Illegality as an exception to the autonomy principle of bank demand guarantees

Demand guarantees, standby letters of credit, and commercial letters of credit are all treated as autonomous contracts whose operation will not be interfered with by courts on grounds irrelevant to the guarantee or credit itself. The idea in the documentary credit or demand guarantee transaction is that if the documents (where applicable) presented are in line with the terms of the credit or guarantee the bank has to pay, and if the documents do not correspond to the requirements, the bank must not pay. However, over the years a limited number of exceptions to the autonomy principle of demand guarantees and letters of credit have come to be acknowledged and accepted in practice. In certain circumstances, the autonomy of demand guarantees and letters of credit may be ignored by the bank and regard may be had to the terms and conditions of the underlying contract. Established fraud is the main accepted international exception to the autonomy principle. For some time it has been uncertain whether illegality in the underlying contract is also an exception. In this article attention will be given to whether England, the United States of America and South Africa consider illegality in the underlying contract to be a valid exception to the autonomy principle of demand guarantees. From the discussion that follows it will be seen that illegality as an exception is very controversial and its scope remains uncertain.