Copyright (c) 2004 Houston Law Review
Houston Law Review
2004
41 Hous. L. Rev. 1053
LENGTH: 18077 words
NOTE: HANIL BANK V. PT. BANK NEGARA INDONESIA (PERSERO): CONTINUING THE
QUANDARY OF DOCUMENTARY COMPLIANCE UNDER INTERNATIONAL LETTERS OF
CREDIT*
* This Note was selected as the recipient of the 2004 King & Spalding LLP Award for the
best paper in the area of international business.
NAME: Kyle Roane
SUMMARY:
... Letters of credit (individually, "LC," or collectively, "LCs"), also known as documentary
credits, frequently have been characterized as one of the more secure methods of payment
available in sales transactions. ... In evaluating whether the documents produced by the
beneficiary conform to the provisions of the LC, the issuing bank utilizes a strict compliance
standard and mandates that unless the documents strictly comply with the terms of the LC,
the beneficiary's payment will be refused. ... The Hanil court's unsuccessful attempt to
reconcile the old standard for LCs - strict compliance - and the UCP's provision that
compliance "shall be determined by international standard banking practice," creates
considerable uncertainty, thereby failing to help define the current state of LC law. ...
Essentially, strict compliance is utilized to protect LC issuers from the need to possess
knowledge of a discrepancy's commercial impact. ... One commentator has noted that "it
appears that compliance with documentary examination requirements under UCP 500
international standard banking practice closely follows the U.C.C. Article 5 commercialbanker distinction of discrepancies for construing strict compliance. ... "International
Standard Banking Practice" and Strict Compliance: Uniformity in a Post-Hanil World? ...
TEXT:
[*1054]
I. Introduction
"Globalization is a reality, and it has irrevocably changed the dimension of law." n1 Rapid
economic expansion, driven by unparalleled technological innovation and transnational
investment, in conjunction with new organizations committed to continuing its expansion, n2
have developed international trading opportunities in favor of formerly nationally-oriented
businesses. n3 Globalization, spurred by an ever-expanding business mindset, has driven
merchandise export growth to new heights. n4 However, with this unprecedented economic
growth comes the need to provide marketplace actors with some basic level of predictability
on which they can structure investment and trading decisions.
[*1055] Letters of credit (individually, "LC," or collectively, "LCs"), n6 frequently have been
characterized as one of the more secure methods of payment available in sales
transactions. n7 However, the use of LCs to facilitate growing international sales
transactions in reliance on this characterization n8 is somewhat ironic: although LCs can
effectuate a secure payment, in most instances the documentary compliance standard
does not require the issuing bank to make a payment to the beneficiary. n9 Under current
compliance standards, even the slightest documentary discrepancy can enable an issuing
bank to avoid its payment obligation under the LC. n10
A study of LC presentment and dishonor reveals that most presentations are discrepant
from the provisions in the LC. n11 Precisely because today's economic market demands
international transactions, discrepancies are usually waived by most buyers, which
ultimately permits the issuing bank to make payment upon documentary presentation
under the terms of the LC. n12 Although scant research has been conducted concerning the
number of failed LCs, one researcher has estimated that only one percent of all documents
presented for payment are rejected. n13 Despite the potential risks inherent in this form of
transactional financing, "commercial letters of credit are the traditional form of letters of
credit created as a payment and financing [*1056] mechanism for international sales of
goods." n14
In the international marketplace, buyers and sellers interact and contract for the sale of
goods. Payment for goods delivered can create numerous problems for sellers dealing with
unfamiliar buyers in foreign countries. n15 LCs were devised to act as a mechanism for
international merchants to secure payment upon shipment of the goods. n16 An LC operates
as a financial instrument through which the issuing bank "makes an independent
commitment, at its customer's [the applicant's] request, to honor a third-party's [the
beneficiary's] demand for payment, as long as the demand complies with the specified
conditions the issuer expressed in the letter of credit." n17
In a typical international sale of goods involving a commercial LC, there is a buyer who
desires to purchase goods from a seller, who, despite interest in selling goods, is uncertain
about the buyer's creditworthiness and thus requests financial assurances prior to
consummating the transaction. n18 Accordingly, the buyer contracts with a bank to assure
the seller that payment will be made for the sale of goods. n19 The buyer and the [*1057]
bank agree that the buyer will reimburse the bank for any monies paid to the seller, and the
bank issues an LC to the seller that provides for the seller's payment if certain documents
requested within the LC are presented as evidence of the seller's shipment of goods to the
buyer. n20
As soon as the seller ships the goods to the buyer and delivers the documents requested in
the LC to the issuing bank, the seller is paid directly by the issuing bank and the buyer
reimburses the bank for the outlay of funds to the seller. n21 In effect, where contracting
parties are separated by great distances, LCs essentially substitute the issuing bank's credit
for the buyer's credit to complete the transaction. n22
Ultimately, LCs assist international sales by reducing the risks of unknown
creditworthiness for both buyers and sellers. n23 There are at least three independent
contractual relationships involved in an LC transaction. n24 The relationship between the
seller and the bank is especially important - by issuing an LC to the seller-beneficiary, the
bank is making an irrevocable promise to pay the beneficiary upon presentation of
documents that conform with the LC provisions. n25 This promise is entirely separate from
the agreement between the applicant and the beneficiary. n26 In fact, "the great utility of the
letter of credit derives from the fact that [the] three relationships are utterly independent of
one another." n27 This independence principle is a fundamental doctrine that creates
certainty in the LC [*1058] transaction. n28 Under the auspices of the independence
principle, the issuing bank's promise to honor the LC, provided the beneficiary produces
documents in compliance with it, is completely independent
underlying sales contract with the beneficiary. n30
n29
from the applicant's
In evaluating whether the documents produced by the beneficiary conform to the provisions
of the LC, the issuing bank utilizes a strict compliance standard and mandates that unless
the documents strictly comply with the terms of the LC, the beneficiary's payment will be
refused. n32 One renowned English judge has explained that under the strict compliance
standard, "there is no room for documents which are almost the same, or which will do just
as well." n33 Strict compliance does not reduce the burden for either party: beneficiaries
must produce conforming documents and banks must pay when those documents are
produced. n34 Litigation is the likely result of a bank's refusal to honor the LC payment. n35
Although "revised Article Five of the Uniform Commercial Code (U.C.C.) governs LC
transactions in the United States," n36 most LCs incorporate specific rules within the LC
provisions that essentially supercede Article 5. n37 The International Chamber of [*1059]
Commerce (ICC) has created rules that are frequently incorporated into LCs: n38 the Uniform
Customs and Practice for Documentary Credits (UCP). n39 At a basic level, courts have
continued the practice of strict compliance when examining documents presented to issuing
banks. n40 A court's ability to determine which discrepancies between the documents
produced and the LC constitute grounds for an issuing bank to reject the documents and
refuse payment is fundamentally important to international LC law. n41 In fact, one
commentator has estimated that eighty-five percent of the documents produced to obtain
payment under an LC contain discrepancies.
New York is arguably the center for commercial LC use, n43 and in March 2000, the U.S.
District Court for the Southern District of New York reaffirmed New York's strict compliance
standard for evaluating documentary discrepancies despite the provisions within UCP
Article 13. n44 The Hanil court's [*1060] unsuccessful attempt to reconcile the old standard
for LCs - strict compliance - and the UCP's provision that compliance "shall be determined
by international standard banking practice," n45 creates considerable uncertainty, thereby
failing to help define the current state of LC law. The court's preference for antiquated case
law that supports strict compliance n46 undermines the parties' decision to incorporate the
UCP into the LC and obstructs rather than facilitates determinations of documentary
compliance based on standard banking practices.
Part II of this Note reviews the factual and procedural development of the Hanil case. Part
III examines the historical development of strict compliance cases, detailing the various
approaches taken by courts both in New York and throughout the United States that have
considered the standard for examining documents tendered under an LC. Further, Part IV
explains and critically evaluates the court's decision in Hanil, thus demonstrating how the
court's departure from the general principles included within the UCP undermines the
predictability and applicability of UCP rules to LCs. Part IV also investigates the ramifications
of the court's decision by revealing the court's unsound reliance on inapplicable case law
and illuminating the effects of the court's oversight of the international rules of banking
practice on the freedom of international parties to enter into commercial trading
relationships. Part V of this Note discusses the impact of the Hanil decision on
international business transactions and questions whether strict compliance has reached
its limit after the Hanil case. Part V also elucidates the current dispositional approaches
advanced by scholars on the issue of strict compliance and document discrepancies. Finally,
this Note advances a compliance test based on international standard banking practices,
which uses a reasonable document-checker standard.
II. Recitation of the Case
In July 1995, PT. Kodeco Electronics Indonesia ("Kodeco") requested that PT. Bank Negara
Indonesia (Persero) ("BNI") issue an LC in the amount of $ 170,955.00 for the benefit of
Sung Jun Electronics Co., Ltd. ("Sung Jun"). n47 Accordingly, BNI issued [*1061] the LC but
mistakenly spelled the name of the beneficiary "Sung Jin Electronics Co. Ltd." ("Sung Jin").
n49
In August 1995, Sung Jun sold the LC and accompanying documents to Hanil Bank n51 BNI
subsequently rejected Hanil's tendered documents under the LC and refused payment, citing
four alleged discrepancies between the documents and the LC, the most critical being the
listing of Sung Jin as the beneficiary on the LC and the listing of Sung Jun as the beneficiary
on the documents tendered. n52 Hanil brought suit for wrongful dishonor of the documents
under the LC, asserting claims for breach of contract, breach of the UCP's terms, unjust
enrichment, and breach of an implied covenant of good faith and fair dealing. n53 BNI denied
the allegations filed by Hanil Bank, and both parties subsequently filed motions for summary
judgment. n54
The court noted that although UCP principles are incorporated into most LCs and thereby
govern them, the UCP is not law. n55 Because the LC incorporated the UCP, New York's
U.C.C. Article 5 did not apply, and the UCP governed the LC transaction. n56 The court
proceeded to explain the fundamental [*1062] tenets of LC law and to confirm that strict
compliance is used to verify tendered documentary compliance. n57 Further, the court
emphasized that ""there is no room for documents which are almost the same, or which will
do just as well.'" n58 However, the court did mitigate the effects of the strict compliance
standard by mentioning that ""some variations ... might be so insignificant as not to relieve
the issuing or confirming bank of its obligation to pay.'" n59 The U.S. District Court for the
Southern District of New York applied this test and granted summary judgment for BNI. n60
The court began its analysis by finding that the misspelling of "Sung Jun" as "Sung Jin" was
similar to the misspelling in Beyene v. Irving Trust Co., n62 The court followed Beyene's
rationale in concluding that it was not unmistakably clear that the misspelling was a
typographical error. n63 Thus, because the misspelling was not obviously recognizable, the
court determined that it amounted to a significant error. n64
The court rejected Hanil's argument that because it was the issuing bank that made the
error in the misspelling, Beyene, which held against a beneficiary who was responsible for
an error, was distinguishable. n66 in which the disputed LC contained an incorrect expiration
date, the Hanil court stated that ""the beneficiary must inspect the letter of credit and is
responsible for any negligent failure to discover that the credit does not achieve the desired
commercial ends.'" n67 Pursuant to Mutual Export's [*1063] reasoning, the Hanil court
determined that Sung Jun had a duty to inspect the LC and to discover the error prior to
selling the documents to Hanil. n68 The court explained that "Hanil assumed the risk of
purchasing documents that did not exactly match the requirements set forth in the letter of
credit." n69
Further, the court rejected Hanil's argument that there were internal inconsistencies in the
LC. n70 Although the court acknowledged Bank of Montreal v. Federal National Bank & Trust
Co., n71 in which two inconsistent spellings were resolved against the LC issuer, the Hanil
court found "no internal inconsistency or ambiguity in the [letter of credit]." n72 In
conclusion, the court determined that BNI properly rejected the documents presented by
Hanil because the misspelling was a significant error that was not clearly recognizable. n73
Consequently, the court granted BNI's motion for summary judgment. n74
III. History of Strict Compliance Cases
Although the majority of LCs issued worldwide both incorporate the UCP n76 one survey of a
group of bankers revealed that approximately ninety percent of all documents presented to
obtain payment under LCs contain discrepancies. n77 However, it is important to [*1064]
note that the UCP allows the issuing bank to approach the applicant to waive the
discrepancies. n78 Understandably, discrepancies are waived by the applicant in roughly
ninety percent of the cases because most discrepancies are minor and technical. n79
Nonetheless, issuing banks' high rate of initial rejections and subsequent requests for the
applicant to waive the discrepancies are largely responsible for high transactional costs n81
Consequently, courts have struggled with the strict compliance issue in the context of an
issuing bank's refusal to honor documents under an LC incorporating the UCP. n82 Therefore,
to fully appreciate the contractual and policy implications of utilizing LCs in today's
international economy, it is necessary to analyze the evolution of strict compliance cases
in both New York and the rest of the United States.
