Question 1

 

The doctrine of strict compliance is best articulated by Lord Summer in
Equitable Trust v Dawson Partners1
wherein his Lordship stated:

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“It is both common ground
and common sense that in such a transaction the accepting bank can only claim
indemnity if the conditions on which it is authorized to accept are in the
matter of the accompanying documents strictly observed. There is no room for
documents which are almost the same, or which will do just as well. Business
could not proceed securely on any other lines”.

The implication of this statement is that every single party to a
letter of credit transaction is required to tender strictly complying documents
in order to be entitled to receive payment. It is for the bank to check that
all documents are in strict compliance. The purpose of this strict compliance
rule is mainly to protect the customer from a beneficiary who may be concealing
non-performance or fraud in the transaction. On the face of it the bank has no
discretion in reviewing the documents and must refuse payment if there are
minor discrepancies. For example, if a certificate signed by
experts is required, a certificate signed by a single expert is not in strict
compliance, as was the case in Equitable
Trust v Dawson Partners.2

 

In Moralice v. E.D. and F3
the doctrine of strict compliance was reaffirmed. It was specified that the
maxim “de minimis non curat lex” (i.e., the rule of insignificance) did not
apply and the bank was entitled to reject the goods. The discrepancy in this
case was between the quantity of shipped goods required by the letter of credit
and the goods that form the documents which had actually been shipped. The
difference was equal to 0.06%.

 

The Bank has the right to refuse documents that do not comply with the
particulars specified in the Letter of Credit, it does not need to consider the
value of the documents or their legal significance.4
Mackinnon LJ stated in JH Rayner & Co Ltd v Hambro’s Bank Ltd,5
that a banker cannot be expected to have knowledge of the customs and customary
terms of everyone of the thousands of trades for whose dealings he may issue
letters of credit. Thus, the bank will have to pay provided the conditions
specified in the letter of credit are met. Devlin J highlighted this in Midland Bank Ltd v Seymour6 when he said:

“..it is not for the bank to reason why..”

It would be easy to jump to the conclusion that doctrine of strict
compliance, and the principle of law “de minimis non
curat lex” was absolute. Soproma
S.p.a. v Marine and Animal By-Products7 highlights the fact that
the courts are open to some relaxation of the principal of strict compliance. McNair
J held in that case that the description of the goods in the invoices was
accurate and the bare statement in the bill of lading was adequate (despite the
conflated reference to fish meal instead of fish full meal) but that the
discrepancies in protein count (“67% minimum” and “protein 69.7%”) in both
quality and analysis certificates rendered them invalid.8

 

Lord Diplock in Gian
Singh v Banque9 made reference to Lord Summer’s dictum in Equitable Trust v Dawson Partners and stated
that it had:-

“never
been questioned or improved upon”

and also stated

“The relevance of minor variations … depends on whether they are
sufficiently material to disentitle the issuing bank from saying that in
accepting the certificate it did as it was told.”

This would suggest that the rule of strict
compliance did not cover minor discrepancies which were insufficiently material
to justify a refusal of payment.

 

It would appear that the increasing complexity of
trade documentation10 and governmental requirements is
putting pressure on the doctrine of strict compliance as outlined by Lord
Summer in 1926 and that courts appear to be willing to explore the extent to
which strict compliance should be enforced.

 

The implementation of UCP 600 helps to address a number of issues that
arise in international trade and gives significant guidance on the Standards
for Examination of Documents11.
UCP 600 applies a more relaxed approach to the strict compliance rule.

 

Article 14.d provides that data in documents need not be identical however it must not
conflict:-

“data in a document, when read in
context with the credit, the document itself and international standard banking
practice, need not be identical to, but must not conflict with, data in that
document, any other stipulated document or the credit”

Article 30.b provides for
certain discrepancies in credit amount, weight and value of the goods:-

 “a tolerance not to exceed 5% more or 5% less
than the quantity of the goods is allowed …”

Article 14.e12 and
Article 14.f13
provide that the description of the goods, services or performance in other
documents may in general terms, be not conflicting with their description in
the credit and that banks will accept the document as presented if its content
appears to fulfil the function of the required document. It should be noted
that both these articles do not apply to “commercial invoice”.

 

The reference to the “commercial invoice” in Article 14.e
& 18.c14
combined highlight a critical difference in the type of document that the
relaxation in the doctrine of strict compliance applies to. It
clearly indicates that strict compliance applies to the “commercial invoice”.

