6.01  We saw in Chapter 4 that it is the beneficiary’s and a nominated bank’s responsibility under a letter of credit to ensure proper delivery of their documents to the issuing bank or the party named in the credit. Also the various ways in which to establish whether a particular presentation has duly reached the designated presentee bank, including the type of situations when that presentee bank can assert improper tendering of the documents as a reason to refuse to honour the submission. Chapter 5 dealt with the nature and scope of the presentee bank’s duty to exercise reasonable care and diligence in handling a presentation, or in examining the documents to determine their compliance with the requirements of the credit. In this chapter, the ensuing discussion covers mostly the conceptual criteria for ascertaining the conformity. The manner of involvement of standard banking practice in the judicial application of the precepts will be included in order to introduce the next two chapters.

6.02  A letter of credit is in general available upon the beneficiary’s or nominated bank’s presentation of documents which comply strictly on its face with the terms of the credit. Delivery of apparently proper documents is thus a condition precedent to the availability of the funds specified in a letter of credit; and the nominated bank, in delivering the document for payment, does not vouch for their genuineness or accuracy,¹ provided it came into possession of the facially conforming documents in good faith.²

6.03  However, a host of US decisions³ at one time embraced the idea that the strict documentary compliance is inapplicable or should at the very least be relaxed in (p. 152) the context of a presentation of a defective set of shipping documents by an issuing bank to its customer, the applicant who requested the issuance of the credit, where the goods which the papers represent have safely arrived at their destination and perfectly comply with the sales contract underlying the credit. Comparatively recently, that idea has, in substance, found favour in the academic literature.⁴ With this approach (occasionally referred to as the bifurcated compliance standard), an issuing bank that inadvertently honours discrepant documents would be afforded protection against the applicant, whereas a nominated bank that mistakenly negotiates such documents to a beneficiary and seeks reimbursement from the issuing bank will fail since the latter could insist on strict conformity to the credit.

6.04  The asserted justification compelling such lopsided treatment of the parties’ rights and liabilities seems to have failed to persuade a majority of the American courts⁵ as well as the banking and mercantile community. Nevertheless, the bifurcated standard now appears to be a matter of historical importance. In substance, the Revised Article 5 rejects it, as do the English⁶ and Canadian⁷ courts. Fundamentally, an applicant-buyer has two rights:⁸ the right to insist on compliance of the goods shipped by the beneficiary-seller with the sales contract, and the right to have documents to which a reasonable banker or businessman entitled to deal in them could not raise a rational commercial objection; or in the words of Lord Sumner in Hansson v Hamel & Horley Ltd,⁹ ‘shipping documents reasonably and readily fit to pass current in commerce’.¹⁰ The rights are separate items of property; neither can be denied the applicant in the absence of his acts or conduct amounting to a waiver or estoppel.

6.05  It thus seems logical to suppose that the strict documentary compliance rule applies to the documents tendered by an issuing bank to an applicant as it does to those tendered by a beneficiary to an issuing or nominated bank, and by a nominated bank to an issuing bank. Shipment on a named vessel and delivery of goods in strict accordance with the sales contract underlying a credit would not obligate the applicant to accept from the issuing bank patently faulty documents. This separation between actual performance of the sales contract and the documents derives from the doctrine of autonomy that has evolved as a cardinal precept to augment the strict documentary compliance rule.¹¹(p. 153)

6.07  The import of the italicized words seems self-evident. In truth, however, the examining bank may on its own investigate facts represented in the documents or contract with the applicant to go beyond the documents as it pleases. At the very least, the cardinal precept of freedom of contract allows the bank to assume such special responsibilities in a given transaction.

6.08  The autonomy doctrine lays down that the various contracts which may be involved in a letter of credit transaction, such as the relations between the (i) applicant and beneficiary, (ii) issuing bank and applicant, (iii) issuing bank and nominated bank, (iv) nominated bank and beneficiary, and (v) issuing bank and beneficiary, are separate and independent of one another.¹³ Nevertheless, they all relate to the same sales or provision of services contract to which only the applicant and the beneficiary are parties and in furtherance of which the credit has been opened. Regularity of the documents presented under the respective contractual relationships is to be determined by what is on their face against the requirements of the credit,¹⁴ without the presentee party being obliged to inquire into the quality of performance by the beneficiary of his sales contract obligations to the applicant or taking into account, if such is the case, the applicant’s inability to obtain a licence from the government of his country permitting him to import the Guinness beer ordered.¹⁵ The impossibility of execution of the underlying contract is wholly immaterial to the obligation arising out of the credit.

6.09  Accordingly, where, for instance, a credit is issued to support a sale of goods transaction or a contract for the provision of professional, technical, or scientific services, a presentee applicant has to take up the documents tendered to him by the issuing bank regardless of his possibly legitimate belief that the documents could not be true because the goods ordered were never shipped, or that the indicated shipment did not occur in the manner stated in the bill of lading submitted, or that no services have been rendered at all. What matters, at all events, is that the documents on their face correspond with the requirements of the credit, and that the issuing bank acted properly and carefully in accepting them from the beneficiary (p. 154) or nominated bank; the applicant’s right of recovery against the beneficiary would have to be pursued under the terms of their sales contract.

6.10  A letter of credit may be payable against a presentation of specified documents evidencing shipment of a stated quantity of, say, salmon, or promise payment upon the issuer’s receipt of a certificate attesting to the occurrence of a named event. The event may concern the applicant’s default on his contractual obligations to the beneficiary, or an unpaid invoice covering materials sold to the applicant. The autonomy rule, in general, forbids the issuing bank, having received the respective stipulated shipping documents or certificate, from going behind the documents to determine personally, or by its agent, whether the cargo of the salmon meets the provisions of the sales contract between the applicant and the beneficiary, or whether the event certificated indeed occurred. The bank’s concern is generally with the facial conformity of the documents with the terms and conditions of the credit; it is not entitled to inquire about the actuality of the facts to which the documents are related.¹⁶

6.12  Similarly, in English, Scottish & Australia Bank Ltd v Bank of South Africa,¹⁹ Bailhache J. expressed the view that: ‘It is elementary to say that a person who ships in reliance on a letter of credit must do so in exact compliance with its terms. It is also elementary to say that a bank is not bound or indeed entitled to honour drafts presented to it under a letter of credit unless those drafts with the accompanying documents are in strict accord with the credit as opened’.²⁰

6.13  Both of these statements are widely regarded as expressing the principle with the greatest degree of accuracy and clarity;²¹ they have remained unquestioned, nor improved upon,²² for (p. 155) nearly ninety years; judges in Anglo-American jurisdictions confronted with cases involving conformity of documents presented by an issuing bank to an applicant, by a nominated bank to an issuing bank, or by a beneficiary to an issuing or nominated bank, routinely preface their decisions with them.²³ Even the various state legislatures of the US, apparently enamoured of the case law stance, have had to follow suit and have enacted the strict documentary compliance rule in section 5-108 (a) of Revised Article 5 of the Uniform Commercial Code.