A. Beyene v. Irving Trust Co.: New York's Benchmark for Strict Compliance
In 1985, the U.S. Court of Appeals for the Second Circuit announced its interpretation of the
strict compliance standard in Beyene v. Irving Trust Co. n83 In Beyene, the beneficiary in an
LC transaction sought damages to compensate for the issuing bank's failure to pay the LC.
n84
In reviewing the issuing bank's decision to refuse the tendered documents, the court
concluded that the misspelling in the bill of lading was a "material discrepancy that entitled
[the issuing bank] to refuse to honor the letter of credit." n85 The court held that the
document's failure to "comply [*1065] literally with the requirement in the letter of credit
relieved the confirming bank of its duty to pay under the letter of credit." n86
Beyene represents the New York benchmark of strict compliance. n87 However, strict
compliance is not the only rule: substantial compliance n88 has been adopted by courts in
some states because of the flexibility it provides both banks and courts in determining
whether tendered documents comply with the provisions of the LC. n89 Substantial
compliance is a judicially created standard designed to promote equity for the beneficiary in
an LC transaction. n91 the court considered whether the beneficiary's production of
documents bearing a different name from the LC justified the issuing bank's refusal of
payment. n92 Finding that the documents were conforming and that the minor differences did
not negate reasonable compliance, the court adopted the substantial compliance standard.
n93
Not everyone supports the use of such a standard, however. One commentator has
stated that the substantial compliance standard threatens the certainty factor for issuing
banks and forces them to determine ahead of time whether documents are close enough to
the terms of the LC, which inherently violates a fundamental tenet of LC law. n94
Although substantial compliance is the chief rival to strict compliance when determining
whether tendered documents comply with the LC, n95 a majority of courts utilize a version of
the strict compliance standard that "requires exacting conformity with every term included
in the letter of credit." n96 Recent LC [*1066] litigation underscores the glaring ambiguities
surrounding the "strict compliance" standard and the continuing struggle to ascertain a
practical means for evaluating documentary compliance under the provisions of an LC. n97
B. New Braunfels National Bank v. Odiorne: New Light on an Old Standard?
Approximately four years after Beyene was decided, a Texas Appeals court granted review
in an LC dispute between a beneficiary and an issuing bank for refusal to honor payment
under an LC. n98 The issuing bank sought to obtain a judgment that it properly refused
payment under the LC, while the beneficiary sought to recover the amount of the LC. n99 The
issuing bank refused payment because the documents tendered did not strictly comply with
the LC. n100 In considering the strict compliance standard, the court noted that "maintaining
the integrity of the strict compliance rule is important to the continued usefulness of letters
of credit as a commercial tool." n101 After balancing the equities of the strict compliance
standard, the court decided that although issuing banks are not required to determine
whether discrepancies in documents are significant, they should be charged nonetheless
with general common knowledge of discrepancies in their own banking instruments. n102
[*1067] After considering both the draft and the documents tendered by the beneficiary,
the court concluded that the discrepancy was simply a typographical or clerical error and
identifiable by any bank document examiner. n103 Further, the court stated that the
beneficiary should prevail and that the issuing bank wrongfully refused payment. n104
Although the court limited its holding to noncommercial discrepancies, it need not have
done so because its holding merely noted that ""strict compliance' means something less
than absolute, perfect compliance." n105
It is questionable whether this was the appropriate standard for the court to use considering
the fundamental tenets of LC law. Some commentators have argued that because
"discrepancies are the rule and perfect tenders are the exception," issuing banks should act
as trusted financers and not as "finders of reasons for non-payment." n106 Professor
Kozolchyk argues that "the bank also ought to be charged with knowledge of the
commercial impact that the absence of a given document or requirement may have upon
the terms of the credit." n107
Although considerable debate exists regarding the commercial versus the noncommercial
discrepancy standard, n108 the Official Comment to U.C.C. Article 5-108 states, "By adopting
standard practice as a way of measuring strict compliance, this article indorses the
conclusion of the court in New Braunfels National Bank v. Odiorne." n109 On November 1,
2000, New York adopted the revised U.C.C. Article 5. n110 By endorsing the reasoning in
Odiorne, which is based on standard banking practices, the U.C.C. is moving towards a
practical approach to strict compliance in analyzing LC disputes. n111
One commentator has argued that a major goal of the revision of Article 5 was to promote
uniformity within the United States and between the U.C.C. and the UCP. n112 Furthermore,
although the comments of the U.C.C. are solely the opinions of [*1068] the Reporters, the
U.C.C. is extremely complex and judges have relied on the comments as much as the
statutes themselves in making relevant decisions. n113 However, one inherent danger
involved with judicial examination of documentary compliance is that it forces courts to
consider myriad options, not the least of which is what factors to rely on when evaluating
strict documentary compliance, for neither the U.C.C. nor the UCP have provided any
objective factors to date. n114
C. Voest-Alpine Trading USA Corp. v. Bank of China: New Twists on Old Standards
More recently, the U.S. District Court for the Southern District of Texas, in Voest-Alpine
Trading USA Corp. v. Bank Of China, n115 held that although the issuing bank's notice was
insufficient for UCP notice requirements, the discrepancies between the LC and the
documents tendered by the beneficiary were not sufficient to justify the issuing bank's
dishonor of the documents. n116 In addition to several discrepancies, the LC incorrectly
named the beneficiary "Voest-Alpine USA Trading Corp." instead of "Voest-Alpine Trading
USA Corp." n117 Subsequently, Voest-Alpine tendered documents to the presenting bank
under the terms of the LC. n118 The issuing bank alleged six discrepancies, most notably the
name inversion, the numbering of the LC, and the name of the destination port, and it
refused to honor the LC. n119
The court analyzed three standards previously employed in LC disputes, thereby
highlighting the insufficiencies in UCP 500 guidance concerning which document
inconsistencies can justify a bank's determination that the tendered documents are not in
[*1069] compliance with the provisions of the LC. n120 The court then stated that "[a]
common sense, case-by-case approach would permit minor deviations of a typographical
nature because such a letter-for-letter correspondence between the letter of credit and the
presentation documents is virtually impossible." n121 Essentially, the court adopted a
common-sense approach that required the bank to examine "whether the whole of the
documents obviously relate to the transaction on their face." n122
Although the court appears to have departed from the Beyene court's reasoning when it
recognized the standard discussed above, n123 the court actually rejected the Odiorne court's
standard by holding that the issuing bank "is not required to evaluate risks or go beyond the
face of the documents" when determining if tendered documents strictly comply with the
LC. n124 After examining the documents as a whole and considering the fact that the
addresses were identical in both the LC and the documents, the Voest-Alpine court reasoned
that the documents produced by the beneficiary "bore obvious links" to the LC because "the
inversion of the geographic locator ... does not signify a different corporate entity." n125
Additionally, the court rejected the issuing bank's claims of noncompliance with respect to
the numbering of the LC and the listing of the destination port after examining the
discrepancies under its adopted approach, which integrates standard banking practices. n126
Commentators have noted that the banking [*1070] practice-oriented approach utilized in
Voest-Alpine is "refreshing" and that "the court, as would LC bankers, treated these
differences as obvious typographical errors in identifying the same things and not as
identifications of different LCs or different ports." n127
Despite the analytical standards provided in the line of cases described above, courts have
failed to agree on a uniform approach to documentary compliance, leaving only divergent
standards that increase investment uncertainty. n128 In the absence of any guidance from
state supreme courts and state legislatures or objective criteria from the UCP, these courts
have had to toil arduously to find the optimum standard for determining when tendered
documents strictly comply with the terms of an LC. n129 In attempting to interpret Revised
Article 5 of the U.C.C. and the UCP provisions, recent cases have veered towards standard
banking practices and reasonable documentary decisions. n130
The U.S. District Court for the Southern District of New York's decision in Hanil Bank v. PT.
Bank Negara Indonesia (Persero) departs from the path of the most recent case law, n131
thereby increasing LC users' concerns about the enforceability of such financial instruments
in international commerce. n132 An examination of the differences between the LC
standards of U.C.C. Article 5 n134 is integral to a complete understanding of Hanil.
[*1071]
D. U.C.C. Article 5 vs. UCP: Two Approaches to Strict Compliance?
The standards included within U.C.C. Article 5 and the UCP help banking institutions
determine whether documents produced by a beneficiary comply with the terms of the LC.
