Introduction
This advice will determine whether an issuing bank, Iran Bank, can reject documents presented under a letter of credit after a delay of one month, during which it took actions inconsistent with rejection. The core legal principles governing this scenario are the doctrine of strict compliance, which gives a bank the right to reject non-conforming documents, and the doctrines of waiver and estoppel, which may prevent a bank from exercising that right. This analysis will argue that although the documents were initially discrepant, Iran Bank’s subsequent conduct and unreasonable delay mean it has lost its right to reject them.
The Initial Right to Reject: The Doctrine of Strict Compliance
A fundamental principle of the law governing letters of credit is that the documents presented to the bank must strictly comply with the requirements of the credit. Banks deal in documents, not goods, and are not concerned with the underlying sale contract. This is known as the autonomy principle. If the documents tendered by the beneficiary (the seller) do not conform exactly to the terms stipulated in the letter of credit, the bank is entitled to reject them and refuse payment. The House of Lords in Equitable Trust Co of New York v Dawson Partners Ltd (1927) confirmed that "there is no room for documents which are almost the same, or which will do just as well" (p. 49).
In this case, the credit required a certificate from the US Government stating the trucks were "new". The seller, Barners, presented a certificate describing them as "new – good" and an invoice stating they were in "new condition". While "new condition" is arguably the same as "new", the phrase "new – good" on the government certificate introduces an ambiguity. A bank is entitled to refuse documents that are not clear on their face (Schmitthoff, 2012). As seen in J H Rayner & Co Ltd v Hambro’s Bank Ltd (1943), where a bank was entitled to reject documents for "machine-shelled groundnut kernels" instead of the required "Coromandel groundnuts", even minor linguistic differences can justify rejection. Therefore, the documents were non-compliant, and Iran Bank initially had a clear right to reject them upon presentation from Barners.
The Loss of the Right to Reject: Delay, Waiver and Estoppel
The right to reject non-compliant documents is not indefinite. An issuing bank has a duty to examine the documents and decide whether to accept or reject them within a reasonable time. If it decides to reject, it must inform the presenting bank of the discrepancies without delay. Failure to do so may preclude the bank from later claiming the documents were non-compliant.
In this scenario, Iran Bank’s conduct after receiving the documents is crucial. Firstly, while it informed Barners that the documents were "faulty", it did not reject them. This created ambiguity. Secondly, it delayed for one month before formally rejecting the documents. Such a long delay is commercially unacceptable and far exceeds what would be considered a "reasonable time" at common law. For instance, in Bankers Trust Co v State Bank of India [1991], a delay of eight days was considered too long. The one-month delay by Iran Bank is therefore clearly unreasonable and would, on its own, likely prevent rejection.
Most significantly, Iran Bank took positive steps inconsistent with an intention to reject the documents. It specifically authorised Barners to increase the credit. This action strongly implies an acceptance of the transaction and a waiver of any discrepancies in the original set of documents. A waiver occurs when a party, with full knowledge of its rights, chooses to abandon them. By authorising an increase in the credit, Iran Bank acted as if the transaction was proceeding, thereby waiving its right to reject the initial documents.
Furthermore, the doctrine of estoppel would prevent Iran Bank from going back on the impression it gave. Barners paid the sellers and passed the documents to Iran Bank expecting reimbursement. Iran Bank’s delay and its instruction to increase the credit would have led Barners to believe that the documents had been accepted and that reimbursement would follow. To allow Iran Bank to reject the documents now would be inequitable, as Barners has relied on this representation to its detriment (by not being able to recover the funds from the seller sooner). The combination of unreasonable delay and positive acts of affirmation creates a clear case of waiver or estoppel against Iran Bank (Goode, 2016).
Conclusion
In conclusion, while the documents presented by Barners were discrepant under the doctrine of strict compliance, giving Iran Bank an initial right to reject them, this right was subsequently lost. Iran Bank failed to reject the documents within a reasonable time. The one-month delay was excessive and prejudicial. More importantly, the bank’s positive action in authorising an increase to the credit constituted a clear waiver of the discrepancies. Therefore, Iran Bank is estopped from rejecting the documents at this late stage and is obliged to honour the credit and provide reimbursement to Barners.
References
- Goode, R. (2016) Goode on Commercial Law. 5th edn. Penguin.
- Schmitthoff, C.M. (2012) Schmitthoff's Export Trade: The Law and Practice of International Trade. 12th edn. Sweet & Maxwell.
- Bankers Trust Co v State Bank of India [1991] 2 Lloyd's Rep 443.
- Equitable Trust Co of New York v Dawson Partners Ltd (1927) 27 Ll L Rep 49.
- J H Rayner & Co Ltd v Hambro’s Bank Ltd [1943] KB 37.