6.14  Pursuant to the rule, the de minimis non curat lex principle which ordinarily applies to documents tendered for payment of the purchase price under a sale of goods contract,²⁴ is inapplicable to documents presented in letter of credit transactions. Thus, under a credit calling for shipping documents for a consignment of 5,000 bags of sugar, a bill of lading which covers 4,997 bags is a bad tender.²⁵ The field abounds with other classic illustrations of the strictness of the doctrine: A telex stating that a packing list has been sent to a designated person but without indicating that it was legalized is defective.²⁶ So are bills of lading bearing ‘Soran’ rather than ‘Sofan’;²⁷ ‘Jun’ instead of ‘Jin’;²⁸ port of shipment ‘Balongan, West Java’ in place of ‘Balongan, Indonesia’;²⁹ ‘granulated white sugar’ instead of ‘standard white granulated sugar’;³⁰ a document which refers to a contract dated 30 June 1987 rather than 30 June 1986,³¹ or 29 April 1983 as opposed to 28 April 1983,³² or a statement ‘The undersigned hereby certifies that I have determined that [A] has failed to make payment’, as opposed to ‘The undersigned hereby certifies that [A] has failed to make payment’, with the words in italics making all the difference.³³ Similarly, a bill of lading indicating ‘machine-shelled (p. 156) groundnut kernels’ accompanied by an invoice showing the goods sold as ‘coromandel groundnuts’ submitted for acceptance under a letter of credit available against ‘invoice and bills of lading for coromandel groundnuts’ is considered non-compliant with the credit.

6.15  Literal, mirror image application of the rule of strict documentary compliance³⁴ has drawn fierce criticism over the years. In particular, it is felt that the courts’ approach effectively turns banks’ checking of documents for conformity under a credit into an extremely exacting proofreading exercise, despite the fact that a very limited period of time³⁵ is traditionally allowed the bank to complete the checking and make a quick decision as to whether to accept or refuse the documents.³⁶ Arguing that cases of the type instanced are difficult to support, Professor Ellinger said:

In modern trade it is virtually impossible to procure a perfectly regular set of documents. Many of the documents tendered under a documentary credit are prepared not by the beneficiary but by a third party, such as a shipping agent, surveyor, or carrier. The beneficiary has no control over the clerks of such a party. Furthermore, the beneficiary’s own staff cannot be expected to be infallible. A typist can make a misprint when she fills out a document; and even a vigilant proofreader can have a lapse. Practical experience with the examination of documents carried out each day by banks all over the world supports the argument that strict compliance has become a somewhat unrealistic doctrine.³⁷

6.16  Although the validity of this passage in relation to the impracticability of operating letters of credit with entirely faultless documents is self-evident, nevertheless, the courts’ insistence on strict documentary conformity needs to be put into perspective. In a general sense, enforcement of strict, literal compliance of documents with the terms of a credit in letter of credit litigations ensures legal certainty and predictability. Moreover, it entails a strong message to any issuing or nominated bank examining a set of documents delivered under a credit that no quarter is given in this branch of the law: an issuing or confirming bank must either take up the documents on pain of the tender proving not to be apparently strictly conforming, or dishonour them at the risk of a lawsuit from the presenting beneficiary or nominated bank.

6.17  It is, however, sometimes thought that the requirement of strict documentary compliance helps to safeguard the applicant’s interests because, for example, a certificate of analysis or of quality which is nearly the same as that called for in a credit is often an indicia of its unreliability and possibly non-shipment of, or defects in, the products it purports to certify, (p. 157) and accordingly a bad tender. But the reality of the matter is that the rule furnishes no such protection, since facial compliance of the documents is practically all that is generally required to entitle the presenting bank or beneficiary to get the amount of a credit and ultimately triggers the applicant’s undertaking to reimburse the issuing bank for that sum.

6.18  The foregoing notwithstanding, the courts typically insist on strict regularity of documents in order to surmount otherwise possibly insurmountable obstacles. A brief consideration of a couple of decisions will afford an insight into this proposition. In Equitable Trust Co of New York v Dawson Partners Ltd, cited earlier, the letter of credit at the centre of the litigation was opened with the appellant bank to finance a consignment of sweet vanilla beans of prime quality, and stipulated for payment against ‘a certificate of quality issued by experts who are sworn brokers’. But the bank honoured a certificate issued by a single expert who was a sworn broker and sought in an action reimbursement from the applicant against the certificate. Rather than the beans he promised the buyer, the applicant for the credit, the beneficiary-seller shipped rubbish and disappeared immediately after receiving payment, and then went into bankruptcy.

6.19  The bank’s claim failed in the House of Lords, with their Lordships, by a majority of 4-1, holding that the certificate tendered to the applicant was not the certificate stipulated for and, accordingly, there had been non-compliance with the requirement of the credit. In the course of his concurring judgment, Viscount Cave L.C. noted that the buyer ‘desired to be protected by the opinions of not less than two experts ... who would ... be severally responsible for the exercise of care and reasonable skill in giving the certificate of quality’,³⁸ and that ‘it is at least possible that if a second expert had been employed, he would have exercised more care than [one expert] and would have satisfied himself that the goods which he had inspected and certified were actually shipped’.³⁹

6.20  It should be noted that, even if the requisite experts had inspected the goods prior to the time of shipment, the beneficiary-seller would still have succeeded in carrying out the fraud, because there was evidence⁴⁰ that he substituted the worthless goods for the genuine ones the single sworn expert had inspected previously. At any rate, a certificate attesting to the integrity of the merchandise placed on board a ship naturally has its limitations, since, as concisely put by Bigham J. in Basse v Bank of Australasia,⁴¹ the quality of the goods is ‘necessarily tested by means of samples’; moreover, many an expert is unwilling, for the comparatively negligible fees the beneficiary-seller is prepared to pay for inspection services, to undertake the extreme inconvenience of opening all the cases containing the goods before issuing the required certificate of quality, analysis, or quantity; nevertheless, such manual verification would be impossible in the majority of transactions.

6.21  We return now to the issue at hand, namely, that the strict compliance rule assists judges in getting over difficult hurdles and doing practical justice in particular cases—as opposed to safeguarding the applicant’s interests. In the course of the reasoning leading to the conclusion (p. 158) reached in Equitable Trust, the majority judges found themselves in the difficult but quite familiar position of deciding, between the claimant issuing bank and defendant applicant, the party who should bear the loss resulting from the fraud of a third person, the beneficiary. In seeking to get over the difficulty, Lord Atkinson emphasized that ‘the business of Courts of law, from the lowest to the highest, [is] to enforce legal rights’.⁴² The credit in question prima facie entitled the applicant to a certificate of quality issued by sworn expert brokers; ergo, just resolution of the matter before their Lordships came down to ascertaining whether there was anything, such as a waiver, estoppel, or an ambiguity arising out of the credit in light of the surrounding circumstances of the case, depriving the applicant of his strict legal right to demand the certificate against which he undertook to reimburse the issuing bank; but the bank could not successfully prove any such countervailing circumstance. Hence it lost the action.

6.22  Situations similar to that in Equitable Trust are exemplified by an omission or misspelling of a designated name or number in presented documents, which renders the documents to be at variance with the credit. Some of these have already been mentioned, but they also include Overseas Union Bank Ltd v Chua Teng Hwee⁴³ (a certificate evidencing shipment of ‘seaweeds’ rather than ‘seaweeds (tengusa)’), Bank of Cochin Ltd v Manufacturers Hanover Trust Co⁴⁴ (letter of credit established in favour of ‘St. Lucia Enterprises Ltd’, but the entity indicated in the documents tendered was ‘St. Lucia Enterprises’; insurance cover note number ‘4291’ rather than ‘429711’), United Bank Ltd v Banque Nationale de Paris⁴⁵ (‘Pan Associated Pte Ltd’ as opposed to ‘Pan Associated Ltd’); Beyene v Irving Trust Co.⁴⁶ (‘Soran’ instead of ‘Sofan’), and Hanil Bank v PT Bank Negara Indonesia⁴⁷ (‘Sun Jun Electronics Co Ltd’ rather than ‘Sun Jin Electronics Co Ltd’).

