Oral Test

“The ‘perfect tender’ rule governing the tender of goods under a contract of sale applies with equal force to the tender of a letter of credit and the tender of documents by [S] (ie the Seller – own emphasis) under a letter of credit.”

Ewan McKendrick, Goode & McKendrick on Commercial Law (6^th edn, Penguin) p1101.

Critically analyse the above quotation in relation to the doctrine of strict compliance for letters of credit under UCP600.

CONTENT

Introduction

Letter of credit base on UCP 600

Doctrine of Strict Compliance

Conclusion

Introduction

• Letters of credit ( “L/C”, “documentary credits” or “bankers’ commercial credits”): an important tool in the finance of international trade.
• Based on two core principles: (i) the independence of credit and (ii) the doctrine of strict compliance.

Introduction

• Issues: L/C seems straightforward but poses challenges that can be encountered in the letters of credit arrangement, much of which deals with the issue of documentary compliance. ‘From the point of view of the average businessman, nothing is simpler and clearer than a documentary transaction. He takes a letter of credit at its face value. (…) However, the legal basis for this expectation is by no means easy to discover’.¹

Fact: discrepancies in documents presented under the letters of credit have led to about 60% to 70% of such documents being rejected on first presentation.²

• The orientation shall focus on the “perfect tender” rule under the strict compliance doctrine in accordance with UCP 600 and precedents.
  1. P. Ellinger, ’Documentary Letters of Credit: A Comparative Study’ (University of Singapore Press), (1970) p.39.
  2. Jason C. Chuah, ’Law of International Trade: Cross-Border Commercial Transactions’ (4th edn Sweet &Maxwell, London), (2009) p. 549.

Introduction

• UCP 600: The Uniform Customs and Practice for Documentary Credits (“the UCP”) (i) set out International standards by the International Chamber of Commerce (ICC) and (ii) is in its sixth edition, in the form of the UCP 600, ICC Publication No. 600.

Note: Article 1 of the UCP 600 expressly states that the rules will only apply “when the text of the credit expressly indicates that it is subject to these rules”.

The UCP is not intended to be a code having the force of law and is only binding in a letter of credit if the parties to the contract expressly state it to be so.

The UCP does not purport to be a universal code setting out the law relating to credits. As a result, there are substantial areas on which the UCP is silent (such as the effect of fraud and

 

forgery, which is the main basis for refusing payment under a documentary credit), and in respect of which national courts of the relevant countries are left to adjudicate.

But L/C become an important method payment for international transactions.

Letters of Credit

• Definition: There is no express definition about L/C under the UCP. It is commonly accepted as undertakings to honour documents representing the current delivery of goods or services. UCP provides a definition on Credit linking to the L/C.

Article 2 of UCP 600 defines a credit as any arrangement, however named or described, that is irrevocable and thereby constitutes a definite undertaking of the issuing bank to honour a complying presentation.

• Categories of L/C: Documentary credits can be categorised as (i) Transferable or non-transferable, (ii) Revocable or irrevocable, and/or (iii) Negotiable or nonnegotiable.

Letters of Credit (Cont.)

• Relevant Parties: (i) Applicant, (ii) Beneficiary, (iii) Issuing Bank, (iv) Advising Bank, (v) Confirming Bank, (vi) Nominated Bank.
• Popular types of L/C: (i) Commercial Letter of Credit, (ii) Standby Letter of Credit.
• How it works: The table below illustrate the basic structure of a Commercial Letter of Credit.

Letters of Credit (Cont.)

Letters of Credit (Cont.)

Fundamental Principles of L/C

• The independence principle dictates that the credit is a “transaction in documents”. The credit is an autonomous contract, the performance of which is separate, and unaffected by, the underlying contract between the account party and the beneficiary that gave rise to it.
• The independence principle works in tandem with the principle that a commercial credit is a transaction in documents only, known as the doctrine of strict compliance. According to this doctrine, a paying bank is entitled to reject documents that do not strictly conform to the terms of the credit.

Doctrine of Strict Compliance

• The “perfect tender” rule: The 1927 decision handed down by the English court established the doctrine of strict compliance as a principle under the letters of credit.

In Equitable Trust Co. of New York v. Dawson Partners Ltd, Lord Sumner expressed that:

“there is no room for documents which are almost the same, or which will do just as well (…) the bank which knows nothing officially of the details of the transactions 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.”

• Applying the “perfect tender” rule developed under the sale of goods law to letters of credit transactions, it was held that the documents tendered were not exactly what the credit called for. The tender of similar documents are not acceptable.

Doctrine of Strict Compliance (Cont.)