 

Gore J explored this in Bulgrains & Co Limited v Shinhan Bank.15 One of the issues was if the addition of the ampersand between “Bulgrains” and “Co Limited” on
the commercial invoice which did not appear on the letter of credit, was a
material discrepancy.
Gore J16 stated:-

“…that there was a discrepancy as to name that was not clearly and
demonstrably simply a typographical error and was material, ……… gave the
Defendant the right to reject the documents.”

What is of particular interest in this case was that Gore J considered the fact that
the letter of credit was transmitted by SWIFT and due to the limits of
technology the ampersands cannot be transmitted by the
SWIFT system17.

 

To support this statement Gore J made reference to United
Bank Ltd v Banque National de Paris18 where
the court held that the difference between the names “Pan Associated Ltd” and “Pan Associated Pte Ltd” was grounds to
reject the documents. Gore J went on to state:-

“…was whether the discrepancy as to description of the goods in the
invoice was cured by the fact that a compliant description was given in another
presented document, namely the quality and quantity certificate ….. I am
satisfied that that is not sufficient, because art 18(c) of the UCP is clear
and unequivocal and states in terms “The description of the goods, services or
performance in a commercial invoice must correspond with that appearing in the
credit.”

It is clear for this recent case that the courts are happy to implement
the doctrine of strict compliance to certain specified
documents in UCP 600, while allowing banks to exercise judgement as to whether other
documents comply in commercial terms.

 

 

Question 2

 

Part (i)

 

Fili Shipping v
Nafta relates to a charterparty containing a “Law and Litigation”
clause which provided that “any dispute arising under this charter shall be
decided by the English courts”, and “either party may…..elect to have any such
dispute referred…..to arbitration in London.”19
The claimants wished to rescind the contract on the basis that it had been
obtained by bribery. The case was argued on two key points.

1.      
“whether, as a matter of construction, the
arbitration clause is apt to cover the question of whether the contract was
procured by bribery”20

2.      
“whether it is possible for a party to be bound
by submission to arbitration when he alleges that, but for the bribery, he
would never have entered into the contract containing the arbitration clause”21

Morison J took a
traditional approach during the initial case22
quoting the grammatical approach of Nourse LJ in Fillite Runcorn v Aqua Lift,23
that disputes arising “out of” a contract were to be referred to arbitration
was regarded as a wider agreement than those disputes which merely arose
“under” a contract. Morison J held as a matter of construction of the
arbitration clause that the word “under” was not wide enough to arbitrate the
bribery claims brought by the charterers. Morison J went on to state in a
highly criticised dicta:-

“Although the modern trend is to
treat the arbitrators as having power to decide for themselves their own
jurisdiction (Kompetenz-Kompetenz) English Law gives the Courts the ultimate
right to determine such issues.”24

In the subsequent
appeals Longmore LJ25
disapproved of this dicta in the strongest possible terms and was supported by Lord
Hoffmann.26

 

The case of Fili Shipping
v Nafta27
fundamentally changed the application of case law as it applied to the law of
arbitration. The Lordships were referred to cases in which various constructions
of arbitration clauses were considered.  Lord
Hoffmann28
stated:

“I do not propose to
analyse these and other such cases any further because in my opinion the
distinctions which they make reflect no credit upon English commercial law.”

Lord Hoffmann applauded Longmore LJ29
view on arbitration clauses stating:

“….that the time has come to draw
a line under the authorities to date and make a fresh start. I think that a
fresh start is justified by the developments which have occurred in this branch
of the law in recent years” 30

 

Construction of an Arbitration Clause

This “fresh start” as
outlined by Longmore LJ is evident in Lord Hoffmann
approach to the question of construction. He was in “no doubt” that the purpose
of the arbitration clause, is to have all related
disputes decided by the same tribunal which
the parties have chosen and not, unless clear wording showed otherwise, to excluded
some types of disputes from the arbitrator’s
jurisdiction.31
Lord Hope fully embraced this position stating that:-

“the proposition that any jurisdiction or arbitration clause…. should
be liberally construed promotes legal certainty”32
and “This approach to the issue of construction is now firmly embedded as part
of the law of international commerce”33

Lord Hope also made an interesting point relating to how
businessmen would view an arbitration clause:-

“It is the kind of clause to which ordinary businessmen readily give
their agreement so long as its general meaning is clear. They are unlikely to
trouble themselves too much about its precise language”

The abundance of case
law on the distinction between “under” and “out of” prior to the Fili Shipping v Nafta case
can lead to confusion.
What is clear is that this issue has been resolved, and jurisdiction or arbitration clauses should be liberally construed.

