Credit Card Fraud Exception To The Principle And Its Application In China

Letter of credit (L/C) has become one of the most popular means of payment and tools of capital financing in today's international business transactions. It is also called the"blood of international commerce"because of its significant role in the development of international trade. The Principle of Independence is one of the basic principles in L/C transaction, which leads to wide use of L/C. However, some businessmen will take advantage of the corollary to the Principle of Independence that the seller will always receive payment from the bank if he submits documents that strictly comply with the L/C, regardless of the sales agreement. In order to cope with this phenomenon, the Principle of Fraud Exception was established in the US and later accepted in many jurisdictions in the world.At the same time, as far as both theory and legal system of L/C are concerned, China is less developed than other countries and judgments made by Chinese people's court have been challenged outside China. Therefore, China is trying to build our own legal system of L/C taking reference of other countries'experience. On October 24, 2005, the Supreme People's Court issued the Provisions on Some Issues Concerning the Trial of Cases of Disputes over Letter of Credit and it came into force as of January 1, 2006.This paper will look at the system of"Fraud Exception"in the following two aspects: 1) analyze the theoretical basis of"Fraud Exception", including the reason of its establishment and its role in the whole system of L/C; 2) discuss the application of"Fraud Exception"in China according to the document of the Supreme People's Court.The paper consists of four parts. Part I is about the definition of"Fraud Exception". In my opinion, it is important to figure out the definition of"L/C Fraud"in order to understand"Fraud Exception", this part first compares the definition of"L/C Fraud"between the statutes and the cases and then lists several kinds of"L/C Fraud"as well as how to judge an"L/C Fraud".Part II reviews the history of"Fraud Exception"in order to fully understand the purpose of this exception. This part describes the whole development process of exception from its first establishment by case law, its first adoption into the legislation and its wide adoption in most of the countries. The whole development process can be concluded as from"prohibited"to"permitted"to"restricted". It can be seen that the existence of"L/C Fraud"is the result of loopholes of L/C system itself and the establishment of"Fraud Exception"is the result of challenges from the increasing"L/C Fraud".Part III explains the relationship between"Fraud Exception"and the Principle of Independence. It should be noted that as an exception, Fraud Exception shall be applied with restrictions. Although both experts and judges are trying to prove that it is reasonable to establish the"Fraud Exception", for example, this exception complies with the principle of Good Faith and the principle of Reservation of Public Order, the Principle of Independence still plays the basic role in the system of L/C while"Fraud Exception"only acts as a supplementary rule. Finally, the latest Supreme People's Court's interpretation was discussed in Part IV. After brief introduction of the document, the paper analyzes its breakthrough and innovation. However, this paper also points out that the interpretation needs to be improved in certain aspects although it has not been examined in practice. In addition,"Fraud Exception"shall be applied cautiously in future practice to prevent misuse and the issues such as judges'discretion and balance of interests shall be reasonably handled in the application of"Fraud Exception". At last, the paper suggests that caveat emptor is more efficient than a perfect system of remedy.