3.

LETTER OF CREDIT REQUIREMENTS HAVE BEEN

SUBSTANTIALLY COMPLIED BY RESPONDENT

Respondent contends non-compliance with the requirements of the Letter of Credit. 1 Such a
claim is opposed by Claimant. First, substantial compliance is a recognised principle of law
[3.1]. Second, Respondent has waived off any claim against Claimant with respect to letter of
credit [3.2]. Third, the principle of autonomy of credit is archaic [3.3]. Fourth, Claimant has
not committed fraud [3.4].

3.1. Substantial Compliance is a Recognised Principle of Law

It is submitted that substantial compliance with the terms of a letter of credit is a recognised
principle of law. Claimant has substantially complied with the terms of the letter of credit.
First, the contemporary jurisprudence supports the principle of substantial compliance
[3.1.1]. Second, in arguendo, strict compliance is the norm, Tribunal is not empowere to
adjudicate upon the issue of letters of credit [3.1.2]. Third, the rule of strict compliance goes
against business common sense [3.1.3]. Fourth, the bank must exercise discretion in the
present case [3.1.4].

3.1.1. Contemporary jurisprudence supports the principle of substantial compliance

It is submitted that contemporary jurisprudence supports the application of the principle of

substantial compliance. Claimant has substantially complied with terms of the letter of credit.
Therefore, Claimant is entitled to payment through the letter of credit.

The rule of strict compliance does not extend to minor variations that are not sufficiently
material to justify refusal of payment.2 Only if the discrepancy goes to the root of the letter of
credit, it must be rejected.3 A de minimis discrepancy does not threaten the merchantability of
the documents.4 When an error in the presentation of the documents was an obvious,
inconsequential error, it was held as a wrongful dishonour of the letter of credit. 5
Fundamental Breach must be interpreted narrowly.6 The breach should substantially deprive a
1
Moot Proposition, Reliefs Requested by the Parties.
2
Bank of Nova Scotia v. Angelica-Whitewear Ltd., [1987] 1 SCR 59.
3
Crocker Commercial Services, Inc. v. Countryside Bank, 538 F. Supp. 1360 (N.D. Ill. 1981).
4
Boris Kozolchyk, Is Present Letter of Credit Law up to Its Task, 8 GEO. Mason U. L. REV. 285 (1986).
5
China 4 June 1999 CIETAC Arbitration proceeding (Industrial raw material case).
6
FCF v. Adriafil, Case No. 4P. 75/2000.
party of its legitimate expectations. 7 A literalistic approach to letters of credit must be
avoided.8 Over the years, courts around the globe have lowered the standards required to
comply with the terms of a letter of credit.9

The principles enshrined under the Uniform Customs and Practice for Documentary Credits
(“UCP”) are the universally followed norm.10 UCP itself has provided for a margin error of
5% in the quantity of goods shipped.11 Furthermore, with every progressive publication, the
standard required for compliance with the terms of a letter of credit has been diluted. 12
Furthermore, even the International Standard Banking Practice, has over the years diluted its
standards for strict compliance.13

On 24th February, Claimant made a delivery to Respondent. 14 The delivery made was three
litres less than the contracted quantity.15 This discrepancy forms 0.003% of the quantity
which was to be delivered as per the contract. 16 Claimant presented relevant documents, and
obtained payment through the letter of credit.17

The discrepancy in question is less than 1% of the quantity contracted. Such a discrepancy is
inconsequential in nature and does not affect the merchantability of either the goods or the
documents. This discrepancy is not fundamental in nature. This discrepancy does not
fundamentally violate the parties’ expectations under the contract for the letter of credit.

Therefore, such a discrepancy cannot be grounds for denying a letter of credit. Consequently,
Claimant has substantially complied with the terms for the letter of credit. Thus, claimant is
entitled to the payment for the second shipment.