n135
Decisions concerning whether particular documents comply with an LC require some
form of guidance to ensure adequate safeguards against potential abuse. n137 for review of
bank documents is ""standard practice of financial institutions that regularly issue letters of
credit.'" n139 issuing banks must observe "international standard banking practices" in
examining documents produced under an LC. n140
In 1995, Revised U.C.C. Article 5 was drafted to govern LCs in the United States. n141 New
York, the critical LC jurisdiction and the commercial center of the United States, n143 The
revision of U.C.C. Article 5 and the frequent incorporation of the UCP into LCs have enabled
LC issuers to waive the U.C.C., n144 permitting the UCP in effect to supercede Article 5,
except under seven nonvariable provisions. n145 [*1072] In light of the demonstrated effort
to create a degree of uniformity between the two standards, one commentator has noted
that "issuers of letters of credit now have the benefits of additional uniformity by virtue of
the fact that Article 5 has been revised to correspond with the ... UCP." n146
A closer examination of Article 5's standard reveals that under the New York version, "an
issuer shall honor a presentation that, as determined by the standard practice referred to in
subsection (e) of this section, appears on its face strictly to comply with the terms and
conditions of the letter of credit." n147 Further, section 5-108(e) provides that "an issuer shall
observe standard practice of financial institutions that regularly issue letters of credit." n148
Although a determination of the issuing bank's adherence to standard practice is subject to
the court's interpretation, the parties to a dispute should be allowed an opportunity to
present evidence of the standard practice. n149
Standard practice includes "(i) international practice set forth in or referenced by the
Uniform Customs and Practice, (ii) other practice rules published by associations of financial
institutions, and (iii) local and regional practice." n150 One example of a source of financial
practice rules is the U.S. Council on International Banking. n151 Standard practice ultimately
serves to supply definitions and other supplemental terms and interpretations for issuing
banks to utilize when engaged in document verification. n152
U.C.C. Article 5 requires that strict compliance be [*1073] interpreted in the context of
standard practice. n153 The reasoning employed in New Braunfels National Bank v. Odiorne is
endorsed by the Official Comment of the U.C.C., n154 which advocates utilizing standard
practice as a tool for strict compliance verification. n155 Under Odiorne, document examiners
are responsible for exercising discretion when determining whether discrepancies, such as
misspellings, are merely the result of typographical error. n156 Essentially, strict compliance is
utilized to protect LC issuers from the need to possess knowledge of a discrepancy's
commercial impact. n157 Under the U.C.C. Article 5 provisions, document examiners must
understand the significance of banking discrepancies according to standard practice, but
they are not held responsible for discrepancies of a commercial nature. n158
E. UCP & "International Standard Banking Practice"
The International Chamber of Commerce promulgated the UCP as a set of rules for LC
conduct and intended them to be incorporated into LCs. n160 UCP provisions are only
applicable if they are incorporated into an LC, and they only represent standard banking
practice. n161 Although LCs are governed in the United [*1074] States by U.C.C. Article 5,
subsection 5-116(c) "expressly recognizes that if UCP 500 is incorporated by reference into
a Credit, the agreement varies the provisions of Article 5 with which it conflicts, with the
exception of nonvariable provisions specified in subsection 5-103(c)." n162
Under the UCP compliance standard, strict compliance is not mentioned, but it has
nonetheless become the standard for evaluating documentary compliance. n163 The UCP
states that
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. n164
Despite its reference to "international standard banking practices," the UCP does not
provide any objective standards to define what constitutes strict compliance or standard
practices. n165
The provision "as reflected in these articles" suggests that the standard practices are
codified only within the UCP, n166 but unfortunately this is not the case. The UCP is not the
sole source of banking practices for evaluating LCs. n167 There are many banking practices
not included in the UCP 500 that provide assistance in determining strict documentary
compliance. n168 One commentator has suggested that failure to recognize uncodified
international banking practices when ascertaining documentary compliance frustrates
parties' reasonable expectations because international standard banking practices are
continually being developed, and failing to recognize new practices would unreasonably
prevent change. n169 However, academics have previously argued that the addition of ""as
reflected in these articles'" to the UCP 500 indicates that "the words of the article [*1075]
do not permit expert testimony on what is standard banking practice beyond the extent to
which other articles of the UCP reflect it." n170
Arguably, the provision "as reflected in these articles" is not meant to be given strict judicial
construction, which would prevent the UCP from accommodating changes in international
standard banking practices. n171 Therefore, the UCP embodies both codified practices and
practices yet to be codified. n172 The evaluation of documentary compliance requires an
understanding of international standard banking practices, which equally requires an
awareness of the authorities on which document examiners, bankers, and lawyers can rely
to formulate opinions on documentary compliance.
Although the UCP demands strict compliance of documents, n174 some courts have
interpreted the standard as "allowing deviations that do not cause ostensible harm," which
is ultimately not functional for evaluating documentary compliance. n175 The UCP only
requires document examiners to know the function of the documents involved and the
significance of the banking discrepancies; it does not require particular knowledge of the
industry involved in the transaction. n176 In the end, courts will likely be the final arbiter of
international standard banking practices and will ultimately decide if a bank's decision to
pay or to dishonor an LC conforms to such [*1076] international practices. n177 Thus,
whether or not a court should require expert testimony on interpretations of international
standard banking practices has become a highly debated issue. n178
One commentator has suggested that the UCP does not require courts to defer to banking
experts when determining international standard banking practices and that such
deference would entail a "battle of the experts." n179 The courts would probably resort to
simply finding whether or not the bank's determination of documentary compliance "made
sense." n180 Alternatively, another commentator has noted that using expert opinions to help
determine international standard banking practices for documentary compliance would
not result in a battle of the experts. n181 However, such an interpretation is unsound because
when an LC dispute reaches trial, each party will probably offer conflicting expert testimony
on international standard banking practices in order to help their respective cases. n182
Whereas the "U.C.C. Article 5 clearly vests ultimate determination of standard banking
practice with the court, ... UCP 500, on its face, attempts to vest ultimate determination of
international standard banking practice with the banking experts." n183
F. Comparison of Differences between U.C.C. and UCP
Although both the U.C.C. Article 5 and the UCP standards similarly apply the strict
compliance standard for LC verification, practical differences remain. n184 The UCP standard
appears to be narrower than that of U.C.C. Article 5 because the UCP standard applies to
documents, whereas the U.C.C. [*1077] standard applies to the presentation of
documents. n185 One commentator has noted that "it appears that compliance with
documentary examination requirements under UCP 500 international standard banking
practice closely follows the U.C.C. Article 5 commercial-banker distinction of discrepancies
for construing strict compliance." n186 Both standards hold document examiners responsible
for understanding a document's function and knowing the significance of discrepancies and
terms unrelated to the underlying trades involved in the LC transaction. n187
IV. Analysis of the U.S. District Court for the Southern District of New York's Decision in
Hanil Bank v. PT. Bank Negara Indonesia (Persero)
A. Perpetuating Documentary Compliance Uncertainty: Misapplication of Strict Compliance
The Hanil decision n188 "reveals that the courts have not overcome the silliness first
witnessed in the now infamous Beyene case." n189 The Hanil court misapplied the strict
compliance standard in rendering its judgment by failing to consider the differences in each
document's significance as utilized in the LC transaction. n190 In Hanil, the court failed to
distinguish between the level of precision of documentary compliance required under the
UCP for commercial invoices and that required for the other documents presented. n191 The
court employed a mirror-image [*1078] interpretation of strict compliance, n192 holding that
because the LC contained the name "Sung Jin" and the documents produced contained the
name "Sung Jun," the documents were discrepant and the issuing bank justifiably refused
payment. n193 Having adopted the mirror-image interpretation while having failed to draw the
important distinction between commercial invoices and additional documents for compliance
standards purposes, n194 the court unfortunately plunged itself into an analysis whereby all
documents "which do not exactly replicate the terms and conditions of the letter of credit
will be judged discrepant." n195 One commentator has noted that by simply using a mirrorimage interpretation, courts will inevitably create opportunities for bad faith issuing banks to
refuse payment based upon minor, and perhaps inconsequential, discrepancies such as
missing commas or asterisks. n196 Moreover,
to validate such bad faith practices in the name of strict compliance tips the contractual
balance sharply in favor of applicants and against beneficiaries. It also creates serious
distrust, not only between the beneficiary and applicant, but also among the correspondent
banks, acting as advising, confirming, negotiating, paying or reimbursing banks. n197
The Hanil decision, which was decided on whether the "Sung Jun"-"Sung Jin" typographical
error was obvious, was premised on a formalistic mirror-image application of the strict
compliance standard. n198 The court's justification for its decision that the misspelled name
was not obviously recognizable, n199 is of little use, and simply perpetuates the quandary of
documentary compliance. n200 In addition, because the court relied on case law [*1079]
rather than on the UCP, n201 it refused to allow expert testimony regarding whether the
misspelling of the beneficiary's name was an obvious error in the parties' countries of origin
- Korea and Indonesia. n202 The court's document examination glossed over the significance
of the matching addresses in the LC issued and the documents tendered under the LC. n203 A
more detailed analysis might have enabled the court to temper its misapplication of the
strict compliance standard and to reconsider whether the misspelling was actually an
obvious typographical error because of the potential match between the documents'
addresses and the addresses of the LC. n204 Courts continue to struggle with identifying and
linking so-called "discrepancies" in presented documents, and they tend to perpetuate a
certain level of pettiness when engaging in document examination, n206
Within the LC community in the United States, the leading figures favor the approach taken
by Voest-Alpine n208 and Beyene n210 While both Hanil and Voest-Alpine were decided in the
same month in 2000, n211 each court interpreted the strict compliance standard differently,
as explained above. n212 If the Hanil court had employed Voest-Alpine's common-sense
approach, arguably the result [*1080] might have been different because the court would
have examined individual documents in the context of all documents presented and
determined whether the documents bore a rational link to one another. n213 Adopting the
common-sense approach would require a court to determine from the LC and the
documents presented whether it was obvious that the difference in the spelling of the
beneficiary's name derived from a typographical error. n214 If the court determined that the
misspelling or error was obvious, then such an error would not justify the issuing bank's
action of dishonoring payment under the LC.
Arguably, the misspelling involved in Hanil n216 was an apparently obvious typographical
error under this standard. n217 However, if a document examination results in a finding that
discrepancies, such as misspellings, were not obvious or could not have been verified from
the face of the documents, the issuing bank's refusal to honor payment would be justified.
n218
Such a determination would require careful examination of the documents as a whole,
which the Hanil court failed to undertake. n219 The court's reliance on prior judicial decisions
to determine what constituted strict compliance, n220 rather than focusing on evidence of
whether a bank document checker would have been able to identify the proper beneficiary,
demonstrates the vice of the Hanil case. The decision is bereft of any practical value and
perpetuates the confusion regarding the application of strict compliance in LC verification.
n221
[*1081]
B. Hollow Reasoning and Misapplication of Mutual Export
Aside from the issues created by the formalistic interpretation of the strict compliance
doctrine employed by the Hanil court in evaluating the documents presented under the LC,
n222
the Hanil decision was also unfortunate because it followed the reasoning of Mutual
Export Corp. v. Westpac Banking Corp. n223 Reliance on Mutual Export allowed the court to
infer that the beneficiary of an LC has both the duty to inspect the LC and the duty to be
responsible for any errors that may prevent the LC from achieving its commercial ends honor and payment. n224 Interestingly, the Mutual Export court relied solely on a professor's
treatise on LC law for the proposition described above. n225
The Hanil court, relying on Mutual Export, carried the confusion regarding LCs even further
by holding that the beneficiary's duty to inspect the LC is paramount. n226 Undoubtedly, in
the event that there is an incorrect expiration date, the beneficiary should object to the
expiration date prior to performance in order to maintain the protection provided by Mutual
Export under the LC. n228 and "commercial parties would not think it necessary to change
"Jin' to "Jun' where all the other data relating to the transaction and the beneficiary such
as address, order number, etc. was correct." n229 The Hanil court failed to understand that
there is a clear difference in significance [*1082] between an incorrect LC term (expiration
date) and an obvious or innocent typographical error. n230 A misspelled name does not
prevent the commercial ends of an LC from being achieved; therefore, the beneficiary
inspection rule of Mutual Export is justifiably inapplicable to the Hanil facts. n231
C. Ignorance Is Bliss: Missing the Incorporation of the UCP
The Hanil decision completely ignores the UCP provisions despite the fact that the LC
explicitly incorporated the UCP. n232 The court failed to provide any justification for
disregarding the UCP and instead relied upon case law for its authority. n233 Ultimately, the
UCP provisions were the only proper governing authority for the implemented LC in Hanil.
n234
D. Commercial Invoice: An Overlooked Analysis
Arguably, the court's ignorance of the UCP potentially had the most impact on the
presentation of the commercial invoice. n235 UCP Article 37 provides that commercial invoices
"must appear on their face to be issued by the beneficiary named in the credit." n236 When
considering the facts of Hanil, the question centers on whether the commercial invoice
provided by Hanil Bank appeared to have been issued by the beneficiary designated in the
LC. n237 A determination of the authenticity of a commercial invoice requires a careful
examination of the documents and [*1083] relevant information in their entirety. n238
Unfortunately, the Hanil court simply passed judgment that the misspelling was not obvious
and, in doing so, failed to examine the documents as a whole and neglected to consider
whether the error would have been considered obvious in either Korea or Indonesia. n239 An
evaluation of the LC and the documents produced would have revealed whether the
difference in the beneficiary's name resulted from typographical error. n240
E.
"International Standard Banking Practice" and Strict Compliance: Uniformity in a PostHanil World?
