One of the central principles of LC law is the doctrine of strict compliance. A creditor seeking to draw on an LC must strictly comply with all of the LC’s documentary requirements. So, what exactly is considered “strict compliance?” As illustrated by two relatively recent state appellate court opinions—one out of Pennsylvania, in Windsor Twp. v. Tompkins Financial Corp. (September 2022) and another out of Massachusetts in ProQuip Ltd. v. Northmark Bank (August 2023)—courts tend to construe the strict compliance requirement quite ... well, strictly.
OVERVIEW OF LETTERS OF CREDIT
An LC arrangement typically involves three parties and three contracts:
- A contract between a creditor and debtor, with the creditor seeking an LC to backstop the debtor’s performance of that contract.
- A contract between the bank and the debtor, known as the LC applicant, who is arranging the issuance of an LC. This contract includes the terms governing the LC, the applicant’s obligation to reimburse the bank for the bank’s payments to the beneficiary upon the presentation of conforming documents, the collateral securing payment of the applicant’s reimbursement obligation to the bank and all fees and other charges owed to the bank in connection with the LC.
- The LC itself is the third contract where the bank is issuing an LC in favor of the creditor, known as the LC beneficiary. When a beneficiary submits all the documents required by the LC to the issuing bank, the bank’s only duty is to examine the documents and determine whether they comply with the LC’s documentary requirements. If the beneficiary has satisfied all of the LC’s documentary requirements, the bank must pay the amount requested by the beneficiary. If the bank rejects a beneficiary’s presentation of conforming documents, the bank is in breach of its obligation to pay on the LC and is subject to the beneficiary’s assertion of a wrongful dishonor claim.
