Principles of autonomy and strict compliance in letter of credit (LC): a comparative study from legal and Shari`ah perspective in Malaysia /by Rosmawani Binti Che Hashim

Abstract

Principles of autonomy and strict compliance are two fundamental principles in letter of credit (LC). They indicate that LC is separate from underlying sale contract and payment for the goods only upon compliance of documents. The autonomous nature of LC which embodied in the UCP 600 however comes to an end in the existence of fraud, which is treated as the most controversial exception compared to other exceptions. In practice, it is always perceived that the Conventional concept envisaged by these principles as well as fraud exception can be applied in pari materia to Islamic LC transaction. Thus, this study primarily aims to discuss critically the application of these principles in Conventional legal perspective and undertakes to highlight differences and similarities between their application in Conventional and Shari’ah perspectives. In addition, this study evaluates also a level of understanding of Malaysian customers on the application of these principles in Conventional and Islamic LC. This study adopted legal and qualitative method as main research method supplemented by quantitative methods to establish how far these two principles applied in LC transactions in Malaysia. For legal method, relevant local cases are analysed and English and US cases are also mainly referred to. For qualitative method, interviews are conducted with bankers, trainers, academicians, Shari’ah advisors as well as other relevant parties. For quantitative method, samples of 102 LC customers in Klang Valley were selected on random sampling basis. This study identified significant differences and similarities in the application of principles of autonomy, strict compliance and fraud exception between Conventional and Shari’ah perspectives. The differences are however not obvious as far as the practices of Malaysian Conventional and Islamic banks are concerned. Simultaneously, it demonstrated that the level of understanding among LC customers on the application of these principles is significantly low and ignorance of the provisions of the UCP. This study concluded by highlighting the issues that warrant further investigations and proposed practical suggestions to the problems. Other then filling up the gap in local literature on legal and Shari’ah issues of autonomy and strict compliance as well as fraud exception especially with respect to Conventional and Islamic LC, this study enhanced the suggestions to the application of those principles in LC transaction which is in harmony with Shari’ah principles. Having analysed the existence of all peculiar characteristics of LC in every disputable angle, this study serves as a holistic understanding to those dealing actively in international trade involving LC payment mechanism such as traders, bankers as well as judiciary and Shari’ah advisors. In addition, the adoption of mixed research methods in data collection distinguished this study from other research which focuses solely on legal or qualitative methods.