How strictly the documents must conform to the terms of the letter of credit or demand guarantee? Is the standard a strict one, so that even the slightest deviations entitle the bank to refuse payment and, indeed, oblige it to do so unless otherwise authorised by the Applicant/Principal of the credit/guarantee? Or is it a substantial compliance standard in terms of which deviations that the bank has no reason to believe of commercial significance are ignored? Or does the law adopt a bifurcated standard, i.e. a strict compliance in suits by the Beneficiary against the issuing bank, but only substantial compliance in suits by the Applicant against the issuing bank, in terms of which the bank is free to invoke a strict standard of compliance against the Beneficiary, but is entitled to the benefit of a more relaxed standard face to its customer in choosing to pay despite minor deviations?
The doctrine of strict compliance is well established for commercial letters of credit; it entails that the documents presented in terms of a letter of credit must be precisely those the letter of credit calls for.
The doctrine of of strict compliance is usually applied to documents provided in conformance with a letter of credit and indeed it is not the same as “exact compliance”. It does not mean, for instance, that a document will be treated as non-conforming if every ‘i’ is not dotted or every ‘t’ is not crossed or contains obvious typographical errors. A rigid and meticulous fulfilment of precise wording is not required in all cases. It is impossible to define exhaustively the nature and extent of the bank’s duty with regard to the exactness of compliance of documents presented to it under a credit, and each case must be considered on its own merits in the light of the language of the credit and the circumstances in which it has been established. A dogmatic generalised approach must be rejected, as a measure of common sense is used when the standard, which is in principle strict, is applied.
The UCP 600, as well as their predecessor, UCP 500, contain a number of provisions that aim at relaxing the requirements of strict conformity; by incorporating one of these versions of the UCP into their contract, either expressly or tacitly, the Applicant / Principal and the Beneficiary agree to a certain relaxation of the required degree of compliance regarding the documents.
The advantage of a strict rule is that it is reasonably clear and absolves the bank from making judgemental decisions; if one looks at international uniform rules, it becomes clear that this strict rule has come under some pressure. The UCP 500 prescribed a standard of compliance with which the stipulated documents presented had to comply, though they did not address directly the problem of how to measure the compliance of the presented documents with the requirements of the credit. In this regard, article 13[a] merely provides as follows: “Banks must examine all documents stipulated in the Credit with reasonable care, to ascertain whether or not they appear, on their face, to be in compliance with the terms and conditions of the Credit. Compliance of the stipulated documents on their face with the terms and conditions of the Credit, shall be determined by international standard banking practice as reflected in these Articles. Documents which appear on their face to be inconsistent with one another will be considered as not appearing on their face to be in compliance with the terms and conditions of the Credit”. The article required banks to examine documents with reasonable care and provided that compliance of the stipulated documents on their face with the terms and conditions of the credit had to be determined by international standard banking practice as reflected in the UCP 500, and the reason of this was because in the past the doctrine of strict compliance was construed as prescribing a rigid proofreading exercise devoid of mercantile reality. This article was in line with a later trend that manifested in a few decisions that suggested that not every minor mistake in a document constituted a discrepancy. Therefore, one of the aims of this article was to deter the courts from being too ritualistic in treating documents as non-conforming where the defects are trivial and obvious. The other is to discourage courts from being too liberal by invoking considerations, such as good faith or the lack of commercial importance of the discrepancy.
In terms of its wording, if the international standard banking practices are not embedded in the UCP 500, they are not relevant. The international standard banking practices to which reference is to be made are only those practices “as reflected in these Articles”. The words of the article do not allow for expert testimony on what is standard banking practice beyond the extent to which other articles of the UCP 500 reflect it. The difficulty with this article was where international standard banking practice was to be found, as such a practice was not reflected in the UCP 500. Real doubt has been expressed that “international standard banking practices” even exist. Various banks had different rules on acceptability and checking of documents presented under documentary credits and standby letters of credit. The words “as reflected in these Articles” tie in with the standard for compliance, the other provisions of the UCP 500 and only the international banking practice that those other provisions reflect. This for instance includes provisions such as article 37[c] in terms of which the description of the goods on the invoice must correspond with the description in the credit, whereas in all other documents the goods may be described in general terms not inconsistent with the description of the credit. For this purpose, the UCP 500 should be read as a whole. The banking practice that is embodied or reflected in the other provisions may be considered to be determinative. There is no other provision that deals directly with the standard for compliance; it is not clear from article 13[a] whether strict compliance is necessary or whether substantial compliance is enough. The other provisions of the UCP 500 are silent on this issue, and under the wording of article 13[a], the practice of bankers with regard to the standard remains inadmissible.
