11 December 2007

Italian court decision: Strict compliance

In general, the Italian approach of “facial” compliance obliges the bank to check the documents only externally to determine whether they comply with the terms and conditions expressed in the credit. The documents may be accepted legitimately if the bank determines that any formal discrepancies are irrelevant to the validity of the credit. Additionally, the bank is not responsible for the discrepancies in the documents if these irregularities cannot be detected during formal examination of the documents. The bank is not required to perform an exhaustive examination of the documents, but this check, though limited and external, must be extended to anything that would be immediately apparent upon examination. The following are some decisions of Italian courts from the early 1950s to the late 1990s that show how the strict compliance doctrine has been approached over the years.

Decision: Credito Italiano v. Banco di Sicilia,
Corte di Appello di Palermo – July 30, 1951
Corte di Cassazione – October 17, 1953

Initially, Italian jurisprudence favored the doctrine of strict compliance. More recently, however, Italian courts seem to prefer the “reasonable approach,” thanks to a decision of the Corte di Cassazione in 1953, which held that the bank’s examination of the documents must be intelligent, not automatic and that it must be based on a reasonable standard.

The case before the court dealt with the responsibility of a bank which, in a letter of credit transaction, paid the beneficiary upon presentation of documents that were not in conformity with the credit. There was a discrepancy between the letter of confirmation issued by the confirming bank and the certificate of analysis of the alcohol content of Marsala wine tendered by the beneficiary to the bank as part of the documents of the credit. The confirmation letter referred to the same terms as the purchase order issued by the customer to the beneficiary (the order referred to a certain amount of Marsala wine having a general alcohol content of seventeen percent), whereas the certificate of analysis specified an alcohol content of seventeen percent “al piccolo Malligand.”

The lower court held that the documents tendered by the beneficiary were formally regular. Nevertheless, the case was brought in front of the court of appeals. The claimant, Credito Italiano, asserted that the term specifying that the Marsala wine was of seventeen percent “piccolo Malligand” implied not just a formal discrepancy in comparison to the order (which referred simply to Marsala seventeen percent), but also a substantial discrepancy, because the generic indication of alcohol content included in the order should use only the measurement system recognized by law, that is, measurement of alcohol content by volume. On appeal, the court held that the discrepancy was irrelevant, and that the acceptance by the Banco di Sicilia of documents referring to “Marsala wine [seventeen] percent al piccolo Malligand” could be considered irregular only if the specific measurement method was not adequate to measure the alcohol content, which was not the case. The duty of diligence of the banks was limited to the mere control of the formal regularity of the documents. A mere literal discrepancy between the description of the goods as contained in the documents tendered by the beneficiary and what was requested by the buyer does not make the payment by the bank irregular if the descriptions in the two sets of documents can be considered equivalent.

The court of Cassazione confirmed the holding, asserting that even if the method of analysis (the “volume” method versus the “Malligand” method) was not suitable for correct measurement of alcohol content, it was not acceptable for the bank to refuse documents and payment on the ground of such a discrepancy between title and document. In other words, what is required of banks in verifying documents is a standard of reasonable care (una media ragionevole cura), for instance the diligence of an average, diligent bank employee, which has nothing to do with an analysis of the merits of the document’s substance. The court explained further that the bank’s duty is limited to that which is within the capacity of the average diligent bank employee who cannot be required to demonstrate specific knowledge in technical fields beyond his competence and expertise in the performance of his job. Both the appellate court and the court of Cassazione confirmed the acceptance of the documents and rejected the claimant’s request.

The International Standard Banking Practice (ISBP) issued by the International Chamber of Commerce states that documents presented under a letter of credit must not be inconsistent with each other, meaning that the data do not need to be identical, merely that the documents shall not be inconsistent. Thus, the decision of the lower courts, confirmed by the court of Cassazione, can be considered in compliance with the ISBP. The two documents (the confirmation letter issued by the bank following the client’s purchase order, and the certificate of analysis) are not inconsistent with each other. They are not identical, but a “mirror image” is not required.

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