In a banker's commercial letter of credit operations it is accepted as a general rule that contracting parties are concerned with the documents, not with the goods.Therefore, documents and their compliance with the terms and conditions who did so would be acting unwisely, for the letter o f request is the document which sets out in detail the terms o f the contract between A and the bankers, and in the event o f subsequent disputes, it is essential that, whatever the interpretation o f the terms themselves should be definite and not a matter o f oral, and probably conflicting, evidence see also Gutteridge, supra (f.n. 4), pp. 4-5.
Lloyds Bank Ltd. v. Bank o f America T rust & Saving Association [1938J2 KB 147; see also discussion related to the bank's right o f security under letters o f credit in Chapter V III.
Harfield, supra (f.n. 6), p. 71 and f.n. 1; see also Article 4 o f UCP 1993 (ICC Publication No. 500); Ellinger, EP, "L e tte r of credit". Horn, Norberth and Schmitthoff, CM, "Studies in International Economic Law. The Transactional Law o f International Commercial Transactions". Kluwer, 1982, Vol. 2, pp. 241-273 [hereinafter referred to as Ellinger's paper in lE L 1982], p. 260.
of the credit or the principal's mandate play an important role in the credit system in accordance with the doctrine of strict compliance.
The concept of the doctrine
Article 4 of the UCP 500 provides: "In a Credit operation all parties concerned deal with documents, and not with goods, services and/or other performances to which the documents may relate." As a result of such a provision bank(s) undertake to examine with reasonable care and in due time all documents required under the credit agreement and presented by the beneficiary of the credit. If, however, documents do not comply with the credit's conditions, then bank(s) must consider, on the basis of the documents alone, whether they should be accepted or rejected.^®
There are reasons, from the banker's point of view, for accepting and applying such a rule to credit transactions. First of all, a banker (the issuing bank or the correspondent bank, as the case may be) is a special agent with limited authority to act in accordance with the principal’s instructions. If a bank acts outside a mandate, it loses its right of recourse against the principal. Moreover, it should be noted that a bank is dealing with banking business and finance, not goods. Secondly, a bank may not have sufficient knowledge or expertise in the usage and practice specific to a trade; even if it is capable of having expertise, it usually does not wish to engage in any other (non-banking) areas of transaction and would prefer to remain solely in banking.
This doctrine has been approved by English courts. In Equitable Trust Company of New York v. Dawson Partners Ltd.,^^ Lord Sumner defined it in the following terms: "It is both common ground and common sense that in such a transaction the accepting bank can only claim indemnity if the conditions on which it
Articles 13 and 14 o f UCP 500; and also appendix 1 for Sections 5-109 (l)(c ) & (2), 5-112 & 112 (l)(a), 5-113, and 5-114 (1) o f the UCC; Sarna, L., "Letters o f Credit, the law and current practice", 2nd ed., 1986, pp. 73-87 [hereinafter referred to as Sarna]; for more details concerning the principle o f strict compliance see relevant discussion in Chapter V I (below).
(1927) 27 Ll.L.R. 49; Kozolchyk, supra (f.n. 10), p. 71, para. 140 and p. 77, para. 147.1.
