Examination of the letter of credit and the fraud exception principle

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Kampala International University; School of Law
The study was carried out on the examination of the letter of credit and the fraud exception principle. In this case the research expounded the documentary credits and its effectiveness in relation to the prescribed laws and the provisions of the conventions against the documentary credits. A letter of credit is a financial device developed by merchants as a convenient and relatively safe mode of dealing with sales of goods to satisfy the seemingly irreconcilable interests of the seller, who refi.1ses to part with his goods before he is paid, and a buyer, who wants to have control of the goods before paying. This study was guided by the following; • To explore the Law relating to the Letter of credit, • To examine the challenges relating to Letters of Credit • To evaluate the law relating to fraud Exception. On the findings upon the need for an exception to the Autonomy Principle in the UCP 600, common law courts have developed one, called the Fraud Exception. According to the exception, if there is a fraud allegation from buyers, banks should consider and assess it. If buyers can present sufficient evidence of material or established fraud, banks may withhold the payment to sellers. If buyers cannot, banks have discretionary power whether to pay. Developments to exceptions for letter of credit and bank guarantees are focused on concretizing the practicality of dealing with conflicts arising from them. English Courts continued to distance itself from direct regulation of merchant and banking relationship and dealings. In conclusion therefore it is submitted that since the UCP 600 failed to address the fraud exception, after much anticipation that it would, the Commission should amend the provisions of the UCP 600 to include the exception. It should give clear guidance as to the criteria applicable when the fraud exception is called into play.
A research submitted to the School of Law in partial fulfillment of the requirement for the Award of a Bachelor of Laws of Kampala International University
Letter of credit, Fraud exception principle