6.23  In each of the first three cases, the beneficiary of the letter of credit involved had tendered the documents to a nominated bank and obtained payment without effecting shipment, or ensuring delivery by his suppliers, of the merchandise covered by the credit. The judge (as did the judges in Equitable Trust) thus confronted the question of deciding between the litigants, the party who should suffer the consequences of the scam. Once again, he took the only course of action open to him, i.e. affirm the strict legal rights of the dishonouring bank to insist on documents that carried on their face the requisite terminology.

6.24  But in doing so, the courts in substance recognize that Lord Sumner’s dictum, ‘There is no room for documents which are almost the same or which will do just as well’, or that of Bailhache J., ‘documents must be in exact compliance’ with the terms and conditions of a credit, ‘does not require literal compliance in all cases’.⁴⁸ Literal, mirror image conformity is generally required; but minor variation between the tendered documents on their face and the terms of the credit will be disregarded,⁴⁹ and a presentee applicant or (p. 159) bank asserting such a disparity as a ground for dishonouring a presentation is doomed to defeat.

6.25  In determining whether a particular discrepancy is sufficiently material to entitle the presentee to reject the document, however, the applicable test, it is submitted, is that of the hypothetical opinion of a reasonable banker located in the jurisdiction of the presentee or of the presenting bank or beneficiary, depending on the character of the omitted or misspelled terminology in issue in the individual case. At all events, an omitted word(s),⁵⁰ a misspelling, or misdescription⁵¹ is material if it would invite⁵² the reasonable bank document checker to make enquiry beyond the presented documents or is such as to instigate litigation,⁵³ mislead the bank, necessitate the solicitation of legal advice,⁵⁴ or raise the likelihood of non-performance of the underlying sales contract or a fraud by the beneficiary⁵⁵

6.26  This was clearly the test applied in all the decisions under reference. To elaborate a little further, in Bank of Cochin, Cannella J. determined on the ground of the evidence before him that the non-provision of the correct number in the insurance cover note ‘was not inconsequential as the mistake could have resulted in the insurer’s justifiable refusal to honour the insurance policy’,⁵⁶ with the consequence that the applicant or some other person who was intended to be benefited by the policy, would be left unprotected should the event insured against occur. The omission of the word tengusa in the description of the goods allegedly shipped in Overseas Union Bank was similarly regarded by Winslow J.

6.27  Moreover, in the same vein, in giving judgment for the presentee bank, the Beyene court, followed by Keenan J. in Hanil, found compelling evidence establishing that in the (p. 160) country where the credit was issued and the presented documents were to be utilized to obtain delivery of the merchandise, the misspelling indicated would not be recognized as an obvious typographical error as would ‘Smithh’⁵⁷ instead of ‘Smith’⁵⁸ in, say, England. This is particularly so because the misspelling of the requisite name could have caused difficulties for the applicant-buyer in clearing the goods from the customs department due to stringent local regulatory requirements. (And that was in fact what transpired in the Beyene case: owing to the misstatement, Sofan, the applicant-buyer, could not obtain the prefabricated houses he sought to purchase by means of the letter of credit; as a result, demurrage and other charges accumulated. Upon failing to reach a negotiated settlement with the seller-beneficiary, Sofan refused to waive the documentary discrepancy.)

6.28  The decisions we have examined, and many others which cannot conveniently be cited here, are all patterned on the fundamental policy which inspired the statement of principle lucidly expressed by Bailhache J. in 1922 and by Lord Sumner in 1927, that a presentee applicant or bank is entitled to reject a document which does not on its face answer strictly to the requirements of a credit. Accordingly, far from being a supposedly blunt instrument, the strict documentary compliance doctrine remains largely the owner of the game in this field, for, while it is unarguable, and indeed commercially inevitable, that the principle requires no such thing as rigid meticulous fulfilment of precise wording of a credit in all cases, banks should bear in mind that the margin allowed is slight;⁵⁹ cases in which less than strict compliance is typically permitted chiefly comprise the subject of inquiry throughout this part of this work.

6.29  It is worth underscoring that the doctrine is extremely stringent⁶⁰ and typically operates as would a strict liability rule in criminal law in that it does not grant recovery on compassionate grounds or have a friendly sympathetic ear. It may, and often will, cause considerable hardship to a presenting beneficiary, issuer, or nominated bank claiming to be entitled to payment against tendered but less than faultless documents. However, so far as the decisions are concerned, it is preferable for such a party to suffer hardship when there is no reason in justice why the counterparty should be denied his strict legal right to insist on perfectly complying documents. We shall now turn to the general circumstances which may and sometimes will compel a non-literal, mirror image application of the strict documentary compliance doctrine, while leaving for consideration in Chapter 7 acceptable manner of documentation in particular contexts.

6.30  A convenient starting point is the letter of credit which featured in Equitable Trust. It will be recalled that the credit was expressed to be payable against ‘a certificate of quality issued by experts who are sworn brokers, signed by the Chamber of Commerce’. The certificate which the plaintiff issuing bank honoured and presented to the defendant applicant for reimbursement was, as appeared on its face, signed⁶¹ on behalf of a body known as ‘Handelsvereeniging te Batavia’. In addition to the argument that the certificate was not issued by a single sworn broker it was claimed that it was not in strict compliance with the provision of credit because it had not been certified by the right body. In other words, the document was not exactly what the applicant promised to take up from the issuing bank.

6.31  Whereas a certificate of one expert was, correctly it is submitted, determined to be defective, it would seem that the credit could have been satisfied in one of two ways: the furnishing of a certificate executed by at least two experts, or two or more certificates separately attested by different experts, provided that in either case the experts were sworn brokers. Support for this view can be gathered from the various speeches of the majority.⁶² This would also be the conclusion under the UCP 600. By its Article 14 (f), if a credit requires presentation of a document that is not a transport document,⁶³ insurance document, or commercial invoice,⁶⁴ without stipulating by whom the document is to be issued or its data content, the presentee bank is entitled to accept a document, the content of which appears to fulfil the function of the required document to the extent that it is otherwise regular on its face. Pursuant to this clause, inasmuch as a certificate called for in a credit such as that in Equitable Trust is required to be issued by sworn experts who are brokers and their signatures certified by a named body, any certificate(s) which facially satisfies those requirements should be considered sufficient.

6.32  As to determining whether a given signature is certified by a designated body, the reasoning of Bateson J. at first instance in Equitable Trust⁶⁵ provides some helpful guidance. The judge found that in Batavia there was no body called the ‘Chamber of Commerce’; instead there were two viz. ‘Kamer von Koophandel’ and ‘Handelsvereeniging te Batavia’. Literally translated into English, they were respectively ‘Chamber of Commerce’ and ‘Commercial Association of Batavia’. As appeared in evidence, each time the former was asked for any certificate or a signature to be certified, it would refer the person to the latter body. Despite their names, therefore, it was only the latter that could in fact do what Chambers of Commerce usually did. In these circumstances, the judge concluded⁶⁶ that, considering the ‘proper business meaning and functions of Handels ... in Batavia’, this body ‘more nearly corresponds⁶⁷ (p. 162) to the “Chamber of Commerce”’ the letter of credit contemplated. Accordingly, the body’s attestation to the certificate was a ‘perfectly good signature’ and complied with the credit.

