Standby letters of credit and the strict compliance standard: the case of the overstated sight draft.(credit column)

Publication: Business Credit

Publication Date: 01-OCT-04

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COPYRIGHT 2004 National Association of Credit Management

INTRODUCTION

A standby letter of credit is a security device where the bank or other entity issuing the letter of credit agrees to pay a letter of credit beneficiary that presents all of the documents conforming to the requirements of the letter of credit. A standby letter of credit usually requires the presentation of documents that evidence a default in the underlying transaction between the letter of credit beneficiary and typically a third party that arranges for the issuance of the letter of credit--the letter of credit applicant.

One of the central tenets of letter of credit law is the doctrine of strict compliance. It requires the letter of credit beneficiary to comply precisely with all of the requirements of the letter of credit. That means presenting all of the documents required by, and making sure the presented documents strictly comply with, the documentary requirements of the letter of credit. Documents that are nearly the same simply will not cut it!

The rigorous nature of the strict compliance standard is demonstrated in a recent court decision, National Union Fire Insurance Company of Pittsburgh PA v. Standard Federal Bank N.A., a case pending in the United States District Court for the Eastern District of Michigan. The letter of credit beneficiary hat] presented the issuing bank with a sight draft in excess of the amount available for payment under the letter of credit. The issuing bank dishonored the draft because it did not strictly comply with the requirements of the letter of credit. The beneficiary sued the issuing bank, claiming wrongful dishonor of the beneficiary's drawing under the letter of credit. The court rejected the...

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