Under “international standard banking practice”, the great majority of courts, as stated above, have held that documents must “strictly comply” with the terms and conditions of the credit. Strict compliance, as measured by “standard banking practice”, is not the equivalent of “mirror image” compliance. Courts have experienced common sense in applying the strict compliance standard; typographical and spelling errors, and other obviously trivial differences between the wording in the credit and the wording in the presented documents have been held not to render the presentation non-compliant under the strict compliance standard measured by standard practice. The ICC attempted to address this problem by the publication of the International Standard Banking Practice for the Examination of Documents Under Documentary Credits [‘ISBP’] in 2003. The ISBP was created with a mere view to define the international banking practice regarding the examination of the different documents tendered under documentary credits. Paragraph 24 of the ISBP provides that “documents presented under a credit must not appear to be inconsistent with each other. The requirement is not that the data content be identical, merely that the documents not be inconsistent”’.
The ISBP cannot be incorporated into a documentary credit and cannot therefore be regarded as comprising standard terms governing the contractual relationships created in documentary credit transactions. Its effect is bound to depend on it being accepted as a declaration of the international practice developed by banks and referred to in article 13[a] of the UCP 500. The drafting of the ISBP was not based on an extensive study of existing banking practice and its purpose was merely to explain how practices set out in the UCP 500 were to be applied by documentary practitioners. The drafters of the ISBP recognised that the law in certain countries may compel a practice different from that stated in it. After all, the UCP was created with the goal to harmonise banking practice and prescribe a uniform set of rules. The adoption of different compliance standards in different jurisdictions tends to undermine the very uniformity the rules are designed to promote. When read with the ISBP, the UCP 500 provides no more than a very generalised statement as to the compliance standard applicable to documentary credits and standby letters of credit, still leaving it to be dealt with by the courts in the different jurisdictions.
Article 13[a] of the UCP 500 [the third sentence] states: ‘Documents which appear on their face to be inconsistent with one another will be considered as not appearing on their face to be in compliance with the terms and conditions of the Credit.’ Therefore, article 13[a] provides that the data content of documents presented must be consistent not only with the terms and conditions of the credit, but with that of the other documents presented as well. In the context of a commercial letter of credit, inconsistencies in the documents may indicate that the goods are non-conforming. Commercial letters of credit normally deal with integrated transactions in which it is to be expected that all the documents presented relate to payment of the purchase price against documents evidencing the same transaction. The purpose of the consistency rule is to allow the issuer to assure itself that the documents relate to the same transaction. In the context of a standby letter of credit, no useful purpose is normally served by requiring that the issuer search for, or take note of inconsistencies among the documents. This requirement is not illogical in a commercial letter of credit, since the transaction is typically a holistic exercise in which internal consistency can be expected. This expectation does not necessarily follow for standby letters of credit; while there may be consistency as to some data, the very reason for the drawing may require an inconsistency between two documents, thereby evidencing the default. The problem is even more distinct in commercial standbys where the goods are usually in the possession of the applicant before the drawing. To dishonour commercial documents for inconsistencies between themselves where the documents comply with the terms and conditions in the letter of credit is normally without justification in a standby situation. Even more importantly, the examiner is never in a position to know whether an apparent inconsistency in a standby presentation is intended to reflect a default and often lacks the data to determine the context of how the entire transaction was structured so as to give isolated figures some contextual meaning, as would be the case in a commercial letter of credit.
Since the UCP 500 were replaced with the UCP 600, it also became necessary to update the ISBP in order to bring it in line with the new set of rules. Accordingly, the new International Standard Banking Practice for the Examination of Documents Under Documentary Credits, 2007 Revision for UCP 600 [“ISBP [2007 revision]”] came about. The ISBP [2007 revision] is an updated version of ISBP and its aims are similar to those of the ISBP, i.e. providing document checkers and other participants with the interpretation of what international standard banking practice represents in relation to the UCP, a credit and the examination of documents.
The most common basis on which documents presented under documentary credits are rejected by banks worldwide is the inconsistency of the data in the different documents presented. A vote by the national committees prevented the Drafting Group of the UCP 600 from addressing this problem by a provision in the UCP to the effect that the data in a document should only be considered against the requirements in the credit for that document and the UCP rules. Article 14[d] provides that “data in a document, when read in context with the credit, the document itself and international standard banking practice, need not be identical to, but must not conflict with, data in that document, any other stipulated document or the credit”. The wording used in article 14[d] of the UCP 600 does away with the less-precise and difficult-to-interpret requirements in article 13[a] of the UCP that the documents must “appear, on their face, to be in compliance with the terms and conditions of the Credit” and must not “appear on their face to be inconsistent with one another”, which is believed to be a major improvement.
