Contractual restrictions on right of beneficiary to draw on a Letter of Credit; possible exception to principle of autonomy
Contractual restrictions on right of beneficiary to draw on a Letter of Credit; possible exception to principle of autonomy

Summary/Abstract: In some circumstances and despite having right to draw under the Letter of Credit, beneficiary agrees in underlying contract that he would not exercise his right before realization of certain conditions stipulated in the contract or any other agreement with applicant. Despite the fact that the instrument itself (documentary letters of credit and bank guarantees) entitles beneficiary for being paid upon presentation of complying documents, making such commitment will impose restrictions on beneficiary within the framework of underlying contract and creates different scenarios that raises respective questions. First scenario would be that beneficiary fulfills his commitments in underlying contract and receives payment under the credit and there will be no dispute between parties. Second scenario is where beneficiary presents complying documents to bank and demands for being paid the amount stipulated in the credit despite existence of an ongoing dispute with applicant regarding his performance in underling contract. Here, it will be a valid question if we ask whether or not breach of such restrictions by beneficiary will influence principle of autonomy? Consecutive question would be, shall the court consider beneficiary’s violation of his restrictive commitment in underlying contract as a new exception to principle of autonomy? To put it in different way, where beneficiary of documentary letters of credit or demand guarantee regardless of his awareness from independence of underlying contract from the credit commits in underlying contract to condition which restricts his right to draw on the credit; will he be allowed by court to rely on the principle of autonomy to neglect his commitment in underling contract? In short, should law recognize other exception in addition to fraud which is in accordance with limits imposed by underlying contract on beneficiary’s right to draw on the credit? In quest of answering above mentioned questions, this paper will be divided into six main parts. After the introduction, second part will describe nature of documentary leers of credit and principle of autonomy. Third part will analyse the nature of exception while fourth one will look at approach of different jurisdictions to this issue. Fifth part will provide different arguments in favour and against recognition of “underlying contract exception”1 and finally last part provides concluding remarks on the subject matter.

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