STRICT COMPLIANCE IN LETTERS OF CREDIT
By
QAISAR ZAMAN
Advocte High Court (
Introduction:
The doctrine
of strict compliance prevails in all the contracts which occur in a letter of
credit transaction: the contract between the buyer and the banker, the contract
between banker and seller and between issuing and correspondent bank,[1]
e.g. in case of the contract between applicant and the issuing bank, the bank
is obliged to observe the borders of the commission given to it and fulfills
that request by observing strict compliance. The bank must accept those
documents which comply with the terms of the credit. It has no mandate to
accept any other documents. If the issuing bank deviates it has no right of
reimbursement by the buyer and if the seller does not present confirming
documents it has no ground of action against a bank, if they are rejected. A
bank that rejects confirming documents may be liable to the seller for the
consequent loss; equally, if the confirming bank deviates it has no right to
claim reimbursement from the issuing bank.
Definition:
“There is no
room for documents which are almost the same or which will just do as well….if
the bank does as it is told, it is safe, if it declines to do anything else, it
is safe; if it departs from the conditions laid down, it acts as own risk”.[2]
There are
certain specific requirements for the doctrine of strict compliance i.e.
1) All of the documents specified in the
credit must be tendered.
2) Each
document must be regular on its face.
3) Documents
must be presented within the stipulated time.
4) Original
documents are required.
5) The
amount of the credit, quantity, unit price must be specified.[3]
Art. 13(a) of
UCP 500 (international standard banking practice) obliges the bank to examine
all documents stipulated in the credit with reasonable care, to ascertain
whether or not they appear, on their face, to be in compliance with the terms
and conditions of the credit.[4]Therefore,
documents which appear on their face to be inconsistent with one another will
be considered as not be in compliance. That standard is applicable only for
stipulated documents; documents which are not stipulated will not be examined
and shall be returned to presenter or be passed without responsibility.[5]
Time for Examination of Documents:
According to
art.13 (b) of UCP 500, banks shall have reasonable time for examination, not to
exceed seven banking days following the day of the receipt of the documents,
and for determination whether to take up the documents or refuse payment.[6]
According to
art. 13(c) of UCP 500, banks will deem conditions as not stated and disregard
them if a credit contains such conditions without stating the documents to be
presented.
Waiver of Discrepancies:
Art. 14(b) of
UCP 500 is very important: banks, which can be the issuing bank, the nominated
bank or the confirming bank, must determine the documents alone whether or not
they appear on their face to be in compliance with the terms or not, if they
appear not to be in compliance, bank may refuse to take up the documents. The
bank hereby has got latitude when judging, which it need because not every
error leads to a rejection and many problems can be solved by communication
between bank, applicant and beneficiary. But the bank is obliged to decide on
its own. If the issuing bank determines documents to be not in compliance, it
may in its sole judgment approach the applicant for waiver of the
discrepancies, art.14(c). Art. 14(d) contains the obligation of issuing,
nominated or confirming bank to give notice with reasons and the obligation of
the remitting bank to pay back refund with interests.[7]
Art.14(e)
rules that if a issuing or confirming bank fail to act in accordance with the
provisions or fail to hold the documents at the disposal of or to return them
to the presenter, they shall be precluded from claiming that the documents are
not in compliance with the terms and conditions of the credit. Art.14 (f)
clears up that if the remitting bank paid under reserve or against a guarantee
that only concerns the relation between such bank and the beneficiary. The
issuing bank and the confirming bank are not relieved from any of their
obligations or provisions of art.14.[8]
Justification of Strict Compliance in the context of Commercial
Credits:
The doctrine of strict compliance has been justified in the
context of commercial letters of credit on two grounds. First, on principles of
agency law, the issuer must act within the mandate given by the applicant and
obtain documents which comply strictly with the applicant’s instructions.