There are also two other important articles of the UCP 600, namely article 14[a] and article 2. The first provides that “a nominated bank acting on its nomination, a confirming bank, if any, and the issuing bank must examine a presentation to determine, on the basis of the documents alone, whether or not the documents appear on their face to constitute a complying presentation”. Article 2 of the UCP 600 introduces the definition of “complying presentation” and states that “a complying presentation means a presentation that is in accordance with the terms and conditions of the credit, the applicable provisions of these rules and international standard banking practice”. This definition lays the foundation for the test applied in article 14[a] relating to the bank’s duty to examine the documents.. Article 14 does in the UCP 600 establishes the basic responsibility of banks to examine documents presented under letters of credit.
The reference to “international standard banking practice” in this context means international standard banking practice in the wider sense, which definitely includes the ISBP [2007 revision] and the ISBP, although not limited to them. As mentioned above, it appears that under “international standard banking practice”, the great majority of courts have held that the doctrine of strict compliance is applicable. However, strict compliance as measured by “standard banking practice” is not the equivalent of “mirror image” compliance. Therefore, it would appear that international standard banking practice favours “fairly strict compliance”, ignoring trivial discrepancies, and obvious typographical and spelling errors. The UCP 600 have not watered down the principle of strict compliance; simply, they have eliminated the possibility of rejecting documents for inconsequential discrepancies, with the results that the possibility of documents being rejected for inconsequential discrepancies has been dramatically reduced.
This problem has been addressed in ISP98 by way of rule 4.03 [Examination of Inconsistency] which establishes the opposite rule. Rule 4.03 deals with the examination of inconsistency between documents and provides that the issuer is required to examine documents for inconsistency with one another only to the extent provided in the standby; the only consistency at issue in the examination of documents under a standby, even documents regarding a transaction for the sale of goods, is with respect to the terms and conditions of the standby itself. The test is whether each document relates to the standby. Each document under a standby must comply with the terms and conditions of the standby itself and the examination and comparison of the documents with one another is not required, because there is not necessarily any one underlying obligation from which the examiner can determine what constitutes consistency. Documents may well be related to different obligations under the same or different transactions and, indeed, in the case of a default, may well be expected to be inconsistent with one another.
The ISP98, like the UCP, refer to the “standard practice” when the documents presented under the standby or any other independent undertaking, are examined. Rule 2.01 provides that an issuer of a standby merely undertakes to the Beneficiary to honour a presentation that appears on its face to comply with the terms and conditions of the standby in accordance with these rules supplemented by standard standby practice. Furthermore, rule 4.01 also provides in this regard as follows:
4.01 Examination for Compliance
- Demands for honour of a standby must comply with the terms and conditions of the standby.
- Whether a presentation appears to comply is determined by examining the presentation on its face against the terms and conditions stated in the standby as interpreted and supplemented by these Rules which are to be read in the context of standard standby practice.
Rules 4.01 and 2.01 state once more the fundamental undertaking of letter of credit practice: the issuer undertakes to honour complying demands. Both the presentation and the documents must be examined in the light of the terms and conditions of the standby. Rule 4.01 avoids the term “strict compliance”, which is a crude and abstract formulation in terms of which the standard of examination is described and one which is used primarily because it is less inaccurate than the notion of “substantial compliance”, by which it is usually contrasted. The test of compliance turns on the role of the particular document in standby practice; the text of some documents must correspond with the one of the standby, others must be identical or exact, while others again merely need be not inconsistent with the standby. The issuer is therefore responsible for examining documents “on their face” and has no duty to investigate or inquire into matters beyond the face of the documents.
Rule 4.02 deals with the non-examination of extraneous documents and provides that documents presented that are not required by the standby need not be examined and, in any event, will be disregarded for purposes of determining compliance of the presentation; they may then, without responsibility, be returned to the presenter or passed on with the other documents presented.
While rule 4.01 helpfully states that the ISP98 are to be read in the context of standard practice, the ISP98 drafters were not content to let the standard practice dictate how documentary compliance is to be measured. Instead, they attempted in rule 4.09 to formulate new rules to apply when the documents presented to the examining bank do not reflect the mirror image of the documents described in the credit. Rule 4.09 was also inserted because the counterparties to the underlying contract often specify the wording [terms] to be used by inserting it in the standby accompanied by some indication that the required document[s] that must be presented is to contain these terms. The indication also typically appears in the form of quotation marks surrounding the desired phrase, an indented and blocked portion of the text of the standby, or an entire document, which is attached as an exhibit. In order to cater for this practice and the situation where the documents presented do not reflect the “mirror image” of the documents described in the credit, rule 4.09 was inserted into the ISP98; it provides the following:
If a standby requires:
- a statement without specifying precise wording, then the wording in the document presented must appear to convey the same meaning as that required by the standby;
- specified wording by the use of quotation marks, blocked wording, or an attached exhibit or form, then typographical errors in spelling, punctuation, spacing, or the like that are apparent when read in context are not required to be duplicated and blank lines or spaces for data may be completed in any manner not inconsistent with the standby; or
- specified wording by the use of quotation marks, blocked wording, or an attached exhibit or form, and also provides that the specified wording be “exact” or “identical”, then the wording in the documents presented must duplicate the specified wording, including typographical errors in spelling, punctuation, spacing and the like, as well as blank lines and spaces for data must be exactly reproduced.