6.33  Scrutton and Bankes L.JJ. in the Court of Appeal⁶⁸ and Viscount Cave L.C. in the House of Lords⁶⁹ agreed with Bateson J. A vitally important principle which these rulings seem to have laid down can easily be identified: In ascertaining whether the documents tendered under a credit are the required documents, the material terms of the credit and the wordings of the particular documents involved must be construed in the same way that a reasonable banker in the situation of the presentee party or presenting party would regard them. This approach, shared by the American courts,⁷⁰ entails giving the documents and requirements of the credit a business construction, and inherently prefers an interpretation that accords with furthering the reasonable commercial purpose of the relevant stipulation in the instrument to one that will defeat it. Without their Lordships, in effect, expressing such a preference in Equitable Trust, no form of certificate could have literally complied with the credit, because the specified body in the credit was not in the habit of providing the certification. Performance of the pertinent stipulation being impossible, the whole object of the facility would thus have been crippled, a result on the slippery slope towards undermining the parties’ ostensible commercial purpose of setting up the credit to finance their sales transaction and, most importantly, to provide the beneficiary-seller with the means of obtaining payment of the purchase price of the consignment shipped to the buyer.

6.34  Diamond Q.C. (sitting as a judge of the Queen’s Bench, Commercial Court) and the Court of Appeal, avoided an undesirable commercial result of the sort adverted to in the foregoing in Kredietbank Antwerp v Midland Bank Plc⁷¹ and consolidated the business common sense approach enunciated and applied by Bateson J. and the House of Lords in the Equitable Trust case. Kredietbank Antwerp involved a letter of credit which stipulated for, among other documents, a ‘Certificate of quality’ and ‘Draft survey report’ issued by ‘Griffith Inspectorate’. A presenting nominated bank claimed to be entitled to reimbursement from the presentee issuing bank against a set of documents which included a certificate of quality and a draft report issued in two papers with the letterhead ‘Daniel C Griffith (Holland) B.V.’. The documents were duly signed for that company. Further, at the foot of each document, as part of the printed paper was a logo ‘Inspectorate’; and the caption ‘Member of the Worldwide Inspectorate Group—dedicated to the elimination of risk’ was legibly printed underneath the logo. One of the issues for determination by the court was whether the documents were in apparent compliance with the terms of the letter of credit, since the certificate of quality and survey report were not issued by ‘Griffith Inspectorate’ as required by the credit. After an extensive review of a long line of authorities advocating the justification for strict documentary compliance, Judge Diamond Q.C. offered some guidance as to the marginal cases(p. 163) in which the commercially reasonable standard of document verification as opposed to the literal, mirror image method might be employed with profit when he said:

6.35  ‘Where [the credit] requirements are ambiguous, it is permissible, and indeed ... essential in practice, for the banker to adopt a reasonable interpretation of those requirements. In considering what is a reasonable interpretation a banker is not precluded from having regard to the commercial function of the document required by the credit if that function is, or should be, apparent to a banker examining the document with reasonable care. It is in this sense that in my view a banker’s approach to document verification should be functional rather than literal or rigid’.⁷²

6.36  As it turned out, and as had happened in Equitable Trust, there was no entity existing as ‘Griffith Inspectorate’. But there was an Inspectorate Group consisting of individual companies having affiliation with it; Griffith Company was a member of this Group. Considering these facts, which the court found would be a matter of common knowledge to a reasonable issuing or nominated bank, his Honour had little hesitation in concluding that the documents presented for reimbursement were what the credit had called for. The Court of Appeal affirmed⁷³ the trial judge’s decision.

6.37  Crucially, the Singapore Court⁷⁴ of Appeal, Hong Kong High court,⁷⁵ and a number of American courts⁷⁶ have effectively adopted the train of reasoning that led his Honour, Diamond Q.C. in Kredietbank to consider the documents before him conforming, and enter judgment in favour of, the presenting nominating bank. It is worthwhile to stress the point that none of these decisions evinced a departure from the literal, mirror image standard of strict documentary compliance. It would be a mistake to take such a view. All that they have done has been to illustrate the type of situations in which one should ensure a non-literal application of the doctrine of strict documentary compliance in the interests of the parties.

6.38  Likewise, although Article 14 (d) of the UCP 600 articulates that ‘data in a tendered document need not be identical⁷⁷ to data in that document, any other stipulated document or the credit’, it should not be forgotten that this provision is in substance in consonance with the (p. 164) courts’ understanding of the requirements of the strict documentary compliance doctrine. It is of course possible to read the italicized words as laying down a substantial documentary compliance rule of general application, unlike the doctrine which denotes the opposite and insists that documents must immaculately conform to the terms of a credit. Still, in practice, as evidenced by the decisions just examined, it can scarcely be doubted that there is no real difference between what Article 14 (d) says and the case law precept. If, however, any doubt exists, this will be cleared up by the ensuing survey of some of the cases in point by reference to the related provision of the UCP 600.

6.39  It would be helpful to begin with J.H. Rayner & Co Ltd v Hambros Bank Ltd,⁷⁸ a case in which a letter of credit was stated to be available against an invoice and bills of lading for ‘Coromandel groundnuts’, but the seller presented bills of lading for ‘machine-shelled groundnut kernels’ accompanied by an invoice for ‘Coromandel groundnuts’. The bank refused payment on the basis that the description of the goods in the bills of lading was inaccurate. However, it was established in evidence that ‘machine-shelled groundnut kernels’ were universally known in the trade to be identical to ‘Coromandel groundnuts’. Relying on dicta in the Equitable Trust and Bank of South Africa cases, the Court of Appeal allowed the nominated bank’s appeal and dismissed the beneficiary’s claim. Responding to the latter’s contention that his documents had complied with the credit, Mackinnon L.J. emphasized that ‘on pure principle (i.e. as matter of strict legal rights created by the facility), the bank was entitled to refuse to accept the sight draft on the ground that the documents tendered, the bill of lading in particular, did not comply precisely with the terms of the letter of credit which they had issued’.⁷⁹

6.40  Significantly, the Court of Appeal also sustained the bank’s argument that the common understanding of the technical terms among the merchants involved in the groundnut trade was immaterial to the bank. In this regard, Mackinnon L.J. was of the opinion that ‘it is quite impossible to suggest that a banker is to be affected with knowledge of the customs and customary terms of every one of the thousands of trades for whose dealings he may issue letters of credit’.⁸⁰ Similarly, Goddard L.J. said: ‘I protest against the view that a bank is to be deemed affected by knowledge of the trade of its various customers’.⁸¹ The subtext of their Lordships’ pronouncements is that the banks are only presumed to have knowledge of usages and practices prevailing in their own trade.

6.41  On this point, Rayner substantially built on the American case law, which had then been prevailing since the 1922 decision of the New York Appellate Division in Lamborn v Lake Shore Banking & Trust Co.⁸² In this case, a bill of lading tendered along with certain drafts for payment showed the goods shipped as ‘Java white sugar’ rather than ‘Java white granulated sugar’. Affidavits were presented on behalf of the beneficiary-seller (the claimant as in Rayner) to establish that Java white granulated sugar was universally known in the market as Java white sugar. The Appellate Division stressed⁸³ that the bank is not concerned at all with (p. 165) the existence of such facts as alleged, because the ‘only contract’ which in the instant letter of credit the defendant issuing bank had made with the beneficiary-seller was to honour the latter’s drafts against a bill of lading for ‘Java white granulated sugar’.