 

Separability

 

Morison J held that no
arbitration could be commenced under the arbitration agreement if the principal
or “matrix” contract was found to have been procured by bribery.34
He used Logicrose v Southend United FC,35
in which it was held that a transaction as a result of bribery could be
rescinded by the innocent party, as the authority for his decision.

 

Longmore LJ expressly
rejected Morison J’s reliance on the Logicrose case in the context of an
arbitration agreement stating:-

“that is no argument for saying
that a separable arbitration clause cannot be invoked for the purpose of
resolving the issue whether bribery occurred. In this connection an allegation
of bribery is (and should be) no different from the allegation of initial
illegality in Harbour v Kansa”36

he went on to state:-

“if arbitrators can decide whether
a contract is void for initial illegality, there is no reason why they should
not decide whether a contract has been procured by bribery…” 37

Lord Hoffmann38
held that this had been “put beyond doubt” by the principle of separability in
the

Arbitration Act 1996.39
Lord Hoffmann made it very clear that the arbitration agreement must be treated
as a “distinct agreement” and can be void only on grounds which
relate directly to the arbitration agreement. It is possible that the reason
why the main agreement is invalid is identical to reason why the arbitration
agreement is invalid,40
such as:-

a)      
The signature was forged on the same document
containing both agreements.

b)     
The signatory was not authorised to sign the
document.

In these examples it
is the validity of the arbitration agreement that is at question in addition to
the validity of the main agreement for exactly the same reasons. Lord Hope agreed with Lord Hoffmann and added

“Issues as to whether the entire
agreement was procured by impersonation or by forgery, for example, are
unlikely to be severable from the arbitration clause.”41
and later “The doctrine of separability requires direct
impeachment of the arbitration agreement before it can be set aside.”42

Part (ii)

 

(a).   The construction of the arbitration clause
and the issues surrounding bribery in this question are similar to the issues in
Fili Shipping v Nafta discussed
above.

 

The first hurdle is to establish if there is a valid
arbitration agreement. The arbitration clause was part of the agreement. It
does not appear it was incorporated as a result of bribery, which would be
grounds to rescind the agreement as in Logicrose v Southend
United FC.43 The
bribery relates solely to the main contract. Also not at issue are any claims
that the agreement was forged or the signatory was not authorised to sign the
document which were specifically highlighted in Fili Shipping v Nafta44  by Lord Hoffmann and Lord Hope, as grounds to void
the arbitration agreement. Separability45
of arbitration agreement from any other agreement was “put beyond doubt” by Lord
Hoffmann46
therefore there is a valid arbitration agreement.

 

The second hurdle is, can the arbitrator claim jurisdiction in cases
relating to bribery. 
This subject was dealt with in Fiona
Trust v Privalov where Longmore LJ held that
there was no reason that an arbitration cannot resolve whether bribery occurred.47
He went on to clarify that if arbitrators can decide whether a contract is void
for initial illegality, there is no reason why they should not decide whether a
contract has been procured by bribery.48
Lord Hoffmann49
fully supported this view on appeal.

 

Therefore an arbitration tribunal will hear this case.

 

(b).         As outline in Part (ii) (a), if the arbitration clause was
incorporated as a direct result of bribery, this is grounds to rescind the
arbitration agreement. As Lord Hope indicated in Fili Shipping v Nafta,50 to
set aside separability requires direct impeachment of the arbitration agreement
which would be the case here.

 

Therefore In this example the court would hear the case.

1 Equitable Trust Co of New York v Dawson
Partners Ltd (1926) 27 Ll LR 49 wherein his Lordship stated at page 52:

2 Ibid

3 Moralice (London) Ltd
v. E.D. and F Man 1954 2 Lloyd’s Rep 526

4 Gian Singh & Co Ltd v
Banque De L’Indochine 1974 2
All ER 754 at 758

5 JH Rayner
& Co Ltd v Hambro’s Bank Ltd 1943 1 KB 37 (CA).” It would be quite impossible for
business to be carried on, and for bankers to be in any way protected in such
matters, if it were said that they must be affected by a knowledge of all the
details of the way in which particular traders carry on their business.”

