point of view; 4) the applicant’s point of view and 5) the bank’s point of view.