6.42  In Indian Overseas Bank v United Coconut Oil Mills Inc,⁸⁴ the Singapore Court of Appeal was presented with the opportunity to consider the extent to which the banks should not be assumed to have knowledge of the customary terms and usages relating to the individual trades of their customers. A negotiation credit issued by the appellant bank in Singapore to provide payment for some 20,000 metric tons of crude coconut oil and cochin oil in favour of a Philippine exporter required to be tendered a certificate of analysis containing, among other information, ‘FFA (as lauric acid): ... % max’. The seller presented laboratory reports which stated in relevant part: ‘FFA (as oleic acid): ... % max; FFA (as lauric acid): ... % max’. The issuing bank claimed that the additional information rendered the reports non-conforming. LP Thean J., delivering the judgment of the Court of Appeal, considered ‘overwhelming’ the evidence that the additional information ‘FFA (as oleic acid)’ contained in the certificate was immaterial because it was a common practice in the trade in the Philippines to express the FFA content of the oil in terms of both oleic acid and lauric acid,⁸⁵ but, relying on Rayner, nevertheless concluded that the bank is not presumed to have knowledge of that practice. A reasonably competent banker on examining the laboratory reports tendered would be unlikely to appreciate that the additional information was inconsequential. The issuing bank was thus justified in rejecting the laboratory reports. It is suggested, however, that this conclusion would be different if it had been sufficiently indicated in the reports that the ‘FFA (as oleic acid) ...’ was an alternative to ‘FFA (as lauric acid) ...’, and that one was convertible to and from the other.

6.43  What is the position where the banking practice in issue is a matter of common knowledge to a reasonable banker in the seller’s locality?⁸⁶ Is such knowledge necessarily to be imputed to the reasonable banker in the issuing bank’s location? In the light of our discussion in Chapter 5, it would clearly be wrong to do so. The answer is, however, less clear where a nominated bank in the seller’s country merely acts as an agent of the issuing bank operating there. There is no direct authority on the point, but it is submitted that, as a matter of general (p. 166) agency principles, any knowledge deemed to be held by such a nominated bank may be imputed to the issuing bank, his principal.⁸⁷

6.44  Any additional information, descriptions, or statements in a tendered document must not create a material inconsistency with the required description. In Bank Melli Iran v Barclays Bank (Dominion & Overseas),⁸⁸ the credit called for a delivery order, invoice, insurance policy, and a United States Government certificate evidencing shipment of 100 new Chevrolet trucks. This set of documents was tendered, but it variously described the trucks as ‘100 Chevrolet trucks in new condition’, ‘100 new, good Chevrolet’, and ‘new-good’. Nevertheless, the nominated bank honoured the tender as conforming. McNair J. held that these expressions taken separately could not mean the same as ‘new’. On the contrary, they established that the trucks shipped to the buyer were second hand. Accordingly, the nominated bank was not entitled to reimbursement from the plaintiff issuing bank.

6.45  It seems reasonable to infer from the cases of Equitable Trust, Rayner, and Bank Melli that where the buyer’s instructions as contained in the letter of credit are clear, both as to the required documents and the description of the goods, a tender must precisely comply with the requirements. It is also obvious from the latter two cases that there must be consistency among the presented documents.⁸⁹ In Rayner, the invoice bearing the words ‘Coromandel groundnuts’ was at variance with the bills of lading containing ‘machine-shelled groundnut kernels’. And in Bank Melli, the United States Government certificate was inconsistent with both the delivery order and the invoice in that it did not purport to relate to any specific trucks, an omission McNair J. regarded as the ‘more important defect’ in the certificate. Under these circumstances no difficulties arise as to what strict documentary compliance entails. Or, to put it differently, in those contexts it is easy to see what the bank is obliged to reject as an irregular set of documents. At all events, the various approaches are mandated by Article 14 (d) of UCP 600, which states that ‘data in a document must not conflict with data in any other stipulated document or the credit’.⁹⁰

6.46  The documents we have seen will also fail sub-article (d) on both counts: one, inconsistency with the credit, and the other, inconsistency among themselves. Notably, as in the case of omitted words, misspelling of designated names, or misstating of an insurance policy number, not all varieties of such inconsistency will be treated by a court as automatically entitling the presentee applicant or bank to refuse the affected document. An inconsistency has to be sufficiently material to enable the presentee to do so(p. 167) If this conclusion is accepted, as it should be, then no real distinction seems to exist between the case law stringent documentary compliance doctrine and the supposed less than strict standard in Article 14 (d).

6.47  This does not, however, ignore the fact that the doctrine has an overly erratic character as demonstrated by the early Singapore case of Overseas Union Bank Ltd v Chua Teng Hwee.⁹¹ The facts were these. A letter of credit called for an ‘inspection certificate in duplicate issued by Moine Comte Co Ltd., Singapore evidencing shipment ... of seaweeds (tengusa)’.⁹² The seller presented his draft and a certificate to the nominated bank for negotiation, but they were dishonoured on the basis of two discrepancies: the word ‘tengusa’ in brackets after ‘seaweeds’ was not in the certificate, the effect of which has already been considered above; and, second, the certificate contained the following reservation: ‘This report refers to weight only and does not certify to the proper description of the goods nor of the contents of the packages’. Upon being provided a letter of indemnity against the asserted discrepancies, the nominated bank honoured the documents, but the issuing bank subsequently rejected the documents for presumably the same irregularities. Whereupon the nominated bank brought an action to recover the sum initially paid out. Recovery was only possible if the alleged discrepancies were valid.⁹³ Winslow J. held that there was no strict compliance with the terms of the credit. Both the asserted discrepancies were thus sustained.

6.48  His Lordship’s conclusion on the tengusa point is surely correct and, indeed, fits in with the Equitable Trust and Rayner type of situation. But his view that the qualification in the certificate rendered it non-complying as a certificate of inspection is open to criticism for a number of reasons best explained by looking at the later decision of the Privy Council in Commercial Banking Co of Sydney Ltd v Jalsard.⁹⁴ Reference may also be made to the much later decision of the Singapore Court of Appeal in Indian Overseas Bank v United Coconut Oil Mills Inc, which has already been examined.⁹⁵

6.49  In Commercial Banking Co of Sydney Ltd v Jalsard,⁹⁶ a credit issued in respect of a shipment of two consignments of decorative Christmas lights from a company in Taiwan to a Sydney based buyer required a ‘Certificate of Inspection’. The issuing bank honoured a certificate it considered to be strictly conforming, but the buyer refused to make reimbursement against the document, claiming that it was not the stipulated certificate and thus discrepant. Lord Diplock, speaking for the Privy Council, noted that the term ‘certificate of inspection’ is capable of covering documents which contain a wide variety of information as to the nature and result of the inspection that had been performed.

6.50  Nevertheless, ‘the minimum requirement implicit in the ordinary meaning of the words is that the goods the subject matter of the inspection have been inspected, at any rate visually, by the person issuing the certificate’. This is certainly helpful and also a weighty illumination, coming as it did from the Privy Council. An inspection entails a careful examination of the specified goods to check whether they are in a safe and proper position, or in the condition (p. 168) they should be.⁹⁷ Once the requisite goods have been so examined, and the fact is certified or attested in a document executed by the inspecting officer or person, the resulting certification or attestation perfectly qualifies as a certificate of inspection. It will then become irrelevant whether the certification is of weight, or quality, or origin. Accordingly, it would seem that Winslow J.’s conclusion that the document before him did not qualify as the requisite certificate cannot be reconciled with the later decisions.

