Acta Universitatis Danubius. Juridica, Vol 12, No 2 (2016)

Comparative study of Unconscionability exception to the principle of autonomy in law of Letter of Credits

Hamed Alavi


This paper touches upon legal nature and scope of unconscionability as an exception to autonomy principle of documentary letters of credit (LC) and bank guarantees. Complicated process of international trade is known as the main reason behind development of new exceptions to globally appreciated principle of autonomy in process of LC transaction. Apart from fraud which has been recognized in international business society and various jurisdictions, other exceptions including unconscionability, nullity, illegality and recklessness have received different treatments in different national laws. Unconscionability is applied to situations where beneficiary’s demand to draw under the LC is not fraudulent but affected with bad faith in a way that court prevents bank from honouring the credit.  While UCP leaves the problem of fraud and other exceptions to autonomy principle to be solved by national laws, , among common law countries , unconscionability defence has been recognized in Australia and Singapore but others do not show welcoming attitude towards it. Current paper tries to find reasons behind different attitudes of common law jurisdictions to unconscionability defence in letter of credit process by answering following questions: What is the nature of unconscionability? How different common law jurisdictions have received it as an exception to principle of autonomy in documentary letters of credit and bank guarantees? And last but not the least, what are arguments in favour and against its universal recognition as a defence for payment under letter of credit and bank guarantee system?


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