The Hanil court's failure to utilize the provisions of the UCP n242 leave courts confronting
similar issues little guidance for the future. Two opposing approaches have developed with
respect to document verification, n244 However, courts employing a mirror-image
interpretation of strict compliance fail to embrace a document verification standard that is
functional, instead perpetuating a version based on practical impossibility. n245 On the other
hand, some courts have favored an interpretation of strict compliance under the UCP that
permits acceptance of discrepancies that "do not violate the court's own version of
"reasonableness' or "equity' when considering the underlying facts and circumstances." n246
This version of strict compliance equally fails to provide a functional standard for document
verification, as it does violence to the [*1084] independence principle. n247
As witnessed in Hanil, the absence of a functional standard for LC verification results in
increased LC litigation and escalating transactional costs, thanks to LC uncertainty. n248 How
can the UCP develop a standard that document examiners can use in rapid application and
that is not so rigid that a bank's document compliance employee will reject the majority of
documents presented? n250
to succeed in it banks must develop customs and practices that encourage their customers'
and correspondents' trust. Sharp, dishonest or negligent practices are invariably short-lived
and do not constitute good international standard banking practice. International
standard banking custom and practice for documentary credits contains the rules that
embody honest and predictable practices. n251
While the UCP represents international banking practices and best practices within the LC
business, n253 may be illustrative of one major concern regarding the UCP: Within the UCP,
there are no objective criteria for defining either strict compliance or international
standard banking practices. n254 Unlike Hanil, the UCP provisions and recent cases indicate
that when the UCP is incorporated into an LC, the court should allow expert testimony on
what constitutes "international standard banking practice." n255 Commentators have agreed
that trial courts should consider expert evidence on how the UCP provisions should be
applied under international standard banking practice. n256 Although the search for a
functional standard has remained fruitless, the LC industry still hopes that the courts will
adopt a practice-oriented approach to strict compliance, international banking practices,
[*1085] and typographical errors. n258 and Beyene n259 approaches are spurned by the LC
community in favor of the Voest-Alpine n260 practice-oriented approach, which uses standard
banking practices. n261
V. A Reasonable Document-Checker Standard: Promises of Uniformity and Predictability in
Documentary Verification
Because judicial constructions of strict compliance have failed to ensure adequate
predictability and fairness, n262 a standard must be developed both to address the new
economy and new technology and to distinguish between true discrepancies and simple
errors. n263 The emerging economy requires uniform standards to ensure that international
financial activities function efficiently. n264 LCs, not unlike other commercial law instruments,
require standards that promote certainty and maximize predictability for the LC community.
n265
Because judicial misapplications of documentary compliance continue to be less than
predictable and fair, courts should employ a reasonable document-checker standard,
utilizing standard banking practices. n266
Prior interpretations of strict compliance have failed commercial fairness standards because
courts have assumed that "strict" can be established without first revealing the parties'
[*1086] expectations, which are defined by reasonable banking practices. n267 Therefore, a
court's interpretation of "strict" must first include a determination of the reasonable
expectations of a document checker. n268 Strict compliance, as determined by the reasonable
document-checker standard, requires courts to determine whether an experienced
document evaluator would find the presented documents to be in compliance. n269
Because the reasonable document-checker standard operates as an a priori standard,
courts, in order to determine strict compliance, should first examine previous banking
practices and then consider what a reasonable document checker would have done under
the circumstances. n271 which was premised on Professor Dolan's assertions and which held
that issuing banks are not required to know the commercial impact of documentary
discrepancies, n272 Professor Kozolchyk argues that document checkers must learn to
differentiate between various types of documents. n273 Further, under the reasonable
document-checker standard, banks are responsible for knowing both the differences
between documents and the commercial impact the absence of a document has upon the LC
terms. n274 Reasonable document checkers must follow guidelines based upon reliable
banking industry practices in order to determine documentary discrepancies. n275
International banking practices accepted throughout the community, such as the UCP,
provide the guidelines for [*1087] document checkers. n276 In addition, the International
Chamber of Commerce has recently developed a practical complement to UCP 500, which
provides guidelines for the examination of documents. n277 The guidelines described above
can be applied in conjunction with internal bank policies to allow for the proper
determination of documentary compliance under the reasonable document-checker
standard. n278 Interestingly, standard banking practices were recently employed in VoestAlpine n280
At a time when banking technology is requiring greater uniformity, harmonization of
standards, and faster verification speeds, n281 the LC community is seeking judicial adoption
of a more practice-oriented application of strict compliance. n282 Although monitoring LC
compliance has inherent difficulties, a standard of compliance premised on banking
practices, with compliance verified by reasonable document checkers, clearly presents the
banking community with the potential for documentary compliance uniformity. n283 The
reasonable document-checker standard has wide-ranging support n285 Although there is some
concern over adoption of an a priori standard, n286 judicial interpretations of strict compliance
would benefit because adoption would force courts to center on previously settled banking
practices, n288 The Hanil court could have legitimized its decision within the LC community
had it engaged the reasonable document-checker standard. n289
VI. Conclusion
To permit issuing banks to reject a beneficiary's presentation of documents and refuse
payment under an LC based on hypertechnicalities undermines the intent of LC law. n290 For
example, allowing an issuing bank to refuse payment because of an inconsequential
discrepancy enables the LC applicant to escape payment performance - by refusing to waive
existing discrepancies - whenever the market price changes and the beneficiary's
documents contain a minor discrepancy. Therefore, judicial interpretations of strict
compliance that employ a mirror-image approach validate these potential bad faith
practices, creating distrust within the LC community. n291 This scenario is untenable because
it erodes the market actor's confidence in the efficient operation of LCs. n292
As a result of Hanil, the confusion surrounding strict compliance has continued. n293 The Hanil
court had an opportunity to harmonize judicial interpretations of strict compliance with
international standard banking practices, as provided in the UCP; however, it did not take
that opportunity. n294 By foregoing an examination of the presented documents, the court
chose to sacrifice a chance to evaluate the documents as a whole, n295 with an open mind
towards the acceptance of obvious typographical errors. Unfortunately, the court decided
the LC dispute by focusing solely on the fact that the "Sung Jun"-"Sung Jin" misspelling
could not be recognized as an obvious typographical error. n297 but it also fails to provide the
LC community with a functional and uniform standard, thus continuing the confusion and
uncertainty that surrounds documentary compliance.
Proliferation of LC litigation, increased uncertainty, and a changing economy necessitate a
new approach to strict compliance based on international standard banking practices. n298
Thus, in the wake of repeated calls by the banking community for greater documentary
verification clarity and predictability, this Note reiterates the call for courts to adopt the
reasonable document-checker standard, based on international standard banking
practices, as the test for determining strict compliance of documents presented under an
LC.
Legal Topics:
For related research and practice materials, see the following legal topics:
International Trade LawLetters of CreditCommercial Law (UCC)Letters of Credit (Article
5)IssuersObligationsStrict ComplianceCommercial Law (UCC)Letters of Credit (Article
5)IssuersObligationsHonor Presentations
FOOTNOTES:
n1. Ewell E. Murphy, Jr., Coming to Grips with Globalization, 11 Currents: Int'l Trade L.J. 3,
5 (Winter 2002).
n2. See World Trade Organization, What is the WTO?, at
http://www.wto.org/english/thewto_e/whatis_e/whatis_e.htm (last visited Oct. 4, 2004)
The World Trade Organization (WTO) is the only global international organization dealing
with the rules of trade between nations. At its heart are the WTO agreements, negotiated
and signed by the bulk of the world's trading nations and ratified in their parliaments. The
goal is to help producers of goods and services, exporters, and importers conduct their
business.
Id.
n3. See Murphy, supra note 1, at 3 (discussing the expansion of international trade).
n4. See id. ("By the 1990s, merchandise exports were growing twice as fast, transnational
investment three times as fast, and cross-border securities sales ten times as fast, as
growth of the world's domestic production.").
n5. See Paolo S. Grassi, Letter of Credit Transactions: The Banks' Position in Determining
Documentary Compliance. A Comparative Evaluation Under U.S., Swiss and German Law,
7 Pace Int'l L. Rev. 81, 85-86, 127 (1995) (defining LCs as instruments of both national and
international trade that can provide security to contracting parties).
n6. See Black's Law Dictionary 520 (8th ed. 2004) (explaining that an LC is a "credit
extended on a document of title or any other legal document").
n7. See Hoguet Newman & Regal, LLP, Letter of Credit Litigation, at
http://library.lp.findlaw.com/articles/file/00418/004456/title/subject/topic/securities%20la
w_securities%20litigations/filename/securitieslaw_1_293 (last visited Oct. 4, 2004)
(explaining that while LCs are often litigated, they invariably provide a reliable means of
"swift and sure" payment); cf. Margaret L. Moses, The Irony of International Letters of
Credit: They Aren't Secure, But They (Usually) Work, 120 Banking L.J. 479, 480-81 (2003)
(recognizing that "letters of credit are generally considered the most secure payment
mechanism," but finding that "in practice, [they are] not ... very secure").
n8. See Mark S. Blodgett & Donald O. Mayer, International Letters of Credit: Arbitral
Alternatives to Litigating Fraud, 35 Am. Bus. L.J. 443, 443 (1998) (discussing the use of LCs
in financing international transactions).
n9. Moses, supra note 7, at 479.
n10. Id. at 479-80.
n11. See id. at 480-81 & 480 n.4 (identifying several studies that have found that up to
ninety percent of documents produced for payment under an LC do not strictly comply with
the conditions for payment).
n12. Id. at 480.
n13. Id. at 482.
n14. Gao Xiang & Ross P. Buckley, The Unique Jurisprudence of Letters of Credit: Its Origin
and Sources, 4 San Diego Int'l L.J. 91, 95-96 (2003) (distinguishing commercial LCs from
standby LCs and guarantees).
n15. See George P. Graham, Note, International Commercial Letters of Credit and Choice
of Law: So Whose Law Should Apply Anyway?, 47 Wayne L. Rev. 201, 204 (2001)
(describing the primary purpose of LCs as enabling international transactions).
n16. See id. (noting that LCs "reducee the risks to both sellers and buyers," thereby
facilitating international transactions). But see S. Isabella Chung, Developing a
Documentary Credit Dispute Resolution System: An ICC Perspective, 19 Fordham Int'l L.J.
1349, 1351 (1996) (estimating that outstanding LCs amounted to USD $ 500 billion in
1996).
n17. Graham, supra note 15, at 202-03. Traditionally, the LC beneficiary is the party selling
the goods in the underlying transaction; the applicant is the party applying for the LC and
is the buyer in the transaction; and the issuing bank is the bank contracted by the
applicant to issue the LC in favor of the beneficiary. Id. at 205-06. According to one
commentator, "the real value of the letter of credit ... is as a verification institution." Moses,
supra note 7, at 483 (citing Ronald J. Mann, The Role of Letters of Credit in Payment
Transactions, 98 Mich. L. Rev. 2494, 2521 (2000)). Indirectly, LCs can serve a useful
purpose for international transactions by verifying the deal's authenticity. Mann, supra,
at 2530.
n18. Graham, supra note 15, at 203 (citing William C. Hillman, Letters of Credit 3 (1987));
see also Alaska Textile Co. v. Chase Manhattan Bank, N.A., 982 F.2d 813, 816 (2d Cir.
1992) (noting that "letters of credit are sui generis[,]... . woven into the fabric of the
common law, largely under the aegis of Lord Mansfield as he fashioned the law merchant ...
to the needs of the 18th Century Industrial Revolution"); Dorothea W. Regal, Basic
Principles of Letters of Credit, in What Lawyers Need to Know About UCC Article 5 - Letters
of Credit 13, 26-27 (Sandra Stern ed., 2002) (stating that in the simple form of an LC, "the
seller requires the buyer to obtain a letter of credit in favor of the seller from a bank
acceptable to the seller, payable upon presentation of an agreed set of documents
appropriate to the transaction").
n19. Graham, supra note 15, at 203 (citing Hillman, supra note 18, at 3).
n20. Id. (citing Hillman, supra note 18, at 3).
n21. Id. (citing Hillman, supra note 18, at 3).
n22. Steven C. Rattner, Comment, Letters of Credit: A Return to the Historical
Documentary Compliance Standard, 46 U. Pitt. L. Rev. 457, 465 (1985).
n23. Refer to note 16 supra; see also John F. Dolan, Strict Compliance with Letters of
Credit: Striking a Fair Balance, 102 Banking L.J. 18, 18-19 (1985) (observing that "prompt
and certain" payment for the seller-beneficiary, as facilitated by the LC, is the main reason
for the use of LCs in international transactions).
n24. Graham, supra note 15, at 210.