7
The United Nations Convention to Contracts for International Sales of Goods, art. 25, Jan. 1, 1988.
8
Fortis Bank SA/NV & Anor v Indian Overseas Bank [2011] EWCA Civ 58.
9
International Chamber of Commerce, Set of Guidance Papers on Recommended Principles and Usages around
the UCP 600, Document no. 470/1128, Mar. 3, 2023.
10
Alan Davidson, Commercial Laws in Conflict--An Application of the Autonomy Principle in Letters of Credit ,
6 INT'l. TRADE & Bus. L. ANN. 65 (2001).
11
Uniform Customs and Practice for Documentary Credits (UCP), ICC Publication No. 600, art. 30(b), Jul. 1,
2007.
12
Boris Kozolchyk, Strict Compliance and the Reasonable Document Checker, 56 BROOK. L. REV. 45 (1990).
13
International Chamber of Commerce, Notes on the Principles of Strict Compliance, Document no. 470/1261,
May 24, 2016.
14
Moot Proposition, Summary of Facts.
15
Id.
16
Moot Proposition, Annexure-I, Cl.4.
17
Moot Proposition, Summary of Facts.
 3.1.2. In arguendo, strict compliance is the norm, Tribunal is not empowered to adjudicate
upon the issue of letters of credit

It is further submitted, that in arguendo, strict and literal compliance is the norm, Respondent
does not have a cause of action against Claimant. Therefore, the Tribunal does not possess
the jurisdiction to hear this claim.

There can be three types of claims regarding documentary compliance in the case of letters of
credit.18 First, seller’s claim against the issuer for wrongful dishonour of draft. 19Second, the
buyer’s claim against the issuer for wrongful honour of the draft. 20 Third, issuer’s claim
against buyer for reimbursement.21 A letter of credit arrangement involves three parties and
two independent contracts.22 The principle of strict compliance and autonomy of the letter of
credit rest on the principle that banks deal in documents only, and not goods.23 The first
contract is the underlying contract between the letter of credit applicant and beneficiary.24
The second contract is the bank's agreement, usually with the letter of credit applicant. 25
Under a letter of credit contract, contractual privity is created between the issuing bank and
the seller and the issuing bank and the issuing bank and the buyer.26

In the present case, the payment is to be made through an irrevocable letter of credit issued by
a reputable bank acceptable to the seller. 27 Only disputes arising out of the sales of goods
contract are arbitrable before this Tribunal.28

If a strict compliance approach is taken, as per the privity principle, Respondent has a claim
against the issuing bank. Respondent does not have a claim against Claimant. Consequently,
the Tribunal would not be empowered to hear such a claim. The only circumstance under
which Respondent has a claim against Claimant is if a “substantial compliance” approach is
taken. This is because, such an approach would require the Tribunal to examine both the
contracts simultaneously.
18
Roger J. Gewolb, The Law Applicable to International Letters of Credit, 11 Vill. L. Rev. 742 (1966).
19
Id.
20
Id.
21
Id.
22
G. W. Bartholomew, Relations between Banker and Seller under Irrevocable Letters of Credit, 5 MCGILL L.
J. 89 (1959).
23
Moralice (London), Ltd. V. E. D. & F. Man. [1954] 2 Lloyd's Rep. 526.
24
Supra, Bartholomew
25
Id.
26
Menachem Mautner, Letter-of-Credit Fraud: Total Failure of Consideration, Substantial Performance and
the Negotiable Instrument Analogy, 18 LAW & POL'y INT'l Bus. 579 (1986).
27
Moot Proposition, Annexure-I, Cl.5.
28
Moot Proposition, Annexure-I, Cl.14.
Therefore, in arguendo, strict compliance is the norm, Respondent does not have a claim
against Claimant. Consequently, the Tribunal is in want of jurisdiction to adjudicate upon this
issue.

3.1.3. The rule of strict compliance goes against business common sense

It is furthered that deeming strict compliance to be applicable norm goes against “business
common sense.” Consequently, the Tribunal should avoid such a ruling

It has been held that while approaching the question of construction of a contract, the
perspective of a “rational businessman” must be kept in mind. 29 Approximately seventy
percent of drafts presented to the issuing banks are rejected on the grounds of strict
compliance.30 Empirical studies have confirmed that discrepancies are the norm and perfect
tenders are exceptions.31 Furthermore, incorrect descriptions of the goods- such as the
quantity, is one of the most common discrepancies present in the drafts issued by the seller. 32
At least 113 million pounds were lost in the UK alone in the year 2000 to correct the
documents.33 Spiralling costs and litigations revolving around wrongful dishonour of the draft
has led to banks abandoning the service of letters of credit altogether. 34 As a matter of fact,
UCP 600 succeeded the UCP 500 with the sole objective of relaxing the documentary
compliance requirements to reduce the rate of rejections.35 Furthermore, the strict compliance
approach has a chilling effect on the issuing banks where they have adopted highly defensive
practices.36 This goes against the principle that the letters of credits should be kept as free
from technicalities as possible.37

