Further to our previous blog, we will now turn to the legal perspective and the interpretation of strict compliance in the courts.
As was noted in the ICC paper, whilst it can certainly be argued that the overall prevailing viewpoint from the courts had been that ascertaining the correctness of tendered documents must be on the basis of ‘strict compliance', exceptions do exist. And, as will be covered in more detail in the next blog, the introduction of ISBP has made a major difference.
The following cases all supported a doctrine of strict compliance.
It is elementary to say that a person who ships in reliance on a letter of credit must do so in exact compliance with its terms. It is also elementary to say that a bank is not bound or indeed entitled to honour drafts presented to it under a letter of credit unless those drafts with the accompanying documents are in strict accord with the credit as opened.
Bailhache J., in English, Scottish & Australia Bank Ltd, v. Bank of South Africa (1922)
The documents ought to be completely in order.
Skandinaviska Aktieolaget v Barclays Bank Ltd (1925)
It is both common ground and common sense that in credit transactions, the accepting bank can only claim reimbursement if the conditions on which it is authorised to accept are in the matter of the accompanying documents strictly observed. There is no room for documents which are almost the same, or which will do just as well. The bank cannot take upon itself to decide what documents will do well enough and what will not. If it departs from the conditions laid down in the credit, it acts at its own risk. The documents tendered were not exactly the documents which the defendants had promised to take up, and prima facie they were right in refusing to take them.
Lord Sumner in Equitable Trust Company of New York v Dawson Partners Ltd. (1927)
The rejection of strict compliance as a doctrine would vitiate the economic value of a credit transaction; for not only would the issuer be compelled to assume the risks of the underlying contract?s non-performance, it would be required to assume the additional risks of judicial realignment of its obligations under the credit.
Philadelphia Gear Corporation v Central Bank (1983)
On these authorities it seems reasonably clear that any discrepancy, other than obviously typographical errors, will entitle either the negotiating or the issuing bank to reject. It is tempting to say that whether a bank is entitled to reject must surely depend on whether the discrepancy is really material. But why should a bank assume the responsibility of determining the question of materiality and take the risk of it, if it goes wrong. As is so clearly stated in the UCP, documentary credit transactions are concerned with documents.
United Bank Ltd. v Banque Nationale de Paris (1992)
I cannot regard as trivial something which, whatever may be the reason, the credit specifically requires.
Seaconsar Far East Ltd. v. Bank Markazi Jomhouri Islaim Iran (1993)?
The duty of the issuing bank is, and is only, to make payment against documents which comply strictly with the terms of the credit.
Glencore International AG v Bank of China [1996]
It is probably true to say that when a contract provides that payment shall be by means of presentation of documents against an irrevocable credit, that necessarily involves, not only, in the contract between the confirming bank and the seller, but that the documents must be such as will strictly comply with the terms of the credit.
Moralice (London) Ltd v E.D. and F. Man (1954)
However, in more recent times, it is clear that courts have moved towards a more relaxed interpretation.
In the ordinary case, visual inspection of the actual documents presented is all that is called for. The relevance of minor variations depends on whether they are sufficiently material to disentitle the issuing bank from saying that in accepting the certificate it did as it was told.
Gian Singh & Co. Ltd. v. Banque de l'Indochine (1974)
Lord Sumner?s statement in Equitable Trust Company of New York v Dawson Partners Ltd. (1927) cannot be taken as requiring rigid meticulous fulfilment of precise wording in all cases. Some margin must and can be allowed.
Banque de l'Indochine et de Suez SA v. J. H. Rayner (Mincing Lane) Ltd. (1982)
The rule of strict documentary compliance requires not only that the tendered documents appear on their face, upon reasonably careful examination, to conform to the terms and conditions of the letter of credit but that they also appear to be consistent with one another, particularly in the sense that they refer to the same shipment of goods. The rule of strict documentary compliance does not extend to minor variations or discrepancies that are not sufficiently material to justify a refusal of payment.
Bank of Nova Scotia v. Angelica-Whitewear Ltd. (1985)
While the English and Canadian courts have not adopted a rule of substantial documentary compliance there has 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.
Appeal - Bank of Nova Scotia v. Angelica-Whitewear Ltd. (1985)
Minuscule difference does not by any stretch of imagination render the documents inconsistent with one another.
Astro Exito Navegacion SA v. Chase Manhattan Bank NA (1986)
The requirement of strict compliance is not equivalent to the test of exact literal compliance in all circumstances and as regard all documents. To some extent, therefore, the banker must exercise his own judgment whether the requirement is satisfied by the documents presented to him.
Where the credit requirements are ambiguous, it is permissible and essential for a banker to adopt a reasonable interpretation of those requirements. It is in this sense that a banker's approach to document verification should be functional rather than literal or rigid.
Kredietbank Antwerp v. Midland Bank plc (1998)