A letter of credit (LC) is a powerful collection tool for creditors. An LC requires an issuing or confirming bank to make payments to an LC beneficiary after the beneficiary makes a valid draw on the LC. It provides the creditor/LC beneficiary a source of recovery in the event a customer fails to pay outstanding invoices—so long as the beneficiary satisfies the LC’s documentary requirements.
Courts generally apply the doctrine of “strict compliance” to LC draws. That is, a creditor seeking payment of an LC must strictly comply with the LC’s documentary requirements. For example, LCs frequently require the presentation of original documents, such as the LC and amendments, rather than copies of those documents. Courts have held that even the slightest deviation from a requirement to present original documents will fall short of “strict compliance” and enable the bank to dishonor the LC draw.
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