Conceptual Criteria for Identifying Conforming Documents

CONCEPTUAL CRITERIA FOR IDENTIFYING CONFORMING DOCUMENTS

A. Introduction

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 Bifurcated standard. 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 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

6.06 Autonomy doctrine. The UCP 600 reflects the autonomy doctrine in two main clauses. Article 4 provides:

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 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

B. Rationale Behind Strict Documentary Compliance Doctrine

6.11 Lord Sumner, in Equitable Trust Co of New York v Dawson Partners Ltd,¹⁷ stated the strict documentary compliance rule in terms worth quoting in extenso:

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 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.

(1) Inapplicability of de minimis non curat lex

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 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.

(2) Major criticism of the doctrine

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:

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, 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.

(3) Limitations of the criticism

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 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 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 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