Documents which go outside the mandate do not entitle the issuer to
reimbursement. Secondly, the doctrine ensures that the issuer obtains documents
which are commercially marketable and can be used in case the goods are lost or
destroyed. The aim is to give the buyer the documents which are valuable or
protective.[9]
Compliance must be Strict:
“In determining whether the documents conform strictly to the
terms of the credit, the bank is only concerned with what appears on the face
of the documents. It does not need to look behind the documents. It is not
concerned with the underlying transaction. This is made clear by art. 4 of the
UCP 500 which states that: ‘in credit operations all parties concerned deal
with documents, and not with goods, services and/or other performances to which
the documents may relate’”.[10]
The documents
must comply strictly with the requirements of the credit. As stated by Viscount
Summer in Equitable Trust Co of New York V. Dawson Partners Ltd.
In J.H.
Rayners and Co Ltd v. Hambro’s Bank Ltd, the correspondent bank advised the sellers that a
letter of credit in their favor was available upon delivery of certain
documents evidencing the shipment of “Coromandel
groundnuts”. The sellers tendered a bill of lading describing the goods as
“machine shelled groundnut kernels” and having in its margin the letters
“C.R.S.” which were an abbreviation of “Coromandels”
but in the invoice the goods were described correctly as “Coromandel
groundnuts”. The court of appeal held that the bank had rightly refused the
payment under the credit, in view of the doctrine of strict compliance.[11]
A literal, Mirror Image of the Credit:
Lord
Summers principle seems to assume a
literal mirror image approach to the determination of documentary compliance.
On the one side is a detailed unambiguous formulation of requirements in the
operative credit instrument. On the other are the required documents,
replicating to the last minute detail the credit terms and conditions. The
issuing, confirming, negotiating or paying banks are supposed to hold the
mirror image of the credit terms to the tendered documents. Any deviation, no
matter how slight, is unacceptable. Yet, in the transition from the general
principle to the concrete documentary tenders that occur daily, the mirror
image becomes quite blurred.
Various
aspects of the doctrine are considered with examples in the following
paragraphs.
Exact literal compliance:
Notwithstanding
the rejection of the de minimis principle,
insignificant or trivial differences typographical errors in names are not
regarded as discrepancies. While the English and Canadian courts have not adopted
a rule of substantial documentary compliance there has been apparently been
recognition that there must be some latitude for minor variations or
discrepancies that are not sufficiently material to justify a refusal of
payment.[12]
In Seaconsar Far East Ltd V Bank Markazi
Jamhouri Islami
In Hing hip Hing Fat Co
Ltd v Daiwa Bank Ltd, the credit was applied for by Cheer goal Industries
Limited, and this name appear on the credit. But the presented bank presented
the letter of credit on a document which showed the drawee
as Cheer goal Industrial Limited. Kaplan J referred to a passage from Gutteridge and Megrah to the
effect that strict compliance did not extend to the dotting of I’s and crossing
of t’s or obvious typographical errors, concluding
that it was impossible to generalize: each case has to be considered on its own
merits. He held that the reference to the industrial was an obvious
typographical error, had caused no confusion and could not be relied upon as
discrepancy.[16]
Discrepancy of the Documents:
The law on
this subject is summed up by sir john Donaldson M.R.[17]
he observed that:
…..that the banker is not concerned with why the buyer
has called for particular documents, that there is no room for documents which
are almost the same, or which will do just as well, as those specified, that
whilst the bank is entitled to put a reasonable construction upon any ambiguity
in its mandate, if the mandate is clear there must be strict compliance with
that mandate, that documents have to be taken up or rejected promptly and
without opportunity for prolonged inquiry, and that a tender of document which
properly read and understood calls for further inquiry or is as such to invite
litigation is a bad tender”.[18]
Technicalities:
“Even though a discrepancy may appear to be
purely technical, a bank is nevertheless obliged to take the point unless the
applicant waives the discrepancy”.[19]
A discrepancy
may not affect the value or merchantability of the goods, and may thus appear
merely technical. A bank is nonetheless obliged to take the point unless it is
instructed by its customers, the buyer, that the documents are acceptable.[20]
The buyer’s
reason for not wanting to take up the documents is almost always unrelated to
the discrepancy, e.g. the market may have moved against him or he may suspect
that the goods may not comply with the contract.
