Shining Light on the Fading Concept of Strict Compliance

A number of references to strict compliance have reappeared recently, which leads me to ponder whether some practitioners still believe this concept to be market practice.

In 2023, the ICC published a consolidated set of guidance papers intended to reinforce recommended principles and usages around UCP 600. Included within is the full text of the ICC paper, “Notes on the Principle of Strict Compliance”, originally released in 2016.

The concept of strict compliance in the context of examining documents under documentary credits has evolved and its application has become more nuanced. Let us look at strict compliance through certain lenses. 

UCP 600 and ISBP 821:

The Uniform Customs and Practice for Documentary Credits (UCP 600) and the International Standard Banking Practice for the Examination of Documents under Documentary Credits (ISBP 821) provide the framework for document examination. These standards, in particular ISBP, have softened the strict compliance principle to a large extent.

Objective Determination:

UCP 600 has made strict compliance an increasingly objective determination based on international standard banking practice. This means that document examiners are guided by clear standards rather than a rigid, literal interpretation.

Data Conflict:

UCP 600 sub-article 14(d) provides that data in documents need not be identical but must not conflict with each other or with the credit. This provision reduces the number of rejections by allowing non-identical data as long as there is no conflict.

Judgment and Common Sense:

The principle of strict compliance is not applied in an absolute sense. Bankers are expected to use judgment and common sense when examining documents. For example, ISBP 821 Paragraph A23 highlights that typing or spelling anomalies that do not affect the meaning of a word or sentence are not considered discrepancies.

Court Interpretations:

In recent decades, courts have shown a reluctance to take the principle of strict compliance to absurd lengths. If a divergence is of no possible importance, courts often find ways to disregard it or look for a way around it.

Customs and Practice:

The doctrine of strict compliance has evolved over time, and customs and practices have provided the necessary clarity. Future revisions of ISBP will continue to reflect these evolving customs and practices.

The principle of strict compliance in documentary credits originates from contract law and has been consistently applied by courts in legal disputes involving documentary credits. UCP intentionally does not provide a specific definition or detailed guidelines on strict compliance. This deliberate silence in the UCP leaves the interpretation and application of strict compliance to the discretion of courts in various jurisdictions.

As a result, the exact meaning and extent of strict compliance can vary based on court decisions in different legal systems. This reality allows for flexibility in interpretation, considering the specific circumstances of each case and the evolving practices in international trade. However, it also means that banks and other parties involved in credit transactions must be aware of relevant case law in addition to the UCP rules when dealing with compliance issues.

Banks are expected to follow international standard banking practices and use judgment when examining documents, rather than adhering to a strict, literal interpretation. This approach aims to balance the need for compliance with the practical realities of international trade.

In summary, strict compliance is no longer applied in an absolute sense; instead, it is interpreted within the context of UCP 600 and ISBP 821, allowing for a more objective and practical approach to document examination. Since 2003 when it was first formulated, ISBP has made a significant impact in lessening the exactitude of the doctrine of strict compliance. In fact, it is arguable whether or not strict compliance even exists any more. A review of the General Principles section of ISBP 821 highlights numerous aspects of the document examination process that reduce the need for a literal application.