6 Midland Bank Ltd v Seymour 1955 2 Lloyd’s
Rep. 147 at 151

7 Soproma S.p.a. v. Marine and Animal By-Products
Corporation 1966 1 Lloyd’s Rep. 367, 390

8 Bridge M, “The Sale of Goods”, 1998 Oxford University
Press, page 243

9 Gian
Singh & Co Ltd v Banque De L’Indochine 1974 2 All ER 754 at 759

10 Banker’s Trust v State Bank of India 1991
2 Lloyd’s Rep 443. In this case there were over 900 documents presented against
a letter of credit.

11 UCP 600 Article 14.

12 UCP 600
Article 14.e: ” in documents other than the commercial invoice, the description
of the goods, services or performance, if stated, may be in genera l terms not
conflicting with their description in the credit ”

13 UCP 600
Article 14.f: “If a credit requires presentation of a document other than a
transport document, insurance document or commercial invoice, without
stipulating by whom the document is to be issued or its data content, banks
will accept the document as presented if its content appears to fulfil the
function of the required document and otherwise complies with sub-article 14(d).”

14 UCP 600
Article 18.c ” the description of the goods, services or performance in a
commercial invoice must correspond with that appearing in the credit ”

15 Bulgrains & Co Limited v. Shinhan Bank
2013 EWHC 2498

16 Ibid at 24

17 Ibid at 22

18 United Bank Ltd v Banque National de Paris
1992 2 SLR 64

19 Fili Shipping Co Ltd v Premium Nafta
Products Ltd (on appeal from Fiona Trust & Holding Corporation v Privalov)
2007 UKHL 40

20 Ibid at 2

21 Ibid at 2

22 Fiona Trust & Holding Corporation v
Privalov
2006 EWHC 2583, 2007 1 All ER (Comm) 891

23 Fillite
Runcorn Ltd v Aqua Lift (1989) 26 Con LR 66, 79; 2006 EWHC 2583 at
14, 2007 1 All ER (Comm) 81, 87

24 Fiona Trust & Holding Corporation v
Privalov
2006 EWHC 2583 at 26

25 Fiona Trust & Holding Corporation v
Privalov
2007 EWCA Civ 20 at 17

26 Fili Shipping Co Ltd v Premium Nafta
Products Ltd (on appeal from Fiona Trust & Holding Corporation v Privalov)
2007 UKHL 40 at 12

27 Fili Shipping Co Ltd v Premium Nafta
Products Ltd (on appeal from Fiona Trust & Holding Corporation v Privalov)
2007 UKHL 40

28 Ibid at 12

29 Fiona Trust & Holding Corporation v
Privalov
2007 EWCA Civ 20 at 17

30 Ibid at 12

31 Ibid at 13

32 Ibid at 26

33 Ibid at 31

34 Fiona Trust & Holding Corporation v
Privalov
2006 EWHC 2583 at 37

35 Logicrose Ltd v Southend United Football
Club Ltd 1988 1 WLR 1256

36 Fiona Trust & Holding Corporation v
Privalov
2007 EWCA Civ 20 at 26

37 Ibid, at 29

38 Fili Shipping Co Ltd v Premium Nafta
Products Ltd (on appeal from Fiona Trust & Holding Corporation v Privalov)
2007 UKHL 40 at 9

39 Arbitration Act 1996, Section 7

40 Ibid at 17

41 Ibid at 34

42 Ibid at 35

43 Logicrose Ltd v Southend United Football
Club Ltd 1988 1 WLR 1256

44 Fili Shipping Co Ltd v Premium Nafta
Products Ltd (on appeal from Fiona Trust & Holding Corporation v Privalov)
2007 UKHL 40 at
17, 34, 35

45 Arbitration Act 1996, Section 7

46 Fili Shipping Co Ltd v Premium Nafta
Products Ltd (on appeal from Fiona Trust & Holding Corporation v Privalov)
2007 UKHL 40 at 13

47 Fiona Trust & Holding Corporation v
Privalov
2007 EWCA Civ 20 at 26

48 Ibid, at 29

49 Fili Shipping Co Ltd v Premium Nafta
Products Ltd (on appeal from Fiona Trust & Holding Corporation v Privalov)
2007 UKHL 40 at 9

50 Ibid at 35