6.51  The certificate at issue in Jalsard expressly stated on its face that the surveyor had supervised the packing of the carton boxes and wooden cases to ascertain the quantity and condition of the goods, which shows somewhat comprehensively that an inspection had indeed taken place. The goods as well as the packages had been inspected and found to be in apparent good condition. These circumstances inevitably led the Board to the conclusion that the certificate lived up to the description specified in the credit.

6.52  It is to be noted, however, that where a certificate of quality is required, a tendered certificate is not to be treated as discrepant simply because it is headed certificate of analysis, as is a laboratory report where a certificate of analysis is specified. Of decisive significance is the entirety of the information it contains on its face. In Indian Overseas Bank v United Coconut Oil Mills Inc., it was held that a certificate entitled ‘Laboratory Report’ strictly conformed to the desired ‘certificate of analysis’ in view of the contents of the report. This may usefully be compared with the British Columbia case of Michael Doyle & Associates Ltd v Bank of Montreal.⁹⁸

6.53  In the Bank of Montreal case, a credit issued in respect of a consignment of 190,000 pounds of frozen herring fillets called for the seller’s drafts for the full amount of the purchase price and a set of documents which included a ‘health certificate issued by the Canadian Department of Fisheries Inspection’. In the event, the tendered certificate was headed ‘Certificate of Inspection’ with no reference to the word ‘health’. Moreover, what the document contained was, in the trial judge’s words, ‘simply too meager to convey any useful message’.⁹⁹ The court therefore held that the document did not on its face strictly conform to the requirement of the credit. The British Columbia Court of Appeal affirmed.¹⁰⁰ It is instructive to note that Taylor J. did not consider the omission of ‘health’ in the heading of the certificate to be necessarily fatal. It would have been sufficient if there was some reference to ‘health’ or a synonymous expression in the body of the certificate.

6.54  Where a specified piece of information is expressly required to be included in a particular document, the presented document must show that it contains the information. An omission to do so constitutes a discrepancy justifying refusal of payment. In Seaconsar v Bank Markazi,¹⁰¹ a document described as proces verbal issued by the buyer’s representative was tendered, among other documents, under an unconfirmed credit opened to finance the sale of a large quantity of artillery shells to the Iranian Ministry of Defence. The document (p. 169) neglected to bear the letter of credit number and the name of the buyer as specifically required in the credit, and the nominated bank considered it non-conforming. The beneficiary counterargued that the omission was trivial. Alternatively, he contended that the fault could be regarded as cured by reference to the accompanying documents which accurately contained the requisite information. Applying the strict documentary compliance doctrine, a majority of the Court of Appeal dismissed both arguments. As to the initial point, Lloyd L.J., with the concurrence of Beldam L.J., noted with empahsis: ‘I cannot regard as trivial something which, whatever may be the reason, the credit specifically requires’.¹⁰² Regarding whether the proces verbal could be read together with the other documents as a set to establish compliance, all their Lordships accepted as law Parker J.’s dictum in Banque de l’Indochine et de Suez S.A. v J.H. Rayner (Mincing Lane) Ltd.,¹⁰³ that ‘so long as the documents can be plainly seen to be linked with each other, are not inconsistent with each other or with the terms of the credit, do not call for inquiry and between them state all that is required in the credit, the beneficiary is entitled to be paid’. But the majority took the view that this was inapplicable to the instant case because Parker J. was there dealing with a case in which the credit did not expressly require each document to bear on its face specified particulars.

6.55  In his dissenting judgment, Stuart-Smith L.J. reasoned that a strong case could be made that the proces verbal should nevertheless be viewed as fulfilling Parker J.’s read together formula. In particular, it identified the goods and the contract and was duly executed by the designated buyer’s representative. Moreover, a glance at the accompanying documents reveals that it relates to the same matter there referred to, and from which the letter of credit number and the buyer’s name could be discovered without any difficulty.

6.56  For these reasons, it has been suggested¹⁰⁴ that Stuart-Smith L.J.’s conclusion is to be preferred to that reached by the majority. The logic behind this suggestion must be that such a stance entails a salutary relaxation of the rigidity of the documentary compliance doctrine as laid down in the leading cases examined earlier on. But its flip side is that it will become a vehicle for purely subjective determinations of what constitutes conforming documents despite the fact that the requirements of the credit are clear and unambiguous.

6.57  The case of Guaranty Trust Co v Van den Berghs Ltd¹⁰⁵ demonstrates the type of circumstances in which the rule would apply. In Guaranty Trust, the question was whether a bill of lading that described the goods as ‘coco-nut oil’ instead of ‘Manila coco-nut oil’ was nevertheless a strictly conforming tender, having regard to the accompanying certificate of origin which contained the appropriate description. Rejecting the defendant’s submission that the document was discrepant, the Court of Appeal held that there was no specific requirement in the letter of credit that the bills of lading should so describe the goods. Instructively, Scrutton L.J. was of the opinion that, ‘As to the omission of the word “Manila” I think the bill of lading and certificate of origin together complied with the letter of credit’.¹⁰⁶ Sargant L.J. arrived at much the same conclusion when he said that ‘The objection that the oil was not described (p. 170) in the bills of lading as “Manila oil” was, I think, sufficiently cured by the indications in the certificate of origin that it was Manila oil’.¹⁰⁷

6.58  So far the focus has been mainly on situations in which the stipulations in the letter of credit are sufficiently clear. But, circumstances frequently arise where they are ambiguous or conflicting as to the required documents. Such stipulations are effectively in breach of the general practice requirements that instructions for the issuance of a credit and the credit itself must be ‘complete and precise’ and ‘state precisely the document(s) against which payment, acceptance or negotiation is to be made’.¹⁰⁸ In practice, the breach attracts no real sanction. Instead, the judges are obliged to make commercial sense out of the ambiguous or contradictory terms to enable the strict documentary compliance doctrine to appropriately operate in the given context.¹⁰⁹

6.59  As a matter of general principle, when a nominated bank has taken up documents upon a reasonable interpretation of an ambiguous stipulation it is entitled to reimbursement from the presentee counterparty.¹¹⁰ It has already been noted that if a stipulation as to the documents required covers more than one kind of document, the documents presented are conforming if they fall within the reasonable scope of the wide stipulation.¹¹¹

6.60  On the other hand, where ambiguity is apparent, reimbursement will be allowed only if at the time of examining the documents for compliance it justifiably failed to notice the ambiguity, or if it was not feasible to seek clarification before honouring a tender of documents under the credit. The leading case is Credit Agricole Indosuez v Muslim Commercial Bank Ltd.¹¹² The facts were that a nominated bank sought to be reimbursed under a negotiation credit which contained a ‘hotchpotch or amalgam of’ eighteen clauses. While clauses 1 and 11 used mandatory language as to the documents required, clause 9 stated that ‘Original documents along with eight copies each of invoice, packing list, weight and measurement list, Bill of Lading and certificate of origin should be sent to us by Courier at the cost of beneficiary’. The question arose whether the documents indicated under clause 9 were stipulated documents. Answering in the negative, Sir Christopher Staughton said:

6.61  ‘It seems to me that the letter of credit leaves one in genuine doubt as to whether cl.9 is stating that the documents which it refers to are stipulated documents, essential to the operation of the credit. It certainly does not, as required by Art 5 (b),¹¹³ state precisely that a weight (p. 171) and measurement list, and a certificate of origin are documents against which payment or negotiation is to be made’.¹¹⁴

6.62  Peter Gibson L.J. stated to the same effect that he was ‘in real uncertainty as to whether the documents in special condition (9) are stipulated documents’.¹¹⁵ Their Lordships then considered that the provision of clause 9 under the credit was inoperative insofar as the presenting nominated bank was concerned, presumably because it legitimately overlooked it.

