Abstract
LL.M. (Banking Law)
The debates and questions surrounding illegality as an exception to the seemingly immaculate
autonomy doctrine of documentary letters of credit and demand guarantees are not few. Fraud
on the part of the beneficiary of these abstract instruments of payment is the established, and
recognized exception in law to this doctrine in most jurisdictions around the globe. However,
over the years, legal trends have suggested that fraud might not necessarily and totally be able
to cover the many loopholes that this doctrine has been or might be exposed to. For this reason,
amongst others, different exceptions have cropped up in many jurisdictions around the world.
The illegality exception is just one of the few alternatives to the entrenched fraud exception.
The illegality exception is not without its troubles. Since it has not really been entrenched in
most jurisdictions, including here in South Africa, many questions as well as debates regarding
its potency in law and the rules governing it, is understandably on the lips of many. For
instance, some have argued that the illegality exception is more beneficial in the view of a
larger public interest than the fraud exception. In the Mahonia case, an English case, the court
remarked that “if a beneficiary should as a matter of public policy (ex turpi causa) be precluded
from utilising a letter of credit to benefit from his own fraud, it is hard to see why he should be
permitted to use the courts to enforce part of an underlying transaction which would have been
unenforceable on the grounds of illegality if no letters of credit had been involved, however
serious the illegality involved.” On the other hand in the well-known United City Merchant
case the court was reluctant to admit to the possibility of an illegality exception when it had
the opportunity to do so. It simply remarked that instead of “illegal” such contracts will simply
be “unenforceable”. The logical question therefore is: unenforceable based on which grounds?
The court in the Group Josi case dealt with the position the United City Merchant case had
earlier adopted. Staughton J in Group Josi accepted that illegality is a separate defence from
the fraud but fell just short of settling this position in law.
Central to this paper, therefore, is the critical discussion and evaluation of the different sides to
the debates surrounding the recognition, scope of application as well as the effects of the
illegality exception. The author will look at different cases from a number of jurisdictions, but
basically focusing on the English law, in his critical analysis of this exception. In addition, the
opinions and positions of academic writers and experts in the field of letters of credit and...