November 19, 2010
Unconscionability and independence in letters of credit
The "independence principle" is the rule -- traditionally very important in letter of credit law -- that a letter of credit is independent of the contract that gives rise to it, and thus ordinary contract defenses are unavailing to defeat the holder. The rule fosters certainty but also (inevitably) leads to tough cases, and thus courts are not particularly friendly to it.
In a new paper, Unconscionability as an Exception to the Independence Principle: A Study of Singaporean Caselaw, M. Hasan Aijaz looks at how courts in Singapore are snipping away at the rule. Here's the abstract:
This paper studies the development, existing status, and suggests a course of development for the independence principle in Singapore. The independence principle is one of the defining characteristics of letter of credit law and ensures that the letter of credit remains true to its origin as a cash replacement. Inroads on the independence principle have been made in most jurisdictions to varying extent through the exception of fraud from the principle such that fraud in the underlying contract may work to vitiate the efficacy of a call on the letter of credit. The independence principle is in tension with the fraud principle in most jurisdictions with the scope of the exception often being misapplied or constantly changing. In Singapore and other jurisdictions the independence principle has further been eroded with the introduction of a second exception, unconscionability, which operates to vitiate the efficacy of a call on the letter of credit in various nebulously defined scenarios. This paper tracks how this exception arose and discusses doctrinal methods to maintain the vitality of the independence principle without overturning significant caselaw.
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