First, there is the contract between applicant and the issuer, under which the issuer, at the
applicant's request, issues the letter of credit for the benefit of the beneficiary. Second,
there is the contract between the issuer and the beneficiary, under which the issuer
promises to honor the beneficiary's demand for payment upon presentation of the requisite
documents. Finally, there is the underlying sales contract between the applicant and the
beneficiary. In addition to these relationships, there may be additional relationships
depending on the presence of advising, confirming, negotiating, or paying banks.
Id.
n25. Alaska Textile Co. v. Chase Manhattan Bank, N.A., 982 F.2d 813, 815 (2d Cir. 1992).
n26. Id.
n27. Id.
n28. Id.; see also Graham, supra note 15, at 211 (contending that the independence
principle serves as the foundation for the LC's commercial importance).
n29. See U.C.C. 5-103(d) (2003) (providing that the "rights and obligations of an issuer to a
beneficiary or a nominated person under a letter of credit are independent of the ... contract
or arrangement out of which the letter of credit arises"); see also Int'l Chamber of
Commerce, Pub. No. 500, Uniform Customs and Practice for Documentary Credits art. 3(a)
(1993) [hereinafter Int'l Chamber of Commerce, UCP 500] (providing that "credits, by their
nature, are separate transactions from the sales or other contract(s) on which they may
be based and banks are in no way concerned with or bound by such contract(s), even if any
reference whatsoever to such contract(s) is included in the Credit").
n30. See Graham, supra note 15, at 211 (explaining that the performance of the underlying
sales contract between the buyer and the seller is entirely independent of the issuing bank's
duty to honor the LC upon presentment of documents by the beneficiary).
n31. Dolan, supra note 23, at 18.
n32. Todd Conley, Comment, Hanil Bank v. PT. Bank Negara Indonesia: The Problem with
Form over Substance in Documentary Compliance Rules, 50 Cath. U. L. Rev. 977, 977
(2001).
n33. Equitable Trust Co. v. Dawson Partners, Ltd., 27 Lloyd's List L. Rep. 49, 52 (H.L.
1927).
n34. Dolan, supra note 23, at 21-22.
n35. See Hoguet Newman & Regal, LLP, supra note 7 (discussing LC litigation).
n36. Conley, supra note 32, at 982.
n37. See U.C.C. 5-116(c) (2004); N.Y. U.C.C. Law 5-116(c) (McKinney 2001). Both of these
provisions provide that "except as otherwise provided in this subsection, the liability of an
issuer, nominated person, or adviser is governed by any rules of custom or practice, such as
the Uniform Customs and Practice for Documentary Credits, to which the letter of credit,
confirmation, or other undertaking is expressly made subject." U.C.C. 5-116(c); N.Y. U.C.C.
Law 5-116(c). Refer also to notes 142-45 infra and accompanying text (noting that U.C.C.
Article 5 operates mainly as a compilation of default rules for LCs).
n38. See Grassi, supra note 5, at 104 (commenting that the UCP, which has "found general
acceptance in a wide section of the business community," is applicable to an LC only when
explicitly incorporated into the provisions of the LC); see also Int'l Chamber of Commerce,
UCP 500, supra note 29, art. 1 (stating that the UCP "shall apply to all Documentary
Credits ... where they are incorporated into the text of the credit"). These internationally
recognized banking principles offer guidance in the examination of documentary LCs. Id.
n39. But see Grassi, supra note 5, at 105 (explaining that because the provisions of the UCP
were not intended to create a comprehensive regulatory system for LCs, relevant national
law will undoubtedly be required to address unregulated issues). Interestingly, the United
States' specific regulations for LCs, embodied within Article 5 of the Uniform Commercial
Code, are unmatched by any nation. See id. (explaining that "the U.S. is the only country
with an extensive specific regulation [for LCs]").
n40. See Conley, supra note 32, at 977 (citing Rattner, supra note 22, at 466 for this
proposition).
n41. Id.
n42. Charles M. R. Vethan, The Sacred Cow of Equity and Strict Compliance in Letter of
Credit Law: Recent Trends and Projections, 6 Int'l Legal Persp. 45, 46 (1994).
n43. Refer to note 142 infra and accompanying text (describing New York as the most
significant LC jurisdiction in the United States).
n44. See Hanil Bank v. PT. Bank Negara Indon. (Persero), No. 96 CIV. 3201, 2000 WL
254007, at 5 (S.D.N.Y. Mar. 7, 2000) (concluding that a one letter difference in the
beneficiary's name was enough to justify the issuing bank's nonpayment). But see Int'l
Chamber of Commerce, UCP 500, supra note 29, art. 13(a).
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.
Id.
n45. . Int'l Chamber of Commerce, UCP 500, supra note 29, art. 13(a).
n46. See Hanil, 2000 WL 254007, at 3-5 (citing strict compliance cases from the 1970s,
1980s, and early 1990s).
n47. Id. at 1. It is interesting to note that "the court failed to specify the transaction the
letter of credit was intended to support." Conley, supra note 32, at 993 n.103.
n48. Hanil, 2000 WL 254007, at 1.
n49. Id.
n50. Prior to the filing of this suit, Hanil Bank merged with another Korean Bank, forming
Hanvit Bank. Id. at 1 n.1. Hanvit Bank elected to pursue Hanil's claims under Hanil's name.
Id.
n51. Id.; see also Conley, supra note 32, at 993 nn.105-06 (explaining that Hanil Bank took
on the role of negotiating bank after giving Sung Jun value for the LC and documents
required to secure payment).
n52. Hanil, 2000 WL 254007, at 1. The court did not consider the three additional
discrepancies cited by BNI because it determined that the misspelling discrepancy was
dispositive. Id. at 5. The three alleged discrepancies included the omission of a packing list,
the failure to state the export quality of the goods, and the failure to supply an "Ocean Bill
of Lading." Id. at 1.
n53. Id. at 2. Hanil sought damages in the amount of $ 157,493.00 plus interest to recover
the amount paid to Sung Jun. Id. Hanil filed suit in a New York state court in April 1996, but
BNI successfully removed the case to the U.S. District Court for the Southern District of New
York. Id.
n54. Id. at 1-2. The court articulated its belief that LC disputes are appropriate for summary
judgment, stating that ""although summary judgment is never lightly granted, letter of
credit disputes generally present legal issues, rather than questions of fact, and are thus
often appropriate for final adjudication upon submission of papers and affidavits.'" Id. at 2
(quoting E & H Partners v. Broadway Nat'l Bank, 39 F. Supp. 2d 275, 280 (S.D.N.Y. 1998)).
n55. Id. The UCP is an internationally recognized compilation of commercial LC practices. Id.
(citing Alaska Textile Co. v. Chase Manhattan Bank, N.A., 982 F.2d 813, 816 (2d Cir.
1992)).
n56. Id. at 2; see also Conley, supra note 32, at 994 n.111 (quoting N.Y. U.C.C. Law 5102(4) (1964), which states that Article 5 of the U.C.C. does not apply to an LC if "such
letter of credit ... is subject in whole or in part [to] the Uniform Customs and Practice for
Commercial Documentary Credits fixed by the Thirteenth or by any subsequent Congress
of the International Chamber of Commerce. (first alteration in original)). Refer to Part
III.D infra (explaining the interplay between U.C.C. Article 5 and the UCP).
n57. Hanil, 2000 WL 254007, at 3. The court stated that ""the essential requirements of a
letter of credit must be strictly complied with by the party entitled to draw against the letter
of credit, which means that the papers, documents and shipping description must be as
stated in the letter.'" Id. (alteration in original) (quoting Marino Indus. Corp. v. Chase
Manhattan Bank, N.A., 686 F.2d 112, 114 (2d Cir. 1982)).
n58. Id. (quoting Alaska Textile Co. v. Chase Manhattan Bank, N.A., 982 F.2d 813, 816 (2d
Cir. 1992)).
n59. Id. (alteration in the original) (quoting Beyene v. Irving Trust Co., 762 F.2d 4, 6 (2d
Cir. 1985)).
n60. Id. at 5.
n61. 762 F.2d 4 (2d Cir. 1985).
n62. Hanil, 2000 WL 254007, at 4 (citing Beyene, 762 F.2d at 6).
n63. Id. The court made a fine distinction between Sung "Jun" and Sung "Jin" and "Smith"
and "Smithh" using the Beyene rationale. Id.
n64. Id.
n65. Id. at 4-5.
n66. 983 F.2d 420 (2d Cir. 1993).
n67. Hanil, 2000 WL 254007, at 4 (alteration in original) (quoting Mut. Export, 983 F.2d at
423). The Mutual Export court emphasized its position by stating that ""it is more efficient
to require the beneficiary to conduct that review of the credit before the fact of performance
than after it, and the beneficiary that performs without seeing or examining the credit
should bear the costs.'" Mut. Export, 983 F.2d at 423 (quoting John F. Dolan, The Law of
Letters of Credit P 6.03, at 6-9 (2d ed. 1991)).
n68. Hanil, 2000 WL 254007, at 4-5.
n69. Conley, supra note 32, at 995 (citing Hanil, 2000 WL 254007, at 5). The court added
that BNI was not responsible for detecting the error because the issuing bank "looks solely
at the letter and the documentation the beneficiary presents to determine whether the
documentation meets the requirements in the letter." Hanil, 2000 WL 254007, at 5 (internal
quotation marks omitted) (quoting Marino Indus. Corp. v. Chase Manhattan Bank, N.A., 686
F.2d 112, 115 (2d Cir. 1982)).
n70. Hanil, 2000 WL 254007, at 5.
n71. 622 F. Supp. 6 (W.D. Okla. 1984).
n72. Hanil, 2000 WL 254007, at 5.
n73. Id. at 4-5.
n74. Id. at 6. The court also granted summary judgment in BNI's favor with respect to the
duty of good faith and fair dealing because the bank requested Kodeco to waive the
discrepancy. Id. at 5.
n75. See Ross P. Buckley, The 1993 Revision of the Uniform Customs and Practice for
Documentary Credits, 28 Geo. Wash. J. Int'l L. & Econ. 265, 266 (1995) ("One
commentator has estimated that some 95% of credits worldwide are issued subject to the
UCP.").
n76. See Int'l Chamber of Commerce, UCP 500, supra note 29, art. 13(a) (describing the
UCP's strict compliance standard).
n77. Boris Kozolchyk, Strict Compliance and the Reasonable Document Checker, 56 Brook.