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. Business could not proceed securely on any other lines. The bank's branch abroad which knows nothing officially of the details of the transaction thus financed, cannot take upon itself to decide what will do well enough and what will not. If it 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 at its own risk."^®
Does the above decision mean that even small and unimportant discrepancies may put an end to a credit contract? According to one writer, that is not a correct interpretation of the decision. He said:. "It is not intended that any discrepancy, however, trifling, would invalidate the promise in the credit."^® Another author has pointed out that from a practical point of view it is not possible to apply that rule in a strict and literal manner. He said: "Nevertheless there is an economic if not a physical limit to the diligence required from a bank when checking formal or apparent regularity. As stated by an experienced banker, if an absolutely perfect tender were the required standard, very few tenders would qualify."^®
Furthermore, there are articles in the UCP 500 concerning the bank's obligation in examining documents, like Article 14.^^ There may even be situations
Ibid., p. 52 (emphasis added); M idland Bank Ltd. v. Seymour [1955] 2 Ll.L.R. 147 (Devlin J.); Kydoti Compania Naviera S.A. v. National West minster Bank Ltd, fTlie Lena) [1981] 1 Ll.L.R. 68 (Parker, J., at p.75); Gian Singh & Co. Ltd. v. Banque de l'Indochine [1974] 1 W.L.R. 1234; Lam born v. Lake Shore Banking and T rust Co. 196 App. Div. 504, 188 N.Y. Supp. 162, affirmed 231 N.Y. 616; M iller, J.B., " A casebook on bankers' commercial credits", p. 63 [hereinafter referred to as M iller]; Soproma S.P.A^
V. M arine & Anim al By Products Corp.. [1966] 1 Ll.L.R. 367, at p. 387; as to the other points look at Schmitthoff, C.M., "S ch m itth o ff s E xport Trade. The law and Practice o f International T ra d e ". 8th ed., 1986 [hereinafter referred to as Schmitthoff], pp. 343-44, particularly f.n. 41 at p. 344 (about difference between Soproma and the S.H. Rayner & Co. v. Hambros Bank Ltd. [1943] 1 K.B. 37, that stated McNair, J., rightly distinguished those cases from each other since the former is the subject o f the UCP, but not the latter.
Megrah, M., "R isk Aspects of the Irrevocable Documentary C re dit". Arizona Law Review, Vol. 24, No. 2, 1982, pp. 255-66, p. 258.
Kozolchyk, supra (f.n. 10), pp. 77-78 and f.n. 430. See ICC Publication No. 500 (1993).
in which the bank may seek to obtain the applicant's agreement for a waiver of the discrepancy(ies)/^ Similarly, it seems English courts have been reluctant to deal with abstract points and have tried to decide on the merits of each case and so have interpreted the principle of strict compliance in a more liberal manner. Otherwise, the principle may damage the credit operation. In Golodetz & Co. inc. v Czarnikow- Rionda Co. Inc, (The "GALATIA"),^® Donaldson, J. unreservedly accepted the view stated by Lord Sumner in Hansson v. Hamel & Horely Ltd.,^"^ and said: "A tender of documents, properly read and understood, calls for further inquiry or are such as to invite litigation is clearly a bad tender. But the operative words are "properly read and understood." I fully accepted that the clause on this bill of lading makes it unusual, but properly read and understood it calls for no inquiry and it casts no doubt at all upon the fact that the goods were shipped in apparent good order and condition or upon protection which anyone is entitled to expect when taking up such a document whether as a purchaser or as a lender on the security of the bill."^®
In Banque de l’ Indochine et Suez v. J.H. Rayner (Mincing Lane) Ltd.,^® Donaldson, M.R., accepted the view of Parker, J., on the linkage between presented
Article 14(c) o f UCP 500 provides: " If the Issuing Bank determines that the documents appear on their face not to be in compliance with the terms and conditions o f the Credit, it may be in its sole judgment approach the Applicant for a waiver o f the discrepancy(ies). Kozolchyk, supra (f.n, 10), p. 78 & f.n. 431; Ellinger, E.P., "Docum entary letters o f c re d it". Singapore, 1970 [hereinafter referred to as Ellinger], at pp. 281-82 said that in some cases demand for literal compliance, e.g., Dyer, J., in First National Bank of Lflcon v. Benslev [2 f. 609, p. 614 (1880)], but general tendency in all important legal systems is to avoidance o f a requirement o f literal compliance.
[1979]2 Ll.L.R. 450.
[1922]2 A.C. 36, at p. 46 Lord Sumner stated: "Wlien documents are to be taken up the buyer is entitled to documents which substantially confer protective rights throughout. He is not buying a litigation [...] These documents have to be handled by banks, they have to be taken or rejected promptly and without any opportunity for prolonged inquiry, they have to be such as can be re-tendered to sub-purchasers, and it is essential that they should so confomi to the accustomed shipping documents as to be reasonably and readily fit to pass current in commerce."; Gutteridge, supra (f.n. 4), p. 123.
