KALYANGO KEITH STEVEN 221- 053012- 21223

QUESTION 1
A Letter of Credit is an assurance that a bank would pay a beneficiary the full amount of the draft and/or
papers, either on behalf of the buyer/applicant or on its own account. The law of letters of credit is then
based on the two fundamental tenets of autonomy and strict compliance in order to guarantee that
payment under these instruments is promptly and easily realizable by the beneficiary. Banks deal with
documents rather than goods.
A legal doctrine known as "strict compliance" gives the bank the authority to reject papers that do not
precisely adhere to the provisions of the letter of credit. Since the banker's job is to compare the papers
only by looking at them against the LC, this safeguards the application or client. The seller gains from the
stringent compliance concept as well because it expedites payment. The vendor may request payment at
any time before the sent items arrive at the buyer's location safely. Once the products have been
transported to the buyer, the seller can request payment for the goods sold by presenting the bank with
the documentation that the buyer requires.
According to Article 16 UCP 600, a bank may decline to honor a beneficiary's payment demand if it finds
that the documentation submitted under a letter of credit is not in compliance. Furthermore, as banks
cannot be assumed to have knowledge of trade practices, it is the bank's responsibility to guarantee
compliance with the transaction outlined in the LC. On the other hand, the principle of autonomy
examines how the fulfillment of the underlying contract affects the payment obligation under these
instruments. The agreement will be examined by the bank to see if each party complied with all of the
provisions. Articles 4 and 5 of UPC 600 state that a letter of credit is by definition an autonomous and
different transaction from the sale or any other contract on which it may be based and that an issuing
bank should discourage the attempt of including terms of the underlying contract into the LC, banks are
expected to deal with documents as opposed to goods and services.

There is no such an obligation to the bank that the goods should correspond to the contract description,
the only obligation the bank has is to make sure it is paying on accurate documents. The buyer carries
with him the risk of paying and yet the wrong goods are delivered, he cannot visit that on the bank.
Although in some cases, few banks might expressly agree with the buyer to get involved in the underlying
contract. Power Curber International LTD V National Bank of Kuwait court held that the bank is in no way
concerned with any dispute that the buyer may have with the seller. The buyer may say that the goods
are not up to contract, nevertheless the bank must honor its obligation.
The concept of autonomy makes it illogical that actually, court can uphold payment of a beneficiary when
there is underlying evidence that he is not actually entitled to it. The only exceptions to the autonomy
rule are fraud and illegality.

In the case of illegality, the bank is expected on grounds of public policy to refrain from enforcing
payment under an illegal contract. In the case of Fraud, the issuing bank is prohibited from honoring a
letter of credit or guarantee even though the documents tendered by the beneficiary appear on their
face to be regular and in conformity with the terms and conditions of the letter of credit or guarantee.

Conclusion: Under the doctrines of autonomy and strict compliance, UCP 600 explicitly states that banks
must deal with the documents that are presented to them rather than the goods or the underlying
contracts when determining whether or not to make payment in international sales. Nevertheless, there
are situations in which the banks deal with the goods and services, or anything related to the goods,
rather than the documents in international sales.