6.63  But the issuing bank alternatively argued that the nominated bank should have requested the issuing bank to clarify the terms of the credit prior to acting on its nomination under the credit. The Court of Appeal agreed, but pointed out that in the circumstances of the case it was highly improbable it could do so. The credit was opened on 5 September 1997, with 10 September 1997 stated as the last date of shipment. Were the nominated bank to seek clarification, it would have had to ask, on ‘a rough estimate’, ten to fifteen questions.¹¹⁶ And it was equally ‘fairly unlikely’ that the issuing bank would have furnished it with an adequate answer in a reasonably prompt manner.¹¹⁷ In such circumstances the nominated bank was not obliged to ask for an explication of the requirements of the credit. A comparative situation is to be found in Credit Agricole Indosuez v Banque Nationale Paris,¹¹⁸ where the Singapore Court of Appeal held that the ambiguity in the letter of credit was so that any reasonable banker would have sought specific clarification from the issuing bank. But what their Lordships found in evidence ‘was just undue haste. On the very same day [the issuing bank] were informed by the [nominated bank] that [the seller] had been advised of the LC, [the nominated bank] proceeded to negotiate [the documents tendered under the credit] without further ado. The nominated bank would have to bear their ... losses’.¹¹⁹ The argument of a reasonable interpretation of the credit was accordingly unavailing.

6.64  Increasingly nowadays, the approach of the courts to ambiguous or conflicting requirements has been to look at the particular language used in the letter of credit so far as a commercially reasonable construction will justify.¹²⁰ It is in substance the same as finding the objective intention of the parties as spelt in the credit against the factual situation in which the facility comes into being, and then determining whether the documents tendered under the individual credit strictly comply with what is stipulated.¹²¹(p. 172)

6.65  In ascertaining the parties’ intention, the court may, in the exercise of its equitable jurisdiction, order rectification of contradictory terms. However, the burden of proving that the rectification is justified in the sense that it could not be their common intention to have the terms stand in the manner they are, lies on the seller vis-à-vis the issuing bank, and on the issuing bank vis-à-vis the buyer. A striking illustration of the position is offered by the decision of the District Court of Appeal of Florida in Ocean Bank of Miami v La Esquina Presidencial Inc.¹²² A reimbursement agreement executed in respect of a standby letter of credit contained 12 July 1989 as the expiry date for presentation of documents. A few days prior to the expiration date, upon the applicant’s request and payment of a specified fee, the credit was renewed for an additional one year period through to 12 July 1990. Unfortunately, the new expiry date was mistakenly engrafted on to the original reimbursement agreement and the credit. On 16 March 1990, the issuing bank honoured a draw under the credit and unsuccessfully sought reimbursement from the applicant. The majority of the Court of Appeal rejected the applicant’s argument that the original latest presentment date remained effective and concluded that the issuing bank was entitled to have the inconsistency reformed to bring it into harmony with the renewal clause and be reimbursed accordingly.

6.66  This approach is eminently supportable. It makes clear that where stipulations in a credit or the reimbursement agreement are conflicting or ambiguous, a construction rendering the contract possible of performance should be preferred to one which renders its performance impossible or meaningless.¹²³ In other words, preference should always be for a construction that sustains the instrument rather than the one that defeats it.

6.67  But a difference of opinion occurred in Tradax Petroleum Inc v Coral Petroleum Inc¹²⁴ In this case, the documents specified in a standby letter of credit issued in favour of Tradax, an oil trading company in Texas, included a signed statement by an officer of Tradax that 31,000 barrels of West Texas Intermediate crude oil (sweet oil) was delivered to Coral, the buyer, and a copy of the shipper’s listing indicating transfer to Coral of 31,000 barrels of ‘WTNM SO or SR’ (soul oil). Tradax shipped the agreed sweet oil without realizing the irregularity on the face of the credit, and then attempted to draw on the credit. The issuing bank dishonoured. Tradax then brought an action, claiming that it was entitled to have the inconsistency in the credit rectified to enable its making a conforming tender of the required documents. The Fifth Circuit dismissed this claim and found for the issuing bank.

6.68  The Fifth Circuit’s refusal to reform the credit terms might appear to be at variance with the quite laudable approach in Ocean Bank and also with Kelley v First Westroads Bank,¹²⁵ in which the Eighth Circuit laid down that when construing the provisions respecting the documents stipulated in a credit, the courts should eschew a stance that runs the risk of frustrating the ostensible objectives of the credit. The wise admonition that a construction rendering the credit possible of performance, should be preferred to one which renders its (p. 173) performance impossible would appear to have been overlooked. As appeared in the case, the parties themselves attributed the inconsistency to a mistake, a fact that should pave the way for reformation of the credit terms by the court.

6.69  However, the reality of the situation which compelled the conclusion reached by the Fifth Circuit should not be ignored. As between the issuing bank and the beneficiary, there was no mutual mistake warranting reformation. In drafting the credit requirements, the issuing bank did as it was instructed by the buyer. In point of fact, the mistake was made initially by the buyer in designating the type of oil required in the shipper’s documentation, and subsequently by the beneficiary in negligently failing¹²⁶ to discover that the credit was defective as issued. It therefore follows that the Coral court was justified in rejecting the argument for rectification of the inconsistency so as to make strict compliance with the credit possible.

6.70  The issuing bank, as we have seen throughout the preceding sections, is under an obligation to deliver to the applicant documents that strictly comply with the applicant’s requirements set forth in the standard form credit agreement. Its right to reimbursement from the applicant therefore depends entirely upon whether it has properly performed that obligation. In modern standard credit agreements, however, an increasingly common practice is the inclusion of a clause which entitles the issuing bank to claim reimbursement despite any discrepancy in the presentment documents inadvertently ignored.

6.71  An illustrative clause is this: ‘The applicant shall accept for payment documents appearing on its face to substantially comply with the terms and conditions of this credit’. Another clause probably less frequently utilized runs as follows: ‘Where the bank pays or accepts drafts and documents tendered under this credit after determining in good faith that they comply with this credit, such drafts and documents shall be deemed to be regular on their face, and the bank shall be entitled to obtain payment and to debit the applicant’s account with the amount concerned’. A clause of that character has the ostensibly deplorable (or salutary, depending on one’s perspective) objective both to relieve the issuer of liability for a possible breach of its duty to furnish faultless documents and to oblige the applicant to reimburse it for payments it thereby carelessly made.

6.72  More importantly, the legal import of the clause is to refashion the standard by which the issuing bank has to perform its document examination function and thus to reconfigure the applicant’s traditional right to insist on strict compliance with his instructions. Put differently, the provision goes to define the scope of the parties’ obligations under the written credit agreement and exclude the issuer from a liability that would otherwise be its at common law and under the international standard banking practice. The parties, i.e. issuer and applicant, are naturally at liberty to do so under the general law of contract, not least (p. 174) the freedom of parties to contract on whatever lawful terms they think fit. Insofar as such a contractual term is not impaired by any of the well recognized vitiating elements, and is sufficiently unambiguous to cover what it purports to do, it is binding on the parties and will be enforced by the courts. So, an assertion that at the time the applicant executed the credit agreement he did not notice it included the clause, and that if he had known it, he would have called off the transaction, will plainly be unavailing.

