Analysis On The Relationship Between Letter Of Credit And Its Underlying Contract In International Trade

Letter of Credit (abbreviated as L/C) is the most important instrument of payment in international trade transactions. By means of L/C, the business credit is substituted by the credit of bank for the purpose of promoting international trade, which greatly reduces the risk of the exporter and eases the trust crisis. How can L/C play so important function? The key lies in the Independence Principle. Therefore, the Independence Principle should be insisted on in both the international trade practice and judicial practice. It has great significance to study and make clear the relationship between L/C and its underlying contract, which can help to understand the Independence Principle.By using international customs and practice and other legal documents for reference, and analyzing related cases, this thesis elaborates the relationship between L/C and its underlying contract. Based on the comprehension of L/C's Independence Principle, this thesis introduces the basic theory of L/C and its underlying contract, and the meaning and application of Independence Principle, then, it discusses when L/C dependent on or independent from the underlying contract, and whether the underlying contract can be affected by L/C, by which, it raises some new points and tells the relationship between L/C and the contract.The thesis includes 4 chapters:The first chapter is about the introduction. Firstly, it introduces the definition and characteristic of L/C, based on the regulation of UCP500, UCP600, UCC1995 and other legislations. Afterwards, it analyzes the legal relationship regarding L/C, and then, it gives the concept of Underlying Contract, so the study objection of thesis is clear.The second chapter is about L/C's dependence on its underlying contract. Firstly, it briefly introduces the operation flow of L/C, which can tell the dependence obviously. Then, it systematically elaborates the concrete performance of the dependence, which includes: the drawing of L/C is based on the existence of the underlying contract; the kind, content and drawing time of L/C is regulated by the underlying contract; the regulation of L/C should be consistent with the underlying contract; the behavior of drawing L/C is performing the underlying contract; the modification of L/C bases on the underlying contract.The third chapter is about L/C's independence from its underlying contract. This chapter makes analysis based on the comprehension of L/C's Independence Principle, it talks about the issues arising after drawing of L/C. At the beginning, it introduces the basic theory of the Principle, including its meaning, significance and concrete performances. Afterwards, combined with practical cases, it discusses some disputed issues, which includes: the applied object and applied period of the Principle, the influence of the clauses cited from the underlying contract upon L/C, and the influence of the arbitration clause in underlying contract upon L/C. In the last part, it briefly introduces the Fraud-exception Principle and Illegality-exception Principle. That is, Independence Principle is not absolute, when there is fraud or the underlying business is illegal, L/C would not be independent from the underlying contract.The chapter 4 talks about the influence of Inconsistent L/C upon the underlying contract. This chapter mainly studies the issue that whether the inconsistent L/C can modify the underlying contract. Firstly, it introduces the forms and causes of the inconsistent L/C, and then analyzes the attitude of the seller when he receives an inconsistent L/C and the risks when he takes different measures. After that, combined with the theories and judicial precedent in and abroad, it raises its own point from the perspective of practice and value of L/C: The Independence Principle does not mean that the underlying contract is independent from the L/C, as a mean of paying regulated in the underlying contract, L/C can affect the contract in some extent. When L/C is inconsistent with the underlying contract, if the beneficiary accepts it by his behavior, the legal result is not"modify the underlying contract", but"waiver", that is, he gives up the right of requiring the buyer to perform the obligation of drawing L/C strictly according to the underlying contract. The"waiver"makes the beneficiary lose the right to ask for indemnity. However, if he declares to reserve that right at the time of"waiver", he still can exercise it.