Selective legal aspects of bank demand guarantees

Abstract

Bank demand guarantees have become an established part of international trade. Demand guarantees, standby letters of credit and commercial letters of credit are all treated as autonomous contracts whose operation will not be interfered with by courts on grounds immaterial to the guarantee or credit itself. The idea in the documentary credit transaction/demand guarantee transaction is that if the documents (where applicable) presented are in line with the terms of the credit/guarantee the bank has to pay, and if the documents do not correspond to the requirements, the bank must not pay. However, over the years a limited number of exceptions to the autonomy principle of demand guarantees and letters of credit have come to be acknowledged and accepted in practice. In certain circumstances, the autonomy of demand guarantees and letters of credit may be ignored by the bank and regard may be had to the terms and conditions of the underlying contract. The main exceptions concern fraud and illegality in the underlying contract. In this thesis a great deal of consideration has been given to fraud and illegality as possible grounds on which payment under demand guarantees and letters of credit have been attacked (and sometimes even prevented) in the English, American and South African courts. It will be shown that the prospect of success depends on the law applicable to the demand guarantee and letter of credit, and the approach a court in a specific jurisdiction takes. At present, South Africa has limited literature on demand guarantees, and the case law regarding the grounds upon which payment under a demand guarantee might be prevented is scarce and often non-existent. In South Africa one finds guidance by looking at similar South African case law dealing with commercial and standby letters of credit and applying these similar principles to demand guarantees. The courts, furthermore, find guidance by looking at how other jurisdictions, in particular the English courts, deal with these issues. Therefore, how the South African courts currently deal/should be dealing/probably will be dealing with the unfair and fraudulent calling of demand guarantees/letters of credit is discussed in this thesis.