The Galatia, supra (f.n. 23), at p. 456(1). [Eemphasis added] [1983] A ll ER468, [1982]2 Ll.L.R. 476, [1983]1 L.L.R. 228 (CA).
documents, and after thorough consideration stated: 'There is in my judgment, a real distinction between an identification of "the goods", the subject matter of the transaction, and a description of the goods. The second sentence of art. 32(c) gives latitude in description, but not in identification [...]. But however general the description, the identification must, in my judgment be unequivocal. Linkage between documents is not, as such, necessary, provided that each directly or indirectly refers unequivocally to "the goods". This seems to me to be the proper and inevitable construction to place on art. 32(c) if the specified documents are to have any value at all."^^
In conclusion, concerning the concept of the principle of strict compliance, the beneficiary of a credit should be aware of conditions stipulated in the credit so as to be able to tender proper and necessary documents. On the other hand, bankers should understand that only those conditions that are actually embodied in a credit are considered by the courts in relation to compliance. Nevertheless, the question is: what type of discrepancies are important to the law? This question is considered below later.
2. DOCTRINE OF AUTONOMY
The doctrine of autonomy is a cornerstone in letters of credit and is defined in Article 3 of UCP 500.^® It has been supported in many decided cases;®® for
27 inque tie l 'Indochine et Suez v. J.H. Rayner nVTincing Lane) Ltd.. [1983] 1 Ll.L.R. 228 (CA), p.
233(1); Article 32(c) o f UCP 290 (1974), referred in case above was similar to Article 41(c) o f UCP 400 (1983) and Article 37(c) o f UCP 500 (1993).
See Chapter V I for more details about the principle o f strict compliance.
Article 3 o f UCP 500 provides: "a. Credits, by their nature, are separate transactions from the sales or other contract(s) on which they may be based and banks are in no way concerned with or bound by such contract(s), even i f any reference whatsoever to such a conü’act(s) is included in the credit. Consequently, the undertaking o f a bank to pay, accept and pay Draft(s) or negotiate and/or to fu lfil any other obligation under the Credit, is not subject to claims or defences by the Applicant resulting from his relationships with the issuing Bank or the Beneficiary.
b. A Beneficiary can in no case avail himself o f the contractual relationships existing between thé banks or between the Applicant and the Issuing Bank."; it is similar to Articles 3 and 6 o f UCP 400; see also appendix 1 for Section 5-109 (I)(a) and 5-114 (1) o f the UCC.
See Chapter V II; Ellinger’s paper, Singapore Conferences 1990, supra (f.n. 12), p. 151; Schmitthoff, CM, "C o n flict o f laws issues relating to letters o f credit: An English perspective". Singapore Conferences
instance, in Power Curber International Ltd. v. National Bank of Kuwait,®^ where the plaintiff (an American Co.) brought an action against the defendant (an issuing bank placed in Kuwait) for rejecting payment of an irrevocable credit in England (since that bank had a registered address in London) the Court of Appeal gave support to the plaintiffs' argument. Lord Denning, M.R., in support of the above doctrine said: "It is vital that every bank which issues a letter of credit honour Its obligations. The bank is in no way concerned with any dispute that the buyer may have with the seller. The buyer may say that the goods are not up to contract. Nevertheless the bank must honour its obligations. The buyer may say that he has a cross-claim in a large amount. Still the bank must honour.its obligations. A letter of credit is like a bill of exchange given for the price of the goods. It ranks as cash and must be honoured. No set off or counterclaim is allowed to detract from it."®®
There is an exception, however, accepted by English courts as to the doctrine of autonomy, namely, if a fraud is committed by the beneficiary or such a crime was committed by a third party but the beneficiary is aware of it. The issue of fraud and other relevant points related to the doctrine of autonomy are discussed later below.®®
1990, supra (f.n. 12), pp. 103-114, at p. 105 (the principle o f autonomy o f the letters o f credit) [hereinafter referred to as Schmitthoffs paper].
31 [1981] 1 W.L.R. 1233; Schmitthoff, supra (f.n. 18), p. 341 & f.n. 25 (for referred cases).