Furthermore, forcing parties to take alternative recourses to arbitration must be avoided,

Rational businessmen prefer arbitration because they want a quick and efficient resolution of disputes
while avoiding the risks associated with proceedings before a national court.38

29
Lukoil Asia Pacific Pte Limited v Ocean Tankers (Pte) Limited 2018 EWHC 163 (Comm).
30
Uniform Customs and Practice for Documentary Credits (UCP), ICC Publication No. 600, Introduction, Jul. 1,
2007.
31
Boris Kozolchyk, Strict Compliance and the Reasonable Document Checker, 56 BROOK. L. REV. 45 (1990)
32
SITPRO, Report on the Use of Export Letters of Credit, Apr. 11, 2003.
33
Id.
34
Supra, Kozolchyk (1986).
35
Uniform Customs and Practice for Documentary Credits (UCP), ICC Publication No. 600, Introduction, Jul. 1,
2007.
36
Supra, Kozolchyk (1990).
37
Donald H. Scott & Co. V. Barclays Bank, Ltd. (1922) 12 Ll.L.Rep. 502.
38
Premium Nafta Products Limited & others v Fili Shipping Company Limited [2007] UKHL 40. 
Claimant and Respondent are two commercial parties who have made a contract for export
and import of oil.39 Promptness and speedy resolution of disputes have been major concerns
of both the parties.40

Applying the strict compliance doctrine will further have a chilling effect on the banks
around the world. Furthermore, it would make the use of letter of credit even more difficult
due to the technicalities upheld. In the present case, it would unnecessarily delay payment for
a service already performed by Claimant. It would force Claimant to look for alternative
recourses to seek payment for goods delivered. This would result in unnecessary litigations.

Thus, ruling in favour of strict compliance goes against the principle of business common
sense. Consequently, the Tribunal should avoid such a conclusion.

3.1.4. The bank must exercise discretion in the present case

It is further submitted that the present set of facts demanded that the bank exercised
discretion.

Where the letter of credit is ambiguous, no breach of contract is committed if the terms were
construed using common sense.41 This principle saw application in the case of Davis O'Brien
Lumber Co. Ltd. v. Bank of Montreal.42 In this case the letter of credit mentioned that a
certain amount of lumber was to be delivered as per the sales of goods contract, and it should
be accompanied by shipping documents and the invoice. The quantity delivered was ten per
cent less that the quantity contracted for. The bank issued the letter of credit. The court held
that such a wording was ambiguous in nature, and the bank honoured the draft after a
reasonable construction of the same. Therefore, the honour was valid.

Furthermore, even the UCP 600 empowers banks to make discretion as to when the
documents go from consistent to inconsistent.43 As long as the discretion is exercised in a
rational manner, the honour of the draft is valid.

39
Moot Proposition, Summary of Facts
40
Moot Proposition, Annexure-3; Moot Proposition, Annexure-4
41
Commercial Banking Co of Sydney Ltd v Jabsard Pty Ltd, [1973] AC 279
42
Davis O'Brien Lumber Co. Ltd. v. Bank of Montreal, [1951] 3 DLR 536
43
Uniform Customs and Practice for Documentary Credits (UCP), ICC Publication No. 600, art. 14, Jul. 1,
2007.
In the present case, the contract says that a letter of credit shall be issued in favour of
Claimant for each shipment of crude oil as stated in the agreement.44

The wording of the contractual clause is similar to the wording of the letter of credit in the
Bank of Montreal case. There is no evidence to the contrary.

In case of such a vague wording of the letter of credit, bank’s discretion of issuing the letter
of credit becomes rational and legitimate. Thus, Respondent cannot contend the issuance of
such a letter of credit.