It also needs to be established whether the doctrine of strict appliance applies with equal force to demand guarantees. If the demand guarantee is governed by the URDG 459, article 9 will apply. The article provides that: “all documents specified and presented under a Guarantee, including the demand, shall be examined by the Guarantor with reasonable care to ascertain whether or not they appear on their face to conform with the terms of the Guarantee. Where such documents do not appear so to conform or appear on their face to be inconsistent with one another, they shall be refused”. It also requires the Guarantor to examine documents with reasonable care to ascertain whether they appear on their face to conform with the terms of the guarantee. The intention is that the standard of compliance regarding a demand guarantee, governed by the URDG, should be the same as for a documentary letter of credit.
If the UNCITRAL Convention were to apply to the demand guarantee or standby, regard should be had for the articles in the Convention establishing what the standard of documentary compliance is that is required for guarantees/credits governed by the Convention. The standard of compliance is found in article 16, but articles 13[2] is also relevant to establish the standard required: “in interpreting terms and conditions of the undertaking and in settling questions that are not addressed by the terms and conditions of the undertaking or by the provisions of this Convention, regard shall be had to generally accepted international rules and usages of independent guarantee or stand-by letter of credit practice”.
Article 14[1] spells out that “the Guarantor/Issuer shall act in good faith and exercise reasonable care having due regard to generally accepted standards of international practice of independent guarantees or stand-by letters of credit”. Furthermore, paragraph [2] of article 14 also states that the Guarantor/Issuer “may not be exempted from liability for its [the guarantor’s/issuer’s] failure to act in good faith or for any grossly negligent conduct”. Article 16 lays down the principles for the care to be used by the Guarantor/Iissuer in its examination of the demand and the accompanying documents: ”the Guarantor/Issuer shall examine the demand and any accompanying documents in accordance with the standard of conduct referred to in paragraph [1] of article 14. In determining whether documents are in facial conformity with the terms and conditions of the undertaking, and are consistent with one another, the guarantor/issuer shall have due regard to the applicable international standard of independent guarantee or stand-by letter of credit practice.” By incorporating into the document the examination article, the notion that the Guarantor/Issuer must examine documents with “due regard to the applicable international standard of independent guarantee or stand-by letter of credit practice”, The Convention clearly adopts the strict standard of compliance over the minority substantial compliance standard, together with the rule that, in order to obtain payment, the Beneficiary must present documents to the Guarantor/Issuer that comply strictly with the terms of the demand guarantee or standby.
It is an international rule that the Beneficiary becomes entitled to payment only by conforming strictly to the terms of the demand guarantee; if he neglects to present a document specified by the guarantee or presents a document that does not meet all the requirements of the guarantee or if the demand is not made in the manner and within the prescribed period of the guarantee, the Beneficiary is not entitled to payment.
The Guarantor is not responsible for the adequacy, correctness or genuineness of the documents presented under a demand guarantee, merely for ascertaining with reasonable care whether they appear on their face to conform to the requirements of the guarantee. He is not therefore obliged to do more than conduct a reasonable visual examination. His duty is restricted to the exercise of good faith and reasonable care in the performance of his duties, since he is also not liable for acts outside his control.
When a counter-guarantee is issued, that is, in an indirect, four-party structure, it possesses the same independence from the demand guarantee as the latter from the underlying contract between the Principal and the Beneficiary. Accordingly, as long as the Guarantor’s demand complies with the requirements of the counter-guarantee, the Guarantor is entitled to payment in the absence of established fraud or another ground for non-payment, whether or not he has paid the Beneficiary or has received a demand for payment or is legally liable to pay a demand received.
As the counter-guarantee, like the demand guarantee, is documentary in character and comprises an abstract payment undertaking, it is in principle independent of the distinct contractual relationship created by the mandate given by the instructing party to the Guarantor. For this reason, a breach of that mandate by the Guarantor, in respect of the terms on which the guarantee was to be issued, is a matter internal to the dealings between the Guarantor and the instructing party, and is not in itself grounds for refusal to pay the Guarantor’s demand, except in so far as the terms of the mandate are incorporated into the counter-guarantee.