L. Rev. 45, 48 (1990) [hereinafter Kozolchyk, Strict Compliance] (citing James E. Byrne, 3
Letter of Credit Update 7, 14 (1987)). Refer also to note 11 supra and accompanying text.
n78. . Int'l Chamber of Commerce, UCP 500, supra note 29, art. 14(c). Article 14(c)
provides that "if the Issuing Bank determines that the documents appear on their face not
to be in compliance with the terms and conditions of the Credit, it may in its sole judgment
approach the Applicant for a waiver of the discrepancy(ies)." Id.
n79. Buckley, supra note 75, at 281.
n80. Kozolchyk, Strict Compliance, supra note 77, at 48-49.
n81. Id. at 49 (discussing the increase of litigation and stating that "the combination of
spiraling costs and seemingly endless litigation cycles explains why a significant number of
American banks with considerable experience in the letter of credit business are now
abandoning it").
n82. Rattner, supra note 22, at 457-58 (describing the struggle courts face by commenting
that the "confusion which results from the use of current standards is all the more
exaggerated as letters of credit are increasingly used to meet the needs of financially
complex transactions").
n83. 762 F.2d 4, 6-7 (2d Cir. 1985).
n84. Id. at 5.
n85. Id. at 6. The court found that the LC specified that the bill of lading was to be issued to
"Mohammed Sofan," rather than "Mohammed Soran." Id.
n86. Regal, supra note 18, at 56.
n87. Id. at 55.
n88. See id. at 59 (observing that the substantial compliance standard is often referred to
as the "bifurcated standard").
n89. Rattner, supra note 22, at 469-70 (citing various court cases).
n90. See Arthur Fama, Jr., Note, Letters Of Credit: The Role of Issuer Discretion in
Determining Documentary Compliance, 53 Fordham L. Rev. 1519, 1528 (1985) (explaining
that substantial compliance protects beneficiaries from banks that attempt to escape
payment using highly technical arguments).
n91. 538 F. Supp. 1360 (N.D. Ill. 1981).
n92. Id. at 1362. The beneficiary presented documents referring to itself as "Crocker United
Factors, Inc.," and the LC required the name to be "Crocker Commercial Services." Id.
n93. Id. at 1362-65 (referring to substantial compliance as "reasonable compliance").
n94. Rattner, supra note 22, at 470-71 (exploring the importance of the independence
principle).
n95. Conley, supra note 32, at 990-91.
n96. Rattner, supra note 22, at 466; see also James G. Barnes et al., The ABCs of the UCC
Article 5: Letters of Credit 34 (1998) (explaining that strict compliance standards require
issuing banks to nitpick some things, such as commercial invoice descriptions of goods, and
ignore others, such as external documents not contained within the terms of the LC).
n97. Compare Hanil Bank v. PT. Bank Negara Indon. (Persero), No. 96 CIV. 3201, 2000 WL
254007 (S.D.N.Y. 2000) (finding that the incorrect naming of a company in an LC did not
meet strict compliance standard), with Voest-Alpine Trading USA Corp. v. Bank of China,
167 F. Supp. 2d 940 (S.D. Tex. 2000) (finding that the incorrect naming of a company in an
LC did meet the strict compliance standard), aff'd, 288 F.3d 262 (5th Cir. 2002).
n98. New Braunfels Nat'l Bank v. Odiorne, 780 S.W.2d 313, 314-15 (Tex. App. - Austin
1989, writ denied).
n99. Id.
n100. Id. at 316. The LC required that drafts drawn on it were to be marked "drawn under
New Braunfels National Bank Irrevocable Letter of Credit Number 86-122-S." Id. at 315.
The drafts tendered referred to "Irrevocable Letter of Credit No. 86-122-5." Id. at 316.
n101. Id. at 316. However, the court added, "that does not mean, however, that strict
compliance demands an oppressive perfectionism." Id. at 316-17.
n102. Id. at 317 (citing John F. Dolan, The Law of Letters of Credit P 6.03 (Supp. 1989)).
The court noted that ""it is not asking too much of the document examiner to exercise
discretion as a banker, even though it is too much to ask a document examiner to exercise
discretion on a commercial matter. Any reasonably prudent document examiner would
recognize immediately that the discrepancies in question are de minimis, and courts should
not hesitate to hold that they do not violate the strict-compliance standard.'" Id. (emphasis
in original) (quoting John F. Dolan, The Law of Letters of Credit P 6.04 (Supp. 1989)).
n103. Id. at 318.
n104. Id. at 317-18.
n105. Id. at 318.
n106. Kozolchyk, Strict Compliance, supra note 77, at 61; refer also to Part V infra
(exploring document checkers' responsibilities in evaluating documentary significance).
n107. Kozolchyk, Strict Compliance, supra note 77, at 65.
n108. See id. at 60-65 (discussing the debate as illustrated by case law).
n109. U.C.C. 5-108, cmt. 1 (2004).
n110. N.Y. U.C.C. Law 5-108 (McKinney 2001); refer also to note 143 infra (discussing New
York's adoption of Revised U.C.C. Article 5 after the Hanil decision).
n111. See U.C.C. 5-108, cmt. 1 (explaining the U.C.C.'s approach to strict compliance).
n112. Sandra Stern, The Impact of UCC Article 5, in What Lawyers Need to Know About the
UCC Article 5 - Letters of Credit 7, 9 (Sandra Stern ed., 2002).
n113. Id.
n114. See Joseph D. Gustavus, Letter of Credit Compliance Under Revised UCC Article 5 and
UCP 500, 114 Banking L.J. 55, 56-57 (1997) (observing that because the U.C.C. recognizes
local and regional practices, which vary based on location, courts often have to determine
what standard practices to use). Furthermore, because international banking practices
constantly evolve, it is only logical that interpretation of the strict compliance standard
includes practices not yet codified in the UCP. Id. at 62.
n115. 167 F. Supp. 2d 940 (S.D. Tex. 2000), aff'd, 288 F.3d 262 (5th Cir. 2002).
n116. Id. at 945-49. The court stated that "although the Court could [have] properly
concluded its analysis [with the preclusion issue], the Court ... [decided to] analyze the
discrepancies listed by the Bank of China." Id. at 945; see also James G. Barnes & James E.
Byrne, Letters of Credit: 2000 Cases, 56 Bus. Law. 1805, 1806 (2001) [hereinafter Barnes
& Byrne, 2000 Cases] (discussing the discrepancies in Voest-Alpine).
n117. Voest-Alpine, 167 F. Supp. 2d at 942.
n118. Id. at 942.
n119. Id. at 943.
n120. Id. at 946-47. The court noted
The mirror image approach is problematic because it absolves the bank reviewing the
documents of any responsibility to use common sense to determine if the documents, on
their face, are related to the transaction or even to review an entire document in the
context of the others presented to the bank. On the other hand, the ... [strict compliance
but reject only when discrepancies in the presented documents create risks for the issuer if
accepted] and ... [analyze the documents for risk to the applicant] approaches employ a
determination-of-harm standard that is too unwieldy.
Id. at 947.
n121. Id.
n122. Id. The court noted that this approach did not require the bank to evaluate risks or
examine more than the face of the documents. Id.
n123. See id. at 948 (distinguishing Beyene); see also Barnes & Byrne, 2000 Cases, supra
note 116, at 1808 (observing that "the leading figures in the U.S. LC community support the
Voest-Alpine approach and regard as too narrow the approach taken in Hanil and its
forerunner, Beyene v. Irving Trust Co.").
n124. Voest-Alpine, 167 F. Supp. 2d at 947.
n125. Id. at 948. The court added that "the UCP 500 does not impose a standard of exact
replication." Id.
n126. Id. at 949 (holding that "the document checker could have easily looked to any other
document to verify the letter of credit number, or looked to the balance of the information
within the document and found that the document as a whole bears an obvious relationship
to the transaction").
n127. Barnes & Byrne, 2000 Cases, supra note 116, at 1807.
n128. Refer to Part III.A-C supra (explaining that although the majority of U.S. courts apply
the strict compliance standard, the strictness of its application depends upon the
circumstances of the case). But see Grassi, supra note 5, at 127 (noting that within the
United States, a rigid application of the strict compliance standard has been utilized that
provides the LC market with expected efficiency).
n129. Although the U.C.C. Article 5 Official Comment endorses the Odiorne approach, New
York only adopted U.C.C. Revised Article 5 in November 2000, eight months after the
controversial Hanil decision. See N.Y. U.C.C. Law 5-108 (McKinney 2001).
n130. See, e.g., Voest-Alpine, 167 F. Supp. 2d at 949 (adopting a reasonable documentchecker standard); see also Barnes & Byrne, 2000 Cases, supra note 116, at 1808
(observing that LC users prefer a more practice-oriented approach with respect to
typographical errors).
n131. See Voest-Alpine, 167 F. Supp. 2d at 949 (reasoning that document checkers should
look beyond the face of a document to determine whether the LC as a whole is consistent
with the transaction before automatically refusing to honor the LC due to a minor
discrepancy).
n132. The central LC objective of facilitating international sales can be easily frustrated by
disputes arising out of differences in each country's approach to strict compliance. See
Grassi, supra note 5, at 127 (explaining the differences between American, Swiss, and
German approaches to the strict compliance standard and market efficiency).
n133. See U.C.C. 5-108(a) (2004) (providing that strict compliance is required for LCs);
N.Y. U.C.C. Law 5-108(a) (McKinney 2001) (same).
n134. See Int'l Chamber of Commerce, UCP 500, supra note 29, art. 13(a) (providing that
documents presented must comply on their face with the LC).
n135. Gustavus, supra note 114, at 55.
n136. See generally John F. Dolan, The Law of Letters of Credit (rev. ed. 1996) (providing a
comprehensive treatise on LC law for lawyers, bankers, courts, and others).
n137. See U.C.C. 5-108(e) (2004) (supplying the basic standard for LC review).
n138. Richard F. Dole, Jr., The Essence of a Letter of Credit Under Revised U.C.C. Article 5:
Permissible and Impermissible Nondocumentary Conditions Affecting Honor, 35 Hous. L.
Rev. 1079, 1107-08 (1998) (quoting U.C.C. 5-108(e)).
n139. See Int'l Chamber of Commerce, UCP 500, supra note 29, art. 13(a).
n140. Dole, supra note 138, at 1108.
n141. Conley, supra note 32, at 982 & n.31.
n142. Dole, supra note 138, at 1097; see also David V. Snyder, Private Lawmaking, 64 Ohio
St. L.J. 371, 392 (2003) (explaining that New York remains the foremost commercial center
for LCs).
n143. N.Y. U.C.C. Law 5-108 (McKinney 2001). It is noteworthy that New York had
previously adopted a nonuniform amendment to U.C.C. Article 5 that supplied LC issuers
with the ability to waive all of the Article 5 provisions by expressly incorporating the UCP
into an LC. See Dole, supra note 138, at 1097 (discussing the 1964 nonuniform
amendment, cited as N.Y. U.C.C. Law 5-102(4) (1964)). The nonuniform amendment was
statutorily repealed in November 2000, and New York adopted the Revised U.C.C. Article 5
eight months after the Hanil decision. 2000 N.Y. Laws c.471 1.
n144. See Snyder, supra note 142, at 392 (noting that Article 5 consists mainly of default
rules that can be avoided by the incorporation of the UCP into an LC).
n145. See N.Y. U.C.C. Law 5-116(c) (providing that "the liability of an issuer, nominated
person, or adviser is governed by any rules of custom or practice, such as the Uniform
Customs and Practice for Documentary Credits, to which the letter of credit, confirmation,
or other undertaking is expressly made subject"). Article 5 states that its effect may be
"varied by agreement or by a provision stated or incorporated by reference," except with
respect to seven of its provisions. U.C.C. 5-103 (2004); see also Dole, supra note 138, at
1097 (discussing the seven provisions that may not be waived).
n146. Dellas W. Lee, Letters of Credit: What Does Revised Article 5 Have to Offer to
Issuers, Applicants, and Beneficiaries?, 101 Com. L.J. 234, 240 (1996).
n147. N.Y. U.C.C. Law 5-108(a); Gustavus, supra note 114, at 55 (citing U.C.C. 5-108(a)
(1995)).
n148. N.Y. U.C.C. Law 5-108(e). Even after its repeal of the nonuniform amendment to the
1962 version of U.C.C. Article 5, New York did not fully adopt the Revised U.C.C. 5-108(e).
