Illegality Exception To Independence Principle Of Letters Of Credit

The Independence Principle is deemed as the cornerstone of the legal system of Letters of Credit. However, the occurrence of Fraud Exception has made the Independence Principle no longer that absolute. Different from the wide acceptance of Fraud Exception, whether the illegality of the underlying contract of a letter of credit can be an exception to the Independence Principle is still under dispute both theoretically and practically even in the countries where judgments supporting the Illegality Principle are made. Whereas this issue has not been intensively investigated and discussed in China yet, the purpose of this Thesis is to demonstrate the reasonableness of Illegality Exception from the perspective of common law by introducing and analyzing the studies regarding this issue made by the scholars in common law countries as well as relevant cases of the UK and the US and reviews and comments on such cases. The Thesis also tries to discuss some other specific issues in applying the Illegality Exception.The full text of the article is divided into three main parts: Introduction, Main Text and Conclusion. The Main Text consists of three chapters.In Chapter One, the author briefly introduces some fundamentals relating to the Illegality Exception, including the basic character of the law of letters of credit, the Independence Principle, the relationship between the underlying contract and the letter of credit, the reason and condition of the application of Fraud Exception, and an overview of the Illegality Exception.In Chapter Two, the author firstly provides a preliminary demonstration of the reasonableness of Illegality Exception and the condition of applying such exception by means of interest balancing analysis with the aid of hypothetic examples. And by introducing and analyzing relevant theories of common law scholars combined with some important cases of the UK and the US and provisions of the US Bankruptcy Code and the UCC, a further argument is provided.In Chapter Three, the author tries to research on some specific issues in the application of Illegality Exception. By reviewing several cases, the author discusses the recognition of the effect of foreign laws as a precondition of applying such exception and the question whether the payment is severable if the letter of credit is enjoined by virtue of Illegality Exception. Furthermore, the author analyses the possibility of applying the exemption events of Fraud Exception in Illegality Exception.