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Posted: March 24, 2015

First Department Analyzes Strict Compliance Requirement for Letters of Credit

On March 19, 2015, the First Department issued a decision in Ladenburg Thalmann & Co, Inc. v. Signature Bank, 2015 NY Slip Op. 02224, enforcing a demand for payment on a letter of credit notwithstanding the drawing party’s inability to present an original copy of one of the amendments to the letter of credit.

In Ladenburg Thalmann & Co, the plaintiff brought an action against the defendant bank for refusing to honor a letter of credit because the plaintiff presented¬†a “true copy” rather than an original of one of the six amendments to the letter. ¬†The trial court enforced the letter of credit despite the plaintiff’s inability to provide the originals. The First Department affirmed, explaining:

New York commercial law requires strict compliance with the terms of a letter of credit. UCC 5-108(a) states that an issuer shall honor a presentation that appears on its face to strictly comply with the terms and conditions of the letter of credit.

. . .

[T]he production of a true copy of amendment 2, instead of an original, was sufficient even to satisfy the strict compliance standard.

Strict compliance has been said to require that the papers, documents and shipping directions be followed as stated in the letter of credit, that no substitution and no equivalent, through interpretation or logic, will serve, and that there is no room for documents which are almost the same, or which will do just as well. Even slight discrepancies in compliance with the terms of a letter of credit have been held to justify refusal to pay.

The strict compliance rule finds justification in the bank’s role in the transaction being ministerial and to require it to determine the substantiality of discrepancies would be inconsistent with its function. The reason for the strict compliance rule is to protect the issuer from having to know the commercial impact of a discrepancy in the documents.

However, as this Court has recently observed, According to the official UCC commentary, the strict compliance standard does not require that the documents presented by the beneficiary be exact in every detail. The doctrine of strict compliance does not mean slavish conformity to the terms of the letter of credit and does not demand oppressive perfectionism.

. . .

In the matter before us, there is no possibility that the presentation of a true copy of amendment 2, instead of the original, could mislead defendant to its detriment. Indeed, this copy had been prepared by defendant itself, and was provided to plaintiff by defendant’s own attorney. Its accuracy was not in dispute, and there is no dispute regarding the content of the document, which merely extended the expiration date of amendment 2 and which had since been superseded by subsequent amendments. Since the submission of a true copy of amendment 2 would not compel any inquiry by the bank into the underlying transaction, the rationale for the strict compliance rule, to protect the issuer from having to know the commercial impact of a discrepancy in the documents.

(Internal quotations and citations omitted). This decision seems right from a common sense point of view, but it does make the strict compliance rule a bit fuzzy, leaving the bank to determine whether compliance was “strict” enough.

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