6.73  Nevertheless, the effectiveness of a clause in a credit agreement entitling the issuing bank to be reimbursed against a non-conforming set of documents poses interesting complications. The applicant may challenge the enforceability of the evidently contractual provision on the basis that in incorporating the UCP¹²⁷ by reference, the credit agreement did not expressly exclude the applicability of the code’s relevant provisions, e.g. Article 14 on the standard for examining presentment documents. After all, by Article 1,¹²⁸ its provisions are ‘binding on the parties unless expressly modified or excluded by the credit’. The short answer, however, is undoubtedly that no such express exclusion is necessary by reason of the long-standing common law principle that where provisions are incorporated by reference into a written agreement, only so much of the incorporated document as is not irreconcilably inconsistent with the terms of the incorporating agreement is to be regarded as mutually needed by the parties.¹²⁹

6.74  Considering the inherent inconsistency of the issuer’s standard of compliance expressly specified in the credit agreement with the requirement of Article 14 of the UCP 600, the issuer may urge that the agreement should take precedence.¹³⁰ On the other hand, the applicant may counterargue that the matter falls within the Unfair Contract Terms Act,¹³¹ since he dealt on the issuer’s written standard terms of business. He might thus seek to pursue the argument on two grounds. First, by virtue of section 1 (1) (a) and (b)¹³² as well as section 2 (2)¹³³ of the Act, the clause does not avail the issuer because it purports to exclude liability for its negligent acceptance of a faulty tender, i.e. negligent discharge of its document examination obligation; and, second, even if the issuer was not negligent in that it exercised reasonable skill and diligence in taking up the documents as compliant, the clause is nevertheless ineffective insofar as it aims to enable the issuer to render contractual performance substantially different from that which a reasonable commercial person would expect from it.¹³⁴ Either (p. 175) way, the clause is deemed ineffective unless the issuing bank is able to establish that it satisfies the requirement of reasonableness.¹³⁵

6.75  The crucial question arising in relation to the issuer is: In what way is a stipulation purportedly entitling it to claim reimbursement against non-complying documents reasonably justifiable, since a defective tender does nothing but leave the applicant vulnerable and insecure in the contractual transaction underlying the credit. It may be objected that the applicant is not entitled to complain if he is held to his explicit contractual promise, but it must be remembered that the Act¹³⁶ directs that the applicant’s consent to or awareness of the stipulation in the credit agreement does not of itself establish that he voluntarily accepted to run the risk of being handed discrepant documents by the issuer.

6.76  In a concurring speech in the House of Lords decision in Smith v Eric S. Bush,¹³⁷ Lord Griffith cautioned that determining whether a clause falling within the Act is reasonable is ‘very difficult’,¹³⁸ not least because it involves balancing a collection of factors, some of which point in favour of reasonableness, while others do not.¹³⁹ Such factors will of course depend upon the circumstances in any given case, but nevertheless his Lordship in the Smith case emphasized that the potential factors should always involve the following considerations:

6.78  Quite apart from these considerations, some helpful guidance is provided under section 11 (1) of the Act. It reads:

6.79  ‘In relation to a contract term, the requirement of reasonableness ... is that the term shall have been a fair and reasonable one to be included having regard to the circumstances which were, or ought reasonably to have been, known to or in the contemplation of the parties when the contract was made’.

6.80  Seeing that at the time of contracting, the parties are clearly aware that proper documents lie at the heart of letters of credit transactions and that furnishing less than perfect documents would cause the applicant financial losses, the inclusion of the clause under consideration in a credit agreement can hardly be considered fair and reasonable, a result that would probably invalidate the contractual provision. However, one factor that may possibly tell against the applicant and thus tip the scale in the issuer’s favour is Lord Griffith’s consideration (iii): a great many banks do not include a substantial compliance clause in their standard application form for the opening of a credit, so the applicant had the choice to approach such other (p. 176) banks for his credit needs rather than the issuing bank in question. On the other hand, where the issuing bank’s acceptance of defective documents is purely the result of a demonstrated negligent failure to notice discrepancies in the documents, it is likely that the issuer will not be allowed to enforce the clause. In that regard, consideration (iii) will be overridden by consideration (iv), as the practical consequence of denying reliance on the clause is rendered inevitable by the proven professional incompetence of the issuer.

6.81  In the United States, the Revised Article 5 might, on the face of it, be regarded as adopting a position that is in effect markedly different from that explored in the foregoing,¹⁴⁰ but the nub of the situation evidently indicates the contrary. As we have already seen, section 5–108 (a) of the Article expressly provides that the standard of strict compliance governs the issuer’s examination obligation.¹⁴¹ Equally, as Official Comment 1 to the section makes clear, the issuer and the applicant may¹⁴² by agreement impose a different standard and thus vary the issuer’s obligation prescribed by the Article, for example, by a clause entitling the issuer to honour a presentation it considers substantially conforming to the terms of the credit. But nowhere does the Article suggest that a clause enabling the issuer to accept a substantially compliant set of documents thereby relieves the issuer from its responsibility to use reasonable care in performing its examination function. This suggestion draws considerable support from the very important but otherwise regrettable decision of the New York Supreme Court, Appellate Division, in Blonder & Co v Citibank.¹⁴³

6.82  The facts of that case¹⁴⁴ were by no means extraordinary. A letter of credit and the reimbursement agreement that generated the credit, which were both expressly made subject to the UCP 500, called for a freight prepaid bill of lading, but the purported bill of lading honoured by the issuer failed to designate a consignee. However, a clause in the reimbursement agreement provided that the applicant will make reimbursement if ‘the documents presented substantially comply with the terms and conditions of the Credit’.

6.83  In an action for wrongful honour, the applicant alleged that the omitted information in the bill of lading was a material discrepancy which a reasonably careful issuer should have discovered and regarded as a reason to reject the document. There was uncontroverted evidence that the document did not constitute a ‘Bill of Lading’ as understood under international standard banking practice. Nevertheless, the trial court dismissed the applicant’s claim and granted the issuer’s summary judgment motion on the ground that the bill of lading ‘substantially complied with the terms and conditions of the letter of credit in accordance with the Uniform Customs and Practice for Documentary Credit (UCP [500])’. In reaching this conclusion, Judge Lowe applied his own understanding of what constitutes international standard banking practice.(p. 177)

6.84  By a majority of four to one, the Appellate Division affirmed the trial court’s decision, no doubt having regard to the clause in the credit agreement. Tom J.P., the dissentient, took the view that the lower court’s substitution of ‘its own knowledge’ for the applicant’s undisputed expert evidence was ‘clearly improper ... and unsupportable’.¹⁴⁵ Ergo, the dismissal of the applicant’s claim was wrong, together with the granting of the issuer’s summary judgment motion. Leaving aside consideration of the unjustified rejection of the applicant’s claim, the interesting subtext to the majority opinion is the recognition that the imposition of a substantial compliance standard in a reimbursement agreement does not relieve the issuer from performing its examination duty in a reasonably careful manner. It thus follows that the issuer will be liable for any negligent failure by it to notice irregularities on the face of the documents it takes up.

6.85  The broader point worth emphasizing is that the invariable insertion of a substantial compliance clause in reimbursement agreements by a growing number of issuing banks should not be treated as receiving encouragement from Blonder. Nor should the issuer’s legal advisers look upon the decision as creating an effective shelter to an issuer shown to have negligently honoured documents containing glaring discrepancies. Indeed, it is not too much to urge the minority banks enamoured of the dubious practice to shun it in favour of the credit applicant’s interests, which their conventional internal policies, say the bankers, would take reasonable steps to safeguard.