Strict compliance in letters of credit transactions
Strict compliance in letters of credit transactions
The rule of strict compliance is in theory structured on the rule of independence of the letter of credit from the underlying Contract. The banker is obliged to make payment on tender of conforming documents. On the other hand, it is also obliged not to pay if presented with non conforming documents. To all intents and purposes, the rule, serves a double function. On the one hand, it obliges the beneficiary to tender regular conforming documents. On the other hand it obligates the bank to hold fast to its authorization in not comforting the beneficiary obligation.
The strict compliance standard supports the aims of assurance and dependability of the banker's credit; that against certainty of payment to the beneficiary, the account party is as well made certain to take delivery of documents in compliance to the tenor of the credit. The implied obligation of the banker is to pay against indisputable compliant documents. In the event this pragmatic aspect is not strictly considered, credits would slack their business efficiency. It is pertinent to indicate that if payment were dependent upon the interpretation of the underlying contract, the beneficiary would not be encouraged to employ the device.
It may be said that the rationalization behind the doctrine of substantial compliance does not warrant its application in letters of credit law. The essential reason for the substantial performance doctrine in Contract Law is to prevent the promisee from forfeiting the right of the promisor, when the latter carries out a substantial portion of his part of the deal. Nonetheless, the banker, under a letter of credit cannot obtain unjust enrichment for just rejecting to honour a draft as the banker usually charges a small fee. Moreover, the doctrine of substantial compliance is not tenable as a justification in a letter of credit transaction, where it specifically requires, as a condition precedent, submission of exacting documents.
It may seem axiomatic that the substantial standard runs opposite to the crucial objective of certainty secured by the strict standard, that the function of the banker is to find out whether the documents match on their face to the credit tenor or not. It is evident that application of the substantial standard imposes on the bankers the burden of performing an examination beyond the documentary field. This necessitates a time consuming effort and increases costs. The practical outcome is that the banker would require, besides well trained bankers in the custom and usage of the banking industry, lawyers to examine the complicated legal issues caught up in the procedure of deciding whether a definite performance is to be considered substantial or otherwise. In actual fact, documentary managers in most banks are not lawyers or having expertise in the arts of different trades. Likewise, a banker is bound to complete the process of examination within a reasonable time. On account of these matters the substantial standard is attacked on the basis that it invites controversy, disputes and it is anathema to the successful functioning of the letter of credit as a wonderful commercial device. In sum, the strict compliance rule is apt to maintain the letter of credit in international trade as a quick, efficient and inexpensive device.
Strict compliance in letters of credit transactions - To learn more about this author, visit Dr. Mohamed Ibrahim's Website.
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Letters of credits are of prime importance in the finance of international trade. They are aptly called the lifeblood of international trade. However, the question of strict compliance poses a practical problem. The main reason underlying the problem is the question of interpretation of the rules governing the process of letters of credits as contained in the Uniform Customs and Practice of documentary credits (UCP 1993 Revision) of the International Chamber of Commerce (ICC). It is submitted that the scope of discrepancy in letters of credits transaction is wide. It may comprise besides discrepancy in documents, errors and omissions, and late presentation of documents. Yet, in reliance on the recent surveys carried in the UK by SITPRO, the extent of loss is great. The UCP rules prescribe that the role of the banker is to examine the documents so as to make sure that the tendered documents do not contradict one another. This position is confirmed by the International Standard of Banking Practice (ISBP) for examination of documents under documentary credits. The ISBP is perceived to uphold uniformity of practice worldwide to the effect of saving time, speed up the flow of international trade, reduce cost and keep away from superfluous disputes.
The rule of strict compliance is in theory structured on the rule of independence of the letter of credit from the underlying Contract. The banker is obliged to make payment on tender of conforming documents. On the other hand, it is also obliged not to pay if presented with non conforming documents. To all intents and purposes, the rule, serves a double function. On the one hand, it obliges the beneficiary to tender regular conforming documents. On the other hand it obligates the bank to hold fast to its authorization in not comforting the beneficiary obligation.
The strict compliance standard supports the aims of assurance and dependability of the banker's credit; that against certainty of payment to the beneficiary, the account party is as well made certain to take delivery of documents in compliance to the tenor of the credit. The implied obligation of the banker is to pay against indisputable compliant documents. In the event this pragmatic aspect is not strictly considered, credits would slack their business efficiency. It is pertinent to indicate that if payment were dependent upon the interpretation of the underlying contract, the beneficiary would not be encouraged to employ the device.
It may be said that the rationalization behind the doctrine of substantial compliance does not warrant its application in letters of credit law. The essential reason for the substantial performance doctrine in Contract Law is to prevent the promisee from forfeiting the right of the promisor, when the latter carries out a substantial portion of his part of the deal. Nonetheless, the banker, under a letter of credit cannot obtain unjust enrichment for just rejecting to honour a draft as the banker usually charges a small fee. Moreover, the doctrine of substantial compliance is not tenable as a justification in a letter of credit transaction, where it specifically requires, as a condition precedent, submission of exacting documents.
It may seem axiomatic that the substantial standard runs opposite to the crucial objective of certainty secured by the strict standard, that the function of the banker is to find out whether the documents match on their face to the credit tenor or not. It is evident that application of the substantial standard imposes on the bankers the burden of performing an examination beyond the documentary field. This necessitates a time consuming effort and increases costs. The practical outcome is that the banker would require, besides well trained bankers in the custom and usage of the banking industry, lawyers to examine the complicated legal issues caught up in the procedure of deciding whether a definite performance is to be considered substantial or otherwise. In actual fact, documentary managers in most banks are not lawyers or having expertise in the arts of different trades. Likewise, a banker is bound to complete the process of examination within a reasonable time. On account of these matters the substantial standard is attacked on the basis that it invites controversy, disputes and it is anathema to the successful functioning of the letter of credit as a wonderful commercial device. In sum, the strict compliance rule is apt to maintain the letter of credit in international trade as a quick, efficient and inexpensive device.
Strict compliance in letters of credit transactions - To learn more about this author, visit Dr. Mohamed Ibrahim's Website.
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