The Autonomy Rules of Documentary Credit in Ethiopia: Is There a Fraud Exception?

Abstract

The 1960 Commercial Code of Ethiopia incorporated the principle of autonomy of documentary credit. The principle requires an absolute separation of the credit from the underlying contract. It imposes an obligation on the bank to honor the credit notwithstanding that there is an allegation or actual fraud in the required documents or the underlying contract. It creates a dilemma that, on one hand, if the principle is strictly applied the system of documentary credit may create undesirable consequences of system-protected fraudsters and abuse of the credit. On the other hand, if it is applied loosely, it would degrade the autonomy of the credit and consequently extend unwarranted protection to unscrupulous parties who, in bad faith, demand enjoinment of payment under the credit for unfounded grounds. This article examined the issue of independence of documentary credit in the Ethiopian legal framework vis-à-vis the trending development of fraud exception rules. The study was conducted based on a qualitative research approach by analyzing laws, documents and data collected through interviews. The study revealed that, unlike the experience of other countries, there is no fraud exception to the autonomy rules of documentary credit in Ethiopia. The author recommended revising the Ethiopian law on documentary credit to incorporate fraud exception rules so as to maintain the equilibrium between ensuring autonomy of the credit and restraining fraudulent activities.