Fairness at the Expense of Commercial Certainty: The International Emergence of Unconscionability and Illegality as Exceptions to the Independence Principle of Letters of Credit and Bank Guarantees
Johns, Roger J.
Blodgett, Mark S.
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International transactions involve an array of risks. A persistent risk in individual commercial transactions occurs when parties do not know each other well enough to trust each other. Letters of credit and bank guarantees manage this transaction risk by shifting it onto trusted independent third parties. The value of these instruments rests upon the reliability of performance by such third parties, and that depends, in part, on the degree of judicial reluctance to enjoin their performance. To the extent one party to an underlying transaction believes the other can control the third party through injunction, the value of the third party’s obligation diminishes. Until recently, the circumstances under which a court could be persuaded to enjoin the operation of letters of credit and bank guarantees were limited almost entirely to some sort of fraud. Over the last several years, courts in a number of common law jurisdictions have begun to recognize unconscionability and illegality as new, fairness-based exceptions to this third-party independence. This article chronicles the evolution and spread of these new exceptions, and examines the threat their exaltation of fairness over contractual certainty poses to the utility of letters of credit and bank guarantees.