FRAUD RULE IN INDEPENDENT GUARANTEES AND STAND-BY LETTERS OF CREDIT UNDER THE UN CONVENTION
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Abstract
The United Nations Convention on Independent Guarantees and Stand-by Letters of Credit, 1995 is drafted to accommodate the independent guarantees and stand-by letters of credit used to facilitate international businesses. To overcome the misuse by the beneficiary who makes demand for payment against the guarantor, the Convention contains the provisions on fraud rule in independent guarantees and stand-by letters of credit as an exception to payment..
Thailand is not a party to the Convention. Thailand therefore has no obligations under the Convention. However, the significance of the independent guarantees and stand-by letters of credit in international trade is well recognized when Thai business entities enter into contracts with their foreign business partners and require independent guarantees and stand-by letters of credit as the financial security to ensure performance of the contract.
Independent guarantees and stand-by letters of credit are used by private section i.e. banks and financial institutions in Thailand with no specific law or ordinary usages on the transactions. However, fraud exception to withhold the payment is still not covered by Thailand’s domestic laws. This issue would lead the contractual parties additional difficulties when the principle basis of independent guarantees and stand-by letters of credit on the fraud rule is not recognized by Thai courts which are unable to grant a provisional order to withhold the payment due to the unavailability of applicable law issue. The study reveals that currently Thailand does not have any law on the fraud rule as stipulated under the Convention. It would lead the applicant or principal to face with significant difficulty to protect itself from the fraud demand by the beneficiary. Thailand has a draft law to deal with commercial documentary credit contracts but its contents are still unable to cover independent guarantees and stand-by letters of credit especially on the fraud rule.
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References
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