New York did not include the provision, stating, "Determination of the issuer's observance of
the standard practice is a matter of interpretation for the court. The court shall offer the
parties a reasonable opportunity to present evidence of the standard practice." Compare
U.C.C. 5-108(e), with N.Y. U.C.C. Law 5-108(e). See also U.C.C. 5-108(e), cmt. 1 (2003)
(discussing the provision New York omitted). Although the omission of these two sentences
may be of little value in interpreting strict compliance in New York following the Hanil
decision, the omission might possibly represent the New York legislature's unwillingness in
light of the Hanil decision to rest all of the power in the court's hands when interpreting
what constitutes standard banking practice, instead focusing attention on uniform banking
standards.
n149. See Gustavus, supra note 114, at 55-56 (citing U.C.C. 5-108(e) (1995)).
n150. N.Y. U.C.C. Law 5-108(e), cmt. 8.
n151. Gustavus, supra note 114, at 56.
n152. . Barnes et al., supra note 96, at 34, 37.
n153. See Gustavus, supra note 114, at 57-58 (stating that strict reliance does not require
"slavish conformity").
n154. U.C.C. 5-108, cmt. 1 (2004); refer also to Part III.B (explaining the Odiorne court's
reasoning that issuing banks are responsible for banking discrepancies but not commercial
documentary discrepancies when evaluating documents).
n155. Gustavus, supra note 114, at 58.
n156. New Braunfels Nat'l Bank v. Odiorne, 780 S.W.2d 313, 317-18 (Tex. App. - Austin
1989, writ denied) (differentiating between the discretion required with respect to
commercial matters and that required with respect to typographical errors).
n157. Gustavus, supra note 114, at 58.
n158. Id. at 59 (noting that issuing banks are accountable for usages commonly employed
within the banking industry and the document verification process). But see Kozolchyk,
Strict Compliance, supra note 77, at 63 (arguing that information contained within the
documents presented for inspection share both a banking nature and a commercial nature,
indicating that document checkers do have to evaluate commercial documents). Although
banks are not required to have knowledge of the industry underlying the contract between
the buyer and the seller, they are charged with differentiating between the commercial
documents described in LC transactions, regardless of their commercial impacts. Id. at 6365.
n159. Grassi, supra note 5, at 104.
n160. See Boris Kozolchyk, The "Best Practices" Approach to the Uniformity of
International Commercial Law: The UCP 500 and the NAFTA Implementation Experience,
13 Ariz. J. Int'l & Comp. L. 443, 461 (1996) [hereinafter Kozolchyk, Best Practices] (stating
that the UCP's perceived status as law derives from its overlap with current international
banking practices).
n161. Grassi, supra note 5, at 104; Conley, supra note 32, at 982-83 & 982 n.33.
n162. Gustavus, supra note 114, at 61 (citing U.C.C. 5-116(c) (1995)); see also Lee, supra
note 146, at 240.
n163. See Grassi, supra note 5, at 118 (observing that within the United States,
Switzerland, and Germany - all countries that utilize the UCP - strict compliance is the
general rule).
n164. . Int'l Chamber of Commerce, UCP 500, supra note 29, art. 13(a).
n165. See generally id. arts. 1-49.
n166. Gustavus, supra note 114, at 62 (internal quotations omitted).
n167. Id.
n168. Id. at 62-63; refer also to note 173 infra (offering several possible sources for
banking practices).
n169. Gustavus, supra note 114, at 62 (arguing that technological advances mandate that
the UCP's international standard banking practices embody uncodified practices).
n170. Buckley, supra note 75, at 279-80 (explaining that Article 13(a) is the only provision
that addresses documentary compliance standards and "the practice of bankers with
respect to the standard remains inadmissible").
n171. See Gustavus, supra note 114, at 62 (internal quotations omitted) (recognizing that
banking practices evolve over time).
n172. Id.
n173. See id. (stating that possible sources for banking practices interpretation include: UCP
500, ICC publications construing the UCP, ICC Commission on Banking Technique and
Practice decisions, national decisions and publications of ICC affiliates, and secondary
sources, including treatises and expert witness testimony). Further, "rigorous adherence to
an international standard and deference to expert witnesses in establishing that standard
will vary depending on the court." Id. at 63.
n174. . Int'l Chamber of Commerce, Documentary Credits: UCP 500 and 400 Compared 39
(Charles del Busto ed., 1994) [hereinafter Int'l Chamber of Commerce, UCP 500 and 400
Compared].
n175. Gustavus, supra note 114, at 64 (demonstrating that the absence of a functional
version of the strict compliance standard has resulted in both increased LC litigation and a
lack of confidence in LCs); refer also to text accompanying notes 241-47 infra (explaining
that judicial interpretations of strict compliance have yet to produce a functional standard
for evaluating documentary compliance).
n176. See Gustavus, supra note 114, at 64, 70-71 (advancing the hierarchy of authorities
referred to in note 173 supra as the foundation of the international standard banking
practice knowledge required of each document checker).
n177. Id. at 70-71.
n178. Refer to text accompanying notes 179-82 infra (exploring the potential role of expert
witnesses in LC dispute litigation).
n179. Gustavus, supra note 114, at 67 (explaining that allowing parties in LC litigation to
use experts to help identify international standard banking practice would lead courts
away from "reasonable, sound, or fair banking practice").
n180. See id. at 67-68 (indicating that courts used to follow a "gut feeling" as to whether or
not the expert "made sense" when faced with expert testimony); see also John F. Dolan,
The Law of Letters of Credit 22 (Supp. 1995).
n181. Gustavus, supra note 114, at 66-67 (citing James Byrne, UCP 500 Explored: The
Standard of Care in Documentary Examination - Standard Banking Practice, 7 Letter of
Credit Update 6, 12 (1991)).
n182. Id. at 67 (explaining the role experts play in LC litigation).
n183. Id. at 71. However, it remains noteworthy that New York's adoption of U.C.C. Article
5 does not include the court provision on international standard banking practices. Refer
to note 148 supra (comparing the U.C.C. and New York law).
n184. Refer to Part III.D supra (describing the U.C.C. and UCP standards for documentary
compliance).
n185. Gustavus, supra note 114, at 63, 71 (stating that UCP Article 13 addresses the
examination of documents (narrower documentary context), while U.C.C. 5-108(a)
evaluates the presentation of documents (broader presentation context)).
n186. Id. at 66.
n187. Id. at 71.
n188. Hanil Bank v. PT. Bank Negara Indon. (Persero), No. 96 CIV. 3201, 2000 WL 254007
(S.D.N.Y. Mar. 7, 2000).
n189. James E. Byrne, Litigation Digest, 4 Documentary Credit World 17, 19 (2000)
[hereinafter Byrne, Litigation Digest]; refer also to Part III.A supra (discussing Beyene's
interpretation of strict compliance).
n190. See Conley, supra note 32, at 999 (noting that courts should take the varying
significance of documents into account); Kozolchyk, Strict Compliance, supra note 77, at 61
(explaining that issuing banks must determine each document's significance prior to finding
a discrepancy).
n191. See Conley, supra note 32, at 999 (emphasizing the differences in exactitude
required in different documents); Int'l Chamber of Commerce, UCP 500, supra note 29, art.
37(c) ("The description of the goods in the commercial invoice must correspond with the
description in the Credit. In all other documents, the goods may be described in general
terms not inconsistent with the description of the goods in the Credit."); refer also to Part
IV.D infra (discussing the invoice and compliance issue in Hanil).
n192. Hanil, 2000 WL 254007, at 3-6 (finding for the bank because the documents were not
identical). But see Kozolchyk, Strict Compliance, supra note 77, at 53 (demonstrating that
while the mirror-image interpretation requires documents to be identical, the UCP embodies
a broader standard in which the documents cannot be inconsistent with one another); Int'l
Chamber of Commerce, UCP 500, supra note 29, art. 13(a) (stating the broader UCP
standard).
n193. Hanil, 2000 WL 254007, at 4-5.
n194. Id. at 4; refer also to Part IV.D infra (discussing the commercial invoice issue).
n195. Conley, supra note 32, at 999-1000 & 1000 n.161 (citing Kozolchyk, Strict
Compliance, supra note 77, at 50).
n196. Kozolchyk, Strict Compliance, supra note 77, at 53-54.
n197. Id. at 54.
n198. See Hanil, 2000 WL 254007, at 4-5 (holding that a misspelling discrepancy justified
BNI's rejection of the documents).
n199. Id. at 4 (following the reasoning developed in Beyene regarding obvious
typographical errors).
n200. See Conley, supra note 32, at 1000 (explaining that the approach adopted by the
Hanil court was hollow and offers little guidance to courts making documentary compliance
decisions in the future).
n201. Hanil, 2000 WL 254007, at 2-5 (finding that the LC incorporated the UCP into the LC's
provisions, but citing case law for all of its legal propositions).
n202. Refer to notes 179-83 supra and accompanying text (demonstrating that expert
testimony may be utilized to explain international standard banking practices).
n203. Hanil, 2000 WL 254007, at 1-6 (making no mention of the potentially matching
addresses). By failing to make any mention of this fact, the court ignored UCP Article 13(a)
entirely. See id. (making no mention of Article 13(a) either).
n204. See Byrne, Litigation Digest, supra note 189, at 19 (suggesting that "if the
documents all related to the LC and one another, bore the same address, related to the
same order, and were otherwise linked to the transaction as revealed in the LC[,] ... the
difference is an apparent typographical error and not a discrepancy").
n205. Id.
n206. Hanil, 2000 WL 254007, at 4-5 (relying on the misspelling of an obvious
typographical error when rendering its decision).
n207. See Voest-Alpine Trading USA Corp. v. Bank Of China, 167 F. Supp. 2d 940 (S.D.
Tex. 2000), aff'd, 288 F.3d 262 (5th Cir. 2002) (affirming the district court's approach);
refer also to Part III.C supra (exploring the Voest-Alpine interpretation of strict compliance).
n208. Refer to Part IV.A supra (analyzing the strict compliance interpretation employed by
the Hanil court).
n209. Refer to Part III.A supra (critiquing the rigid and formalistic approach undertaken by
Bayene in evaluating documentary compliance).
n210. Barnes & Byrne, 2000 Cases, supra note 116, at 1808.
n211. Hanil, 2000 WL 254007, at 1; Voest-Alpine, 167 F. Supp. 2d at 940.
n212. Refer to notes 120-22 supra (contrasting the courts' interpretations of strict
compliance).
n213. See Voest-Alpine, 167 F. Supp. 2d at 947 (discussing its common-sense, case-bycase approach).
n214. See id. (noting that the common-sense approach allows "minor deviations of a
typographical nature"); Barnes & Byrne, 2000 Cases, supra note 116, at 1808 (advocating
the common-sense approach).
n215. Barnes & Byrne, 2000 Cases, supra note 116, at 1808.
n216. Hanil, 2000 WL 254007, at 1.
n217. See Tosco Corp. v. FDIC, 723 F.2d 1242, 1247-48 (6th Cir. 1983) (finding that minor
deviations in the documents produced under the LC, including name inversions, were
insubstantial and did not justify document rejection).
n218. Voest-Alpine, 167 F. Supp. 2d at 947-48 (explaining that the discrepancy would have
justified a refusal to honor payment if the name inversion had signified a different corporate
entity).
n219. See Hanil, 2000 WL 254007, at 3-5 (focusing on the misspelling, not the context of
the misspelling). After the Hanil decision, commentators and the LC community alike have
urged the courts to adopt a more practice-oriented approach when addressing apparent
typographical errors. Barnes & Byrne, 2000 Cases, supra note 116, at 1808 (noting that
leading figures support the practical Voest-Alpine approach).
n220. Refer to text accompanying notes 191-212 supra (explaining the Hanil court's
insufficient interpretation of strict compliance).
n221. Refer to notes 198-20 supra and accompanying text.
n222. Refer to Part IV.A supra (exploring the Hanil court's misapplication of strict
compliance in evaluating documents presented).
n223. 983 F.2d 420, 420, 423-24 (2d Cir. 1993); see also Byrne, Litigation Digest, supra
note 189, at 18; Conley, supra note 32, at 1000.
n224. See Hanil, 2000 WL 254007, at 4-5 (citing Mut. Export, 983 F.2d 423); see also Mut.
