Towards the recognition of the illegality exception under documentary credits in South Africa
Marange, T. L.
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Letters of credit have two cardinal principles namely Strict compliance and the Independence principle. Strict compliance entails that for a beneficiary to be honoured under a credit, he has to strictly comply with the terms and conditions of the credit. The independence principle treats letters of credit as being autonomous from the underlying contract and their application will not be interfered with on grounds irrelevant to the credit itself. The idea behind the letter of credit transaction is that if the beneficiary makes a conforming presentation, the bank will honour the credit and conversely if the presentation made by the beneficiary is not conforming the bank will not honour the credit. The independence principle is not of absolute application and has exceptions to it. The universally accepted exception being fraud by the beneficiary. This is the only exception recognized in South Africa under letters of credit. This exception however does not extend to situations where there is illegality in the underlying contract. This leaves a lacuna in the legal framework as the banks are mandated to pay against a conforming presentation, notwithstanding the presence of blatant illegality in the underlying contract. The status quo enables banks to honour credits even if they are against certain foreign exchange regulations or if payment is being made to an enemy alien. South African law does not recognize the illegality exception. The study seeks to argue for the recognition of the illegality exception. The established fraud exception rule is premised on the maxim ex turpi causa non oritur actio, which means that the court will not allow its process to aid a bad cause. The bad cause being either fraud or illegality. With this maxim also encompassing illegality, the illegality exception has, however, not been recognized and established. The study argues that the illegality from the underlying contract ought to pierce the impregnable autonomy principle so as to prevent illegalities under the guise of letters of credit. The study seeks to advocate for the recognition and establishment of the illegality exception under letters of credit in South Africa, which is abstract from the fraud exception. The illegality exception, if recognized will furnish banks with autonomy to dishonour a letter of credit tainted by illegality from the underlying contract. This study also seeks to conceptualise the scope of application for the illegality exception.
- Law