Trivial Discrepancies:
“The
distinction between trivial discrepancies and those which require the bank to
reject documents tendered is not always easy to draw”.[21] In Moralice
(London) ltd v. E D and F man the documents were required to evidence the
shipment of 500 metric tons of sugar in bags of 100 kgs
net weight each. The shipment was three bags short (0.06%). It was held that
because it was a letter of credit transaction the maximum de minimus non cur at lex, or the
rule of insignificance could not be relied upon, and the bank was entitled to
reject the documents.[22]
Today
situation is different due to incorporation of art. 39(b) “where the UCP
applies art. 39 allow the bank to disregard certain minor variations subject to
the express provisions of the credit. Art. 39(a) provides that the words
“about”, “approximately”, “circa” , or similar expressions are used in
connection with the amount of the credit or the quantity or unit price of the
goods they are to be construed as allowing a tolerance not exceeding ten
percent more or less than the amount or quantity to which they refer”.[23]
Originality of Documents:
Where the documents tendered appear to have been or have
actually been produced by reprographic, automated or computerized systems or as
carbon copies, they shall also be acceptable as long as they are marked as
original and where necessary appear to be signed. (art. 20. b) [24]The
certificates required by the credit in this case to be marked as original were
not so marked. It was contended that they could not, therefore, be accepted
under art, 20.[25]
In this case Midland Bank had rejected the documents inter alia, on the grounds that the insurance policy was not
marked “original”. The document was laser printed on the colored notepaper of
the insurance company and signed in original. The court of appeal held that
where the document is clearly an original, art.20 (b) does not impose the
requirement that it should be marked or stamped as original.[26]The
onus is on the applicant for credit to establish that a bank has failed to
discharge his duty of reasonable care.[27]
Forfeiture of right of reimbursement:
The doctrine
requires the bank to accept the documents that strictly comply with the terms
and conditions of the credit. “The bank loses its right of reimbursement and
forfeits remuneration from the applicant if it accepts documents that do not
comply with credit and thereby causing loss to the applicant”.[28]
The case of North
Western Shipping and Towage Co Ltd v Commonwealth Bank of
Problems concerning the Doctrine of Strict Compliance:
There are
several problems concerning the doctrine of strict compliance:
1)
different
interpretation and extent of strict compliance
2)
fraud
exception
3)
the
liability of banks if they don’t pay attention to strict compliance
In this paper
I will discuss the last two problems.
Fraud Exception:
“Fraud unravels all. This maxim is rooted in
common law and equitable tradition. In the letter of credit case of
Fraud may be
actual or constructive. A fraud sometime may be committed by the applicant. In Szteijn v Henry Banking Corp. (1941), the
applicant of credit wanted to prevent his bank from making payment. To do so,
he applied for an injunction. He claimed that the seller who was beneficiary of
credit shipped rubbish instead of goods contracted. Being proved in the court
that seller did it intentionally, the court refrained the bank from making
payment. The reason was that the seller deliberately failed to meet its
obligation.
The Liability of Bank if they don’t pay
attention to Strict Compliance
Art. 15-17 of
UCP 500 contain liability of the banks in case of deviation from the doctrine
of strict compliance. Art. 17 of UCP rules that bank assume no liability Force Majeur, which appear not relevant regarding problems of
strict compliance. Bank assume no liability or responsibility for the
consequences arising out of delay and / lost in transit of any message, letters
or documents, art.16.