3.2. Respondent has waived of any claim against Claimant in respect of letter of
credit

It is further submitted that Respondent, albeit not explicitly, has waived off any claim of
wrongful honour of the letter of credit. First, there is an implied time-bar on bringing a claim
for wrongful honour of the letter of credit [3.2.1]. Second, Respondent has waived off any
discrepancies that existed [3.2.2].

3.2.1. Respondent has breached the implied limitation period to bring a claim for wrongful
honour of the letter of credit

It is submitted that Respondent’s claim for wrongful honour is time-barred.

When the buyer waited for a year to bring a claim for wrongful dishonour, it was held to be
time-barred.45 Similarly when a buyer waited for a few months before bringing a wrongful
honour claim, the same was held to be time-barred.46 In both of these cases the buyer was
aware of the discrepancies from the date of the approval of the letter of credit. The underlying
principle is that as per the UCP the issuing bank is supposed to give notice of any
discrepancies in a presentation within a reasonable time. 47 UCP 600 specifies such a time
limit to be five banking days.48 There is a high stress on using expeditious means of
communication to further speed up the process.49 While the buyer has no duty point out such

44
Moot Proposition, Annexure-1, Cl.5.
45
Petra International Banking Corp. v. First American Bank of Virginia, 758 F. Supp. 1120 (E.D. Va. 1991).
46
Linkers (Far East) Pte., Ltd. v. International Polymers, Inc., No. 94 Civ. 9226, 1996 WL 412854 (S.D.N.Y.
July 23, 1996).
47
Banker’s Trust Company Vs State Bank of India, (1991) 2 Lloyd’s Report 443, CA.
48
Uniform Customs and Practice for Documentary Credits (UCP), ICC Publication No. 600, art. 16, Jul. 1,
2007.
49
Id.
discrepancies, in a case buyer gets to know about them, he must raise a claim expeditiously. 50
When the documents are to be examined by a bank, there must not be a prolonged enquiry. 51
When there are few documents to examine, the reasonable time is less than seven days.52

In the present case, Respondent came to know about the discrepancy on 27 th March, 2022.53
The claim for wrongful honour has been raised on 25th November, 2022.54 The only
documents to be examined were the shipping documents and the invoices related to
shipment.55

Such a claim by Respondent falls within the factual matrix of Linkers.56Therefore, such a
claim is bound to be rejected following the ratio of the same. This counterclaim is an after-
thought. Furthermore, the documents to be examined were not bulky which would demand a
longer time period.

Considering the duties imposed by the UCP and international banking conventions, along
with the fact that Respondent was already aware of the discrepancies, Respondent’s counter-
claim of wrongful honour has an implied time-bar.

3.2.2. Respondent has waived off the discrepancies

It is further submitted that by the inaction of Respondent, Respondent has impliedly waived
off the discrepancies.

Inaction on the knowledge of discrepancies has an effect similar to waiving off the
discrepancies.57 Further discussed under issue 4.

In the present case, Respondent came to know about the discrepancy on 27 th March, 2022.58
The claim for wrongful honour has been raised on 25th November, 2022.59

50
Linkers (Far East) Pte., Ltd. v. International Polymers, Inc., No. 94 Civ. 9226, 1996 WL 412854 (S.D.N.Y.
July 23, 1996).
51
Hansson V. Hamel & Horley, Ltd. (1921) 6 Ll.L.Rep. 432.
52
DBJJJ Inc. v National City Bank, 123 Cal. App. 4th 530.
53
Moot Proposition, Summary of Facts.
54
Id.
55
Moot Proposition, Annexure-1, Cl.5.
56
Linkers (Far East) Pte., Ltd. v. International Polymers, Inc., No. 94 Civ. 9226, 1996 WL 412854 (S.D.N.Y.
July 23, 1996).
57
Id.
58
Moot Proposition, Summary of Facts.
59
Id.
 3.3. The principle of autonomy of letter of credit is archaic

It is furthered that the principle of the autonomy of the letter of credit is archaic and there is
growing jurisprudence to show the same. First, the principle of autonomy does not apply to
letters of credit [3.3.1]. Second, in arguendo, the principle of autonomy applies, the tribunal
does not possess jurisdiction to adjudicate upon the issue [3.3.2].

