Legal issues resulting from the autonomy of letter of credit in international sale of goods (Malaysian position)

Abstract

Letters of credit have historically been an important and popular method of payment in international trading transactions. The principle of autonomy is one of the foundation stones of the law of letters of credit. Letter of credit has been considered by the law governing the letter of credit, the Uniform Custom and Practice (UCP) as a separate and autonomous contract from the underlying contract of sale of goods or other transactions. The essence of this separation or this doctrine of autonomy, was aimed to make letters of credit, the most secure method of payment in international sales transactions, by protecting the interests of both seller and buyer and balancing the risk between them, where the beneficiary (seller) may greatly reduce the risk of not being paid. However at the same time this autonomy principle guarantees payment to the seller as long as he tenders and complies with all the necessary documents stipulated by the buyer independent of the underlying contract for sale of goods. The bank representing the buyer is bound to fulfil its duty to pay the seller and cannot withhold or deny payment until the goods have safely reached the buyer. Banks only deal with documents presented for negotiation under the letter of credit and do not have any involvement with the commercial contracts or goods being shipped