Strict Documentary Compliance

Strict Documentary Compliance

L/C negotiated for “standard white granulated sugar”, while the bill of lading described the sugar as “granulated white sugar, Java No. 24, direct polarization, 98.5”. Can the bank be forced to pay?

This appears to correlate to the case of National City Bank versus Seattle National Bank (Sup. Ct. Wash., 1922) in "Fundamentals of International Business Transactions" by Robert Bland, 2000 where differences in product description terms resulted in the L/C being found to be non-conforming at that time. It however appears villainous nonetheless.

This minor description error would classify strict documentary compliance as a discrepancy possibly resulting from improper or insufficient documentation or clerical error in the transfer of product information. In that case, the discrepancy might be correctable if made in advance of expiry dates, or
exporter may request issuing bank to pay on L/C notwithstanding discrepancy, buyer may be required to pay on documents collection basis, or draft may be negotiated under reserve.

Banks with long-term relationships between both the buyer and seller would not permit a small discrepancy like this from ruining the relationship. Both buyer and seller would need to agree to these new terms as well.

Disreputable and unethical one time buyers and shady bankers would jump at the chance to pull this off. Sometimes a buyer is only a slot in a doorway in an alley behind an empty dumpster. At the same time the questionable bank may be a shop front in a factory zone with shady snaggle-tooth characters manning a phone and fax machine.

Otherwise according to International Payments Second Addition, by Edward J. Hinkleman neither the issuing bank nor (if it is confirmed) the confirming bank need pay out.

However this would be detrimental to the banks reputations, if indeed, as it appears these two product descriptions are being used to describe the self-same product. A buyer walked away with a seller's goods without paying for it. It would be extremely unlikely that either of the banks or the buyer could walk away without sticky implications similar to stealing a man's horse circa 1922.

A vindictive Javanese might suddenly appear out of fragrant harbour and start messing with black spots for Model T Fords in US parking lots.

At the same time Canadian exporters have been complaining that importers in China have been using documentary compliance more forcefully lately than in the past. At the heart of the credit letters issue are triple-fold cost increases in the last few months. Reputable now means pay through the nose. Financial reliability of issuing or confirming banks may not be the only motivator. It is possibly a convenient time to make those losses known based on non-conformance in an issue to force buyer concessions such as partial advance payments for cash starved companies seeing 20-30% declines in orders over the last three months. Is it coincidence that BRIC appears flush with cash?

"Fundamentals of International Business Transactions," Brand (2000)