Ibid., p. 1241; the credit arrangement is also independent from the contract between the buyer and the issuing bank dealing with furnishing a credit in favour o f the seller/ beneficiary. This view found support in N orth American M ainifacturers Export Associates. Inc. v. Chase National Bank o f C ity o f New Y o rk . 77 F. Supp. 55 (1948), where the plaintiffs' allegation was that the presented documents, although they did not comply with the terms and conditions o f the credit, were in accordance with terms which were agreed by the buyer and the defendant (the issuing bank) in an amendment o f the credit. Therefore, they should be regarded as good presentation under the credit contract. Medina, J., refused to accept that contention and held that: " If the bank, in the formulation o f the letter o f amendment, failed to follow the instructions o f its customer [...] this would not involve the bank in any responsibility to plaintiff. The letter o f credit, either in its original form or as amended must control."
See Section B, Chapter V II (below).
CONCLUSIONS
The letters of credit system offers a method of payment through a mediator (bank(s)) and provides a good assurance for both seller/beneficiary and buyer/applicant in an international sale transaction. LCs are used in different forms, namely, revocable credit, irrevocable credit and irrevocable/confirmed credit; the last one is the safest form of credit used in international trade including four parties (the applicant for a credit, the issuing bank, the confirming bank, and the beneficiary).®"^ Moreover, it is obvious that a letter of credit is a type of conditional payment, namely, against document(s) including a document of title (bills of lading) and serving as a means of payment in non-title passing transactions.®® This is the most important contribution of the documentary credit system in international trade.
Two important principles are operative for LCs, namely the doctrine of autonomy and the principle of strict compliance. Most questions about documentary credit operations are related to these principles. On the one hand the applicant for the credit may try to adopt a narrow interpretation of the rule of compliance, inter alia, by raising exceptions to the independent nature of LCs, and attempt to stop payment in undesirable circumstances related to the credit arrangement.®® The beneficiary of the credit, by contrast, may invoke the doctrine of autonomy in order to safeguard his rights within the system.®^ This may in some cases develop into an ongoing argument between the parties to the credit contract, making it difficult for the bank to decide which argument is correct, particularly where the subject for dispute is a legal issue such as fraud.
The importance of the above mentioned principles for providing a reasonable balance between the applicant and the beneficiary in a credit transaction and the
See Articles 2 (meaning o f credit), 6-9 (revocable, irrevocable credits) and 9(b) (irrevocable and confirmed credit) o f UCP 500, in ICC Pub. No. 500.
See Article 4, and 20-38 concerning the role and different types o f documents used in LCs. For legal issues related to the principle o f strict compliance see Chapter V I (below). See below Chapter V IL
sensitivity of issues related to them (which are legal in nature) are the main reason for the present status of law of LCs at international level. The UCP 500 provides only some general provisions concerning these principles (Articles 3 and 4), but the rest of important issues (such as their real concepts and exceptions) have not been codified at the international level and have been left to be decided by courts in different jurisdictions. As a result the same issue could be interpreted differently under different national laws.
It is true that there would be issues treated similarly in different jurisdictions; and, it is also true that providing a set of international standards to cover all details relevant to one issue would be impractical. However, this does not justify to discourage any attempt towards harmonisation and unification of law of LCs internationally. There is a real and practical need, as pointed out elsewhere,®® that the law of LCs to be unified and codified, as much as it is possible worldwide; parties to an international letter of credit transactions would prefer to face a set of international standards rather than different national laws concerning LCs. Moreover, recent activities by international organisations like UNCITRAL for preparing an international convention concerning SLCs and Bank Guarantees (BGs), are examples which confirm such a need for having possibly unified and codified international rules concerning the legal as well as practical aspects of LCs.®® In that respect, the next chapter of the present study deals with SLCs in more detail in order to establish whether a standby letter of credit is a type of LC; and if so, the impact of the recent UNClTRAL's activities upon the law of LCs at the international level.
For more details see relevant discussion in Section B, Chapter X (below). See Section A .2.1.3 in Chapter III and Section A.2 in Chapter X (below).