Art. 15 of UCP
500 provides as follows: Banks assume no liability or the responsibility for
the form, sufficiency, accuracy, genuineness, falsification or legal effect of
any documents or for the general or particular conditions stipulated in the
documents or superimposed thereon; nor they do assume any liability or
responsibility for the description, quantity, weight, quality, condition,
packing or description of good represented by any document”.[31]
In Gian Singh and Co ltd v Banque De
l’ Indochine, Lord Diplock
stated: the duty of the issuing bank, which it may perform
either by itself, or by its agents, the notifying bank, is to examine documents
with reasonable care to ascertain that they appear on their face to be in accordance
with the terms and conditions of the Credit. The express provision art. 15 of
the UCP 1983 revision do no more than restate the duty of the bank at common
law. In ordinary case visual inspection of the actual documents presented is
all that is called for. The bank is under no duty to take further steps to
investigate the genuineness of the signature which, on the face of it, purports
to be the signature of the person named or described in the letter of credit.[32]
Conclusion:
Despite the common sense and
elementary nature of the doctrine of strict compliance, there has been much
debate and litigation over just how strict or exact the compliance must be. It
is no part of the bank role to consider the materiality of the discrepancies to
the parties or whether they affect the value or effect of the document. On the
other hand the examination of documents requires judgment by the bank and is
not simply a mechanical exercise of comparison. The doctrine of strict
compliance is not to be applied in a literal or robotic manner and does not
require the presentation of documents the contents of which exactly duplicate
the relevant parts of the credit.
[1]
[2] Equitable Trust Company of New York
V. Dawson Partners Ltd (1927) 27 LIL R49
[3] Ewan Mckendrick,
[4] Robin Burnett, Law of International
Business Transactions, 3rd ed., 2004
[5]Commercial Law, Roy Goode, 3rd ed.,
pub.2004
[6] Roy Goode, Commercial law, 3rd ed.,
pub.2004
[7] Raymond jack, Ali Malek, David quest, Documentary credits, 3rd ed
[8] UCP 500
[9] J Mendes, “ Strict or Substantial
Compliance in Letters of Credit: the need for guidelines” (1996) 1 Canadian
Journal of International Business and Policy 23 at 26.
[10]Gabriel Moens
and Peter Gillies, International Trade and Business
Law, Policy and Ethics, 2nd ed. 2006
[11] Paul Todd, Cases and Materials on
International Trade Law, 1st ed. 2003
[12] Bank of Nova Scotia V Angelica White
Wear Ltd [1987SCR 59 at 67
[13][1993] 1 Lloyds Rep 236 at 240
[14] [1999] Lloyds Rep Bank 219 at 223
[15] Raymond jack, Ali Malek, David quest, Documentary credits, 3rd Ed
[16] [1991] 2 HKLR 35 (
[17]Banque De I Indochine
ET De Suez SA v J.H. Rayner (
[18] The Law and Practice of
International Trade, Leo D’Arcy, Carole Murray, Barbara Cleave ed.2000
[19] Ewan Mckendrick,
[20] Glencore
International AG v Bank of
[21] Kredietbank
Antwerp v. Midland Bank Plc [1999]1All E.R.(comm.)801,806
[22]
[1954] 2 Lloyds Rep 526.
[23] Law of International Trade, Jason Chuah, 2nd ed., p.495
[24] Law of International Trade, Jason Chuah, 2nd ed., p.498
[25] Glencore
International AG v. Bank of China [1996] 1 Lloyd’s rep.135
[26]
[27] Robin Burnett, Law of International
Business Transactions, 3rd ed., 2004
[28] Agasha Mugasha, The Law of Letters of Credit and Bank Guarantees,
Published 2003, p.24
[29] (1993)118 ALR 453 (FCA)
[30] International Trade and Business Law
Annual, May 2003, vol. 3 Cavendish Publishing, p.27
[31] Gabriel Moens
and Peter Gillies, International Trade and Business
Law, Policy and Ethics, 2nd ed. 2006, p. 318
[32] [1974] 2 All ER 754