3.3.1. The principle of autonomy of letters of credit does not apply

It is submitted before the Tribunal that the principle of autonomy of letters of credit is
archaic. Consequently, the evolving jurisprudence suggests against the application of the
same.

The Tribunal in the Industrial Raw Materials Dispute Case60pierced the autonomy principle.
It held that as long as the discrepancy in the presentation does not affect the merchantability
of the goods in question, it cannot be used to block seller’s payment through the letter of
credit. Furthermore, the court has also held that pre-dating the bill of lading does not affect
the merchantability of goods, therefore, seller’s access to finances though letters of credit
cannot be withheld.61 As per the previous standards, such a discrepancy would not have been
tolerated.62 It is also worth mentioning that fraud is an exception to the rule of autonomy of
letters of credit.63

On 24th February, Claimant made a delivery to Respondent. 64 The delivery made was three
litres less than the contracted quantity.65 This discrepancy forms 0.003% of the quantity
which was to be delivered as per the contract. 66 Claimant presented relevant documents, and
obtained payment through the letter of credit.67

The discrepancy in question is less than 1% of the quantity contracted. Such a discrepancy is
inconsequential in nature and does not affect the merchantability of either the goods or the
documents. Furthermore, if Respondent claims fraud on the side of Claimant, the Tribunal

60
China 4 June 1999 CIETAC Arbitration proceeding (Industrial raw material case).
61
United City Merchants (Investments) Ltd. v. Royal Bank of Canada, [1982] 2 Lloyd's Rep. 1.
62
Supra, Kozolchyk (1990).
63
R D Harbottle (Mercantile) Ltd. v. National Westminister Bank Ltd., 2 All E.R. 862, 870 (Q.B. 1977).
64
Moot Proposition, Summary of Facts.
65
Id.
66
Moot Proposition, Annexure-I, Cl.4.
67
Moot Proposition, Summary of Facts.
will have to apply the exception to the principle of autonomy. In such a case, a case for de
minimis exemption can be made out.

3.3.2. In arguendo, doctrine of autonomy is the norm, Tribunal is not empowered to

adjudicate upon the issue of letters of credit

It is further submitted, that in arguendo, strict and literal compliance is the norm, Respondent
does not have a cause of action against Claimant. Therefore, the Tribunal does not possess
the jurisdiction to hear this claim.

As discussed under issue 3.1.2

Therefore, in arguendo, principle of autonomy of letters of credit is the norm, Respondent

does not have a claim against Claimant. Consequently, the Tribunal is in want of jurisdiction
to adjudicate upon this issue.

3.4. Claimant has not committed fraud

It is also submitted that Claimant has not committed fraud, consequently, no such claim can
be made out.

A mere allegation of fraud will not stop the operation of the letter of credit. 68 It must be
supplemented with strong documents coming from the buyer. 69 It is only under exceptional
circumstances that the courts will interfere with the irrevocable obligations assumed by a
bank.70 As per UNCITRAL, the fraud must be clear and manifest. 71 The same is reiterated by
English law as well.72 Furthermore, the fraud claimed must be material to the value of
goods.73 As per English law, the crime of fraudulent misrepresentation is committed when a
person dishonestly makes a false representation to make a gain for himself or cause loss to
another.74

In the present facts, there is no evidence of Claimant submitting any forged documents or
making a fraudulent misrepresentation.

68
Themehelp v West, [1995] 3 WLR 751.
69
Id.
70
R D Harbottle (Mercantile) Ltd. v. National Westminister Bank Ltd., 2 All E.R. 862, 870 (Q.B. 1977).
71
United Nations Commission on International Trade Law, a Uniform Law on International Guarantees, art.19,
1996
72
Edward Owen Engineering Ltd v Barclays Bank International Ltd. and Another [1978] All ER 986.
73
 United Trading Corp SA v Allied Arab Bank Ltd, [1985] 2 Lloyd's Rep. 554.
74
Fraud Act, 2006 c 35, sec. 2
An accusation of fraud cannot be made merely on assumption. It must be supplemented by
documentary evidence. Such a claim would not block Claimant’s access to the letter of credit.

Therefore, the essentials of fraud have not been met.