Export, 983 F.2d at 423-24 (explaining that the beneficiary had no basis to object to the
issuing bank's refusal of the documents after an incorrect expiration date was included in
the LC and went undetected); Conley, supra note 32, at 1000 (describing the beneficiary's
duties under Hanil and Mutual Export).
n225. Mut. Export, 983 F.2d at 423 (citing John F. Dolan, The Law of Letters of Credit (2d
ed. 1991)). "It is more efficient to require the beneficiary to conduct that review of the
credit before the fact of performance than after it, and the beneficiary that performs without
seeing or examining the credit should bear the costs." John F. Dolan, The Law of Letters of
Credit P 6.03, at 6-10 (2d ed. 1991).
n226. Byrne, Litigation Digest, supra note 189, at 19.
n227. See Mut. Export, 983 F.2d at 423-24 (explaining that the LC no longer met its
commercial end because the beneficiary "failed to require that the expiration date be
changed or even to seek extension"); Byrne, Litigation Digest, supra note 189, at 18
(stating that the beneficiary must determine whether the LC meets the needs of the
transaction prior to performance).
n228. Hanil, 2000 WL 254007, at 1, 4-5.
n229. Byrne, Litigation Digest, supra note 189, at 19.
n230. Id.
n231. Conley, supra note 32, at 1001. Compare Hanil, 2000 WL 254007, at 1, 4-5
(analyzing the misspelled name and finding that the beneficiary had a duty to inspect the LC
for simple errors), with Matter of Coral Petroleum, Inc., 878 F.2d 830, 833-34 (5th Cir.
1989) (explaining that the beneficiary's duty to inspect the LC prior to performance is
particularly important when the mistake arises from technical or trade terms). "Jun" and
"Jin" should not be viewed by the court as either a technical or trade term. See Hanil, 2000
WL 254007, at 1, 4-5 (noting that it was just the name of the beneficiary that was
misspelled on the LC).
n232. Hanil, 2000 WL 254007, at 2; Conley, supra note 32, at 1001.
n233. Hanil, 2000 WL 254007, at 2-3. At the time of the decision, New York's nonuniform
amendment to Article 5 was still the law, and it stated that if the UCP was expressly
incorporated into the LC, the U.C.C. did not apply. Id. at 2; N.Y. U.C.C. Law 5-102(4)
(McKinney 1964); see also Dole, supra note 138, at 1097 (discussing New York law); refer
also to note 143 supra and accompanying text (stating that New York adopted Revised
Article 5 in November of 2000).
n234. Hanil, 2000 WL 254007, at 2 (explaining that the "L/C provides that it is governed by
the UCP and both parties agree that the provisions of the UCP govern the L/C in this case").
n235. See Byrne, Litigation Digest, supra note 189, at 19 (discussing the fact that the
misspelled name probably appeared on the commercial invoice).
n236. . Int'l Chamber of Commerce, UCP 500, supra note 29, art. 37(a)(i).
n237. Byrne, Litigation Digest, supra note 189, at 19.
n238. Id.; Barnes & Byrne, 2000 Cases, supra note 116, at 1808.
n239. Hanil, 2000 WL 254007, at 4. Although the court continually made reference to the
misspelled name as an obvious error, it failed to cite UCP Article 37 even once. Id. at 3-5;
Conley, supra note 32, at 1002 n.178.
n240. See Barnes & Byrne, 2000 Cases, supra note 116, at 1808 (explaining that if the
misspelled name was obviously a typographical error, then refusal to honor payment under
the LC would not be justifiable). However, the independence principle prohibits any
evaluation of extrinsic evidence if the error is not apparent from the face of the documents.
Id.
n241. See Brenntag Int'l Chems., Inc. v. Norddeutsche Landesbank GZ, No. 97 CIV. 2688,
1999 WL 1021121, at 1, 10 (S.D.N.Y. Nov. 8, 1999) (explaining that the UCP's primary
purpose "is to facilitate international trade by providing a uniform set of rules accepted
around the world").
n242. Refer to Part IV.A supra (analyzing the court's adherence to the mirror-image
interpretation of strict compliance).
n243. See Buckley, supra note 75, at 278 (describing the "mirror image" and "reasonable
deviations" approaches); Gustavus, supra note 114, at 63-64 (same).
n244. Refer to Part IV.A supra (exploring the Hanil court's preference for a nonfunctional
standard based on the provisions contained within the UCP).
n245. Buckley, supra note 75, at 278; Gustavus, supra note 114, at 63-64.
n246. Gustavus, supra note 114, at 64.
n247. Buckley, supra note 75, at 278; Gustavus, supra note 114, at 64.
n248. Gustavus, supra note 114, at 64.
n249. Buckley, supra note 75, at 278.
n250. . Int'l Chamber of Commerce, UCP 500 and 400 Compared, supra note 174, at 39.
n251. Id.
n252. See Kozolchyk, Best Practices, supra note 160, at 461 (praising the UCP for
prescribing conduct that is indistinguishable from international banking practice).
n253. Refer to Part IV.C supra (explaining the effects of the court's failure to consider
documentary compliance as interpreted by the UCP provisions in its final decision).
n254. Refer to note 165 supra and accompanying text (mentioning this omission).
n255. . Int'l Chamber of Commerce, UCP 500, supra note 29, art. 13.
n256. See James G. Barnes & James E. Byrne, Letters of Credit: 2002 Cases, 58 Bus. Law.
1605, 1606 (2003) (explaining that expert testimony should be considered on general
banking practices but not on the "understanding of the particular issuer, nominated bank, or
beneficiary").
n257. Barnes & Byrne, 2000 Cases, supra note 116, at 1808.
n258. Refer to Part IV.A supra (discussing Hanil's mirror-image approach to documentary
discrepancies).
n259. Refer to Part III.A supra (exploring Beyene's rigid mirror-image approach to the strict
compliance standard).
n260. Refer to Part III.C supra (analyzing Voest-Alpine's approach to strict compliance:
considering the documents as a whole).
n261. Barnes & Byrne, 2000 Cases, supra note 116, at 1808.
n262. Kozolchyk, Strict Compliance, supra note 77, at 72.
n263. Conley, supra note 32, at 1002-03.
n264. See Herbert V. Morais, The Quest for International Standards: Global Governance
vs. Sovereignty, 50 U. Kan. L. Rev. 779, 786-87 (2002) (calling for global governance);
Kozolchyk, Strict Compliance, supra note 77, at 78-80 (explaining that global financial
pressures on document verification necessitate a uniform reasonable document-checker
standard).
n265. See Ross P. Buckley & Xiang Gao, The Development of the Fraud Rule in Letter of
Credit Law: The Journey So Far and the Road Ahead, 23 U. Pa. J. Int'l Econ. L. 663, 701
(2002) (arguing that effective commercial laws should maximize certainty for the banking
community).
n266. See Conley, supra note 32, at 1003 (suggesting that looking at standard banking
practice would resolve predictability and fairness issues); Kozolchyk, Strict Compliance,
supra note 77, at 72 (describing the need for an "a priori standard"). The LC community
possesses a universal fear of victimization by court-imposed strict compliance standards.
Kozolchyk, Strict Compliance, supra note 77, at 48.
n267. Kozolchyk, Strict Compliance, supra note 77, at 72.
n268. Id.
n269. Conley, supra note 32, at 1003 & n.186 (explaining that the knowledge and
experience of a document checker, in addition to his time and skill spent checking
documents, are factors that are important to the standard's usefulness).
n270. Kozolchyk, Strict Compliance, supra note 77, at 72-75.
n271. Refer to Part III.B supra (analyzing the strict compliance approach adopted in
Odiorne with respect to discrepant documents).
n272. New Braunfels Nat'l Bank v. Odiorne, 780 S.W.2d 313, 317 (Tex. App. - Austin 1989,
writ denied). Although "banks deal in documents and not in goods," requiring document
checkers not only to distinguish between documents but also to detect the commercial
impact of documents upon an LC helps establish uniform verification techniques under the
reasonable document-checker standard. Kozolchyk, Strict Compliance, supra note 77, at 63.
Without a reasonable test based on standard banking practices, the Odiorne standard would
allow banks to act as "finders of reasons for non-payment" by claiming that its document
evaluator could not decipher the discrepancy's impact. See id. at 61-63.
n273. Kozolchyk, Strict Compliance, supra note 77, at 62-63. Differentiation between
documents may be based on their primary transactional function and on the LC. Id. at 63.
n274. Id. at 65. "The relevance of an apparent discrepancy, then, must be determined by
weighing its impact upon the intrinsic value of the document in question as well as upon the
companion documents." Id. at 64-65.
n275. Id. at 74.
n276. Conley, supra note 32, at 1004 & n.190 (explaining that bankers and banking lawyers
mold these practices over time).
n277. See generally Int'l Chamber of Commerce, International Standard Banking Practice
for the Examination of Documents Under Documentary Credits (ISBP) (2003) (describing
how the UCP should be applied on a day-to-day basis).
n278. Conley, supra note 32, at 1004-05. As industry-wide banking standards become more
available, judicial interpretations of strict compliance will benefit. Kozolchyk, Strict
Compliance, supra note 77, at 76.
n279. Refer to Part III.C supra (exploring Voest-Alpine's interpretation of strict compliance,
which utilizes a practice-oriented approach centered on standard banking practices).
n280. Conley, supra note 32, at 1005.
n281. Kozolchyk, Strict Compliance, supra note 77, at 78-79.
n282. Barnes & Byrne, 2000 Cases, supra note 116, at 1808.
n283. Conley, supra note 32, at 1007-08.
n284. Kozolchyk, Strict Compliance, supra note 77, at 79 (stating that the standard "enjoys
strong statutory, decisional and doctrinal support in the world's major trading centers").
n285. See id. at 72-73 (asserting that banking law favors a priori standards).
n286. See id. at 78 (explaining that while some consider document checkers "dumb high
school graduates," bank training and supervision ensure that these employees are
professionals who have specialized knowledge and who are capable of documentary
compliance review).
n287. Conley, supra note 32, at 1008.
n288. See Kozolchyk, Strict Compliance, supra note 77, at 72 (implying that an a priori
standard would increase certainty and reliability, which are benchmarks of efficiency).
n289. Conley, supra note 32, at 1008.
n290. Refer to notes 196-97 supra and accompanying text (explaining that issuing banks
can utilize the mirror-image interpretation of strict compliance in bad faith to refuse
payment).
n291. Kozolchyk, Strict Compliance, supra note 77, at 53-54.
n292. Refer to notes 248-51 supra and accompanying text (providing that LC litigation has
increased in the absence of a functional documentary compliance standard).
n293. Refer to Part IV.A supra (exploring the Hanil decision).
n294. Refer to Part III.D supra (explaining the practice-oriented approach of the UCP, which
Hanil did not adopt).
n295. Refer to Part III.C supra (summarizing the broad Voest-Alpine interpretation of strict
compliance in documentary evaluation).
n296. Refer to Part IV.A supra (criticizing the Hanil court's reliance on the Beyene mirrorimage interpretation).
n297. Conley, supra note 32, at 1008.
n298. Refer to Parts IV.E, V supra (explaining that the absence of a uniform functional
standard has increased LC litigation and eroded LC predictability).