Blog

At the end of 2015, we published a blog on the principle of autonomy with regard to documentary credits.

Key considerations

• A documentary credit is separate from the sale or other contract on which it may be based.
• Banks deal only with documents and not with goods, services or performance to which the documents may relate.
• A documentary credit is one of a number of means used to facilitate the settlement of an international trade transaction.
• It is not:
  • A contract between the buyer (applicant) and seller (beneficiary).
  • A guarantee that the seller (beneficiary) will definitely receive payment.
  • A guarantee that the buyer (applicant) will receive the goods that it has ordered.

A sales contract may be the basis from which a documentary credit is generated, but it is entirely separate and should never form part of the documentary credit.

A documentary credit has its own terms and conditions which do not rely upon the terms or performance of the sales contract. This is the principle of autonomy and relates to a documentary credit being treated as an independent transaction. The autonomy of a documentary credit has been re-confirmed in law many times over the years.

A recent UK court case re-affirmed that principle of autonomy under English law with respect to documentary credits - Petrosaudi Oil Services (Venezuela) Ltd v Novo Banco SA and others.

In essence, the decision clarified that an obligation to pay under a documentary credit will not be easily avoided by reference to provisions of the governing law of the underlying contract.

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