The doctrine of strict compliance for letters of credit : has there been a significant improvement in its application?

Abstract

Letters of credit have played a vital role in financing international trade transactions since the setup of the General Agreement on Tariffs and Trade (GATT). The continued dependence on letters of credit in international trade has rendered uniformity in the use thereof, as paramount. Such uniformity is governed by the Uniform Customs and Practice for Documentary Credits (UCP), a set of rules developed by the International Chamber of Commerce, which has been amended several times since it first came into force in 1933. The current version thereof is the UCP 600. However, despite their global phenomena, letters of credit have caused international traders to experience a series of difficulties in complying with the high standards of documentary compliance required by banks. These intricate circumstances have led to the amendment of the doctrine of strict compliance as provided for in the UCP 600. With the omission of key words in the definition of the doctrine, it is argued that the standard of compliance has been relaxed and has paved the way for what is termed as “substantial compliance”. The possibility of international traders falling short in meeting the documentary compliance standards poses the risk of non-payment for the beneficiary (seller) which, in turn, could have catastrophic consequences for the international trade industry. From this, one can deduce that the governing rules were not set out clearly and thus left ample space for ambiguity. Courts have not assisted in this regard, as they too have created many controversial judicial decisions and standards that apply to similar situations. A little closer to home, South Africa has not enacted a specific piece of national legislation dealing with documentary letters of credit nor has it incorporated the Uniform Customs and Practice for Documentary Credits into its national legislation. The absence of legislation does, however, not leave this area of the law ungoverned. The legal relationships that come into existence are governed by the law of contract. Furthermore, a closer look into whether or not South African courts have experienced any commonly known difficulties as far as the interpretation of the doctrine of strict compliance is concerned. This is achieved by considering the recent developments found in the UCP and the application of the doctrine of strict compliance by the South African courts.