Principle Of Fraud Exception And Its Application

Occupying an important place in the field of the international settlement, letter of credit is titled with " the life blood of international commerce ". The principle of independance and abstract which has been respected by business is the base of letter of credit . In spite of this , it has to face the significant challenge from fraud for its inborn defect which induces the fraud of letter of credit .That how to contain the extension of fraud but not to damage the safety , the reliability and the promptitude provided by letter of credit is the supreme goal of applying the principle of fraud exception and the purpose of the dissertation .Principle of fraud exception , is based on the principle of independance and abstract while admits it has exception . That is , if material fraud exists in the transaction , the bank has the right of dishonouring when the client claims or the bank decides to do so itself . Meanwhile , the court can issue stop-payment order to prohibit the bank from accepting or paying letter of credit.Since it was established by the US Sztejn case , the principle of fraud exception is observed by judicial practice in most states in the world . But different courts in different states have different criterion of application because of the difference in judicial tradition and in understanding letter of credit, etc. especially about determining fraud ,adducing evidence , the range of exemption , and the exercise of the right of stop-payment.As for stop-payment in China , too much judicial interference incurred a lot of international criticism and damaged the fame of the court and the bankseriously . In order to adopt the common international practice , we must improve the understanding letter of cretit system and find a balanced point between the principle of independance and abstract and the principle of fraud exception . Of course , the key problem is , that the court must respect and abide by the principle of "not interfere in letter of credit transaction recklessly " .