• The paying bank’s refusal to make payment to the beneficiary when the presented documents are not compliant with the terms of the credit in the majority of cases has been upheld by the courts.
• In Bulgrains & Co. Ltd. v. Shinhan Bank, a discrepancy between “Bulgarian Co Ltd” in the credit and “Bulgarian & Co Ltd” in the tendered commercial invoice was held to be discrepant.

Discrepancy: Documents which comply in all respects will trigger payment under the L/C. Where documentary presentations do not comply strictly with the requirements, they are known as discrepant.

In many cases like: Moralice (London) Ltd v ED and F man (1954) Lloyd’s Rep 236;

Seaconsar Far East Ltd v Bank Markazi Jomhouri Islami Iran [1993]; Glencore

International AG v Bank of China [1996]…

Doctrine of Strict Compliance (Cont.)

Important Notes:

• All the specified documents need to be tendered and
• Tendered documents (by the beneficiary to the bank) shall strictly conform on their face with the documents specified under the terms stipulated under the credit.

Doctrine of Strict Compliance (Cont.)

Under the general contexts of UCP 600

Article 5 of UCP 600: Banks deal with documents and not with goods, services or performance to which the documents may relate.

Article 14.a of UCP 600: A nominated bank acting on its nomination, a confirming bank, if any, and the issuing bank must examine a presentation to determine, on the basis of the documents alone, whether or not the documents appear on their face to constitute a complying presentation.

Article 14.d of UCP 600: A nominated bank acting on its nomination, a confirming bank, if any, and the issuing bank must examine a presentation to determine, on the basis of the documents alone, whether or not the documents appear on their face to constitute a complying presentation.

Doctrine of Strict Compliance (Cont.)

Under the general contexts of UCP 600 (Cont.)

Article 16.c.(ii) of UCP 600: When a nominated bank acting on its nomination, a confirming bank, if any, or the issuing bank decides to refuse to honour or negotiate, it must give a single notice to that effect to the presenter. The notice must state: .. (ii) each discrepancy in respect of which the bank refuses to honour or negotiate..

Article 18.b of UCP 600: A nominated bank acting on its nomination, a confirming bank, if any, or the issuing bank may accept a commercial invoice issued for an amount in excess of the amount permitted by the credit, and its decision will be binding upon all parties, provided the bank in question has not honoured or negotiated for an amount in excess of that permitted by the credit.

Article 18.c of UCP 600: The description of the goods, services or performance in a commercial invoice must correspond with that appearing in the credit.

And many Articles of UCP 600 are expressed the Doctrine of strict compliance.

Doctrine of Strict Compliance (Cont.)

Remarks:

• Banks deal in finance and not in goods and every single party under a letter of credit transaction is required to tender strictly complying documents in order to be entitled to receive payment. In order to sustain the credit transaction, banks are only required to check the compliance of the documents with the credit terms.
• A complying presentation means a presentation that is in accordance with the terms and conditions of the credit, the applicable provisions of these rules and the international standard banking practice.

Doctrine of Strict Compliance (Cont.)

• The substantial compliance as the main principle and the application of strict compliance in the case of commercial invoice is implied under UCP. In other words, data in a document need not be identical but must not conflict.
• The description of the goods, services or performance in a commercial invoice must correspond with that appearing in the credit.
• Regarding the invoice amount, a bank may accept a commercial invoice issued for an amount in excess of the amount permitted by the credit, and its decision will be binding upon all the parties, provided that the bank in question has not honored or negotiated for an amount in excess of that permitted by the credit.

Conclusion

• The perfect tender rule or strict compliance principle, in general, has provided banks with a certain level of certainty and consistency.
• The bank, as issuer, is rest assured that the documents presented are for the same transaction under which the credit was issued.
• It further grants the bank absolution from making judgmental decisions by placing a restriction on the banks responsibility to deal strictly with documents.
• It also gives the seller certainty of payment under the letters of credit transaction. On the other hand, it ensures that the seller produce the required documents, which also assures the buyer as the applicant for the credit that the stipulated documents will be made available to him by the bank.

Bibliography

International Chamber of Commerce (ICC), ‘The Uniform Customs and Practice for Documentary Credits’ , ICC Publication No. 600

International Chamber of Commerce (ICC), ‘The International Standard Banking Practice for the Examination of Documents under Documentary Credits 2007’, ICC Publication No. 681 (“the ISBP”

681)

Ewan McKendrick, Goode & McKendrick on Commercial Law (6^th edn, Penguin) 1101

1. P. Ellinger, ‘Documentary Letters of Credit: A Comparative Study’ (University of Singapore Press, Singapore) (1970) 39

Jason C. Chuah, ‘Law of International Trade: Cross-Border Commercial Transactions’ (4th edn Sweet &Maxwell, London) (2009) 549.