DOI: 10.14457/tu.the.2014.333
title: Fraud rule in independent guarantees and stand-by letters of credit under the UN Convention

description: 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. The Convention further to clarifies the situations of fraud as well as the provisional means for principal or applicant to enforce their rights through court injunction in the event that the guarantor or issuer does not comply with its duty to withhold payment under the provisions of the Convention. 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. Thailand and its legislation, therefore, should be more familiar with and able to resolve the issues in the event that the beneficiary has committed fraud on demand of payment. It should be more comfortable if Thailand is able to accommodate independent guarantees and stand-by letter of credit usages especially on the fraud rule as an exception to payment to protect the applicant and principal from making payment to the beneficiary when the fraud on the part of the beneficiary is established.Independent guarantees and stand-by letters of credit are used by banks and financial institutions with no specific law or ordinary usages on the transactions. Furthermore, 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. Therefore, Thailand needs to have specific law to deal with this business function of fraud in independent guarantees and stand-by letters of credit whether or not Thailand chooses to become a party to the Convention. Considering the significance of protection of the applicant or principal from demand for payment with fraud element in independent guarantees and stand-by letters of credit in international level, Thailand needs to develop Thai law on this matter. Thailand may consider becoming a party to the Convention or to adopt the Convention provisions on the fraud exception in Thai law without joining the Convention. This legal implementation will be able to ensure the protection of the parties who are engaged in international business in Thailand in the event that demand for payment involves fraud elements.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. However, 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. It is recommended that Thailand should have its own specific law on this matter. The draft law should be amended by (1) adding “independent guarantees” as a part of the definition term “commercial documentary credit contract” (2) adding the provisions dealing with the presumption that the beneficiary is deemed to certify that the demand is in good faith and none of fraud elements are presented (3) Clarifying more situations under which the fraud rule can be invoked to withhold payment (4) adding the specific provisions dealing with provisional court measures to stop payment to the beneficiary in case fraud is invoked by the applicant or principal.