10 December 2007

Problem concerning 'strict compliance'

Literal compliance
Literal compliance generally means that the terms and conditions of the letter of credit must be fulfilled “literal” letter by letter. The bank is obliged to act within the frontiers of the given, formal and precise banking commission because the underlying sale contract between applicant and beneficiary lies outside knowledge and judgement of the bank. Where a bank receives the documents with a request for payment, it pays at its peril against documents which do not comply exactly with the terms of the credit.

Strict literal compliance
A first opinion interprets strict compliance in a strict literal sense: The bank has discharged its duties when it “has ascertained that, within the scope of the documents, all the necessary “i´s” are dotted and all the “t´s” are crossed, but on the other side it is not the bank´s concern if the appearance of compliance masks, some fraudulent dealing. Banks acting as they should under the doctrine of strict compliance may sometimes be criticized by their customers for being too ambitious when pointing out discrepancies of no or little relevance, but this would be an unavoidable consequence which follows from the nature of the service.
In most cases, it would be possible that the bank can ask the customer for approval; if there is no time for communication, a bank can still pay under reserve which would make it possible for the bank to claim reimbursement in case of a relevant discrepancy. To examine the documents “on their face” would have the meaning that banks are obliged to a formal examination of obvious discrepancies, but not to control if there are material discrepancies. Even a hyphen can lead to different interpretations. In other words, even the smallest discrepancy would not be tolerable because the bank cannot judge if such a small discrepancy can lead to enormous damages.

Wide literal compliance
Another opinion demands a wider compliance: where it can be shown that the supposed discrepancy results from a patent error, it would be unrealistic to treat the entire tender as invalid by reason only of a technical slip or mistake. To treat any typographical error or patent mistake as a discrepancy would convert the commercial transaction covered by the letter of credit into a proof reading exercise.
The kind and relevance of the mistake is therefore decisive, but not only if there is a mistake which is perhaps irrelevant for all parties. A discrepancy may not affect the value or merchantibility of the goods, and may thus appear merely technical. In such a case, a bank would nonetheless be obliged to found the documents acceptable. If a bank was obliged to ask the customer for approval even in obvious cases, a situation could occur where the customer tries to exploit the situation by requesting a discount of the price or other benefits from the seller. But a discrepancy must not be an emergency exit for buyers who regret their decision to buy. Therefore the bank must decide. In cases of obvious typographical or irrelevant errors it should be obliged to take up the documents.

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