Letter Of Credit Rule #1: Strict Compliance: What Are Adzing Machines?

Letter Of Credit, Issuing Bank, Strict Compliance

LETTER OF CREDIT: STRICT COMPLIANCE

One cardinal rule of letters of credit always prevails: strict compliance. Early in my career as an international banker, a lawyer wisely told me, “Roy, when processing a letter of credit, your job is to compare; not interpret.” That advice has helped me on numerous occasions to keep issues in perspective.

It would have helped another banker in this lesson, too, if she had received the same advice.

Before the electronic computer age, international banks typically communicated with each other by telex. A bank in Greece issued a letter of credit by telex and advised it through a New York bank. Upon receipt of the letter of credit, the New York bank followed their policy to re-type the information on their own letterhead and send it to the beneficiary.

BAD JUDGMENT

As the typist transferred the information onto the bank’s letterhead, she came across the merchandise description, which read, “1,000 adzing machines.” In her best judgment, the bank in Greece had made a mistake, so she altered it to read, “1,000 adding machines.”

Upon receipt of the letter of credit, the beneficiary shipped the adding machines and presented documents to the New York bank, which made payment because the documents correctly complied with the terms of the letter of credit.

ISSUING BANK REFUSED TO PAY

The New York bank couriered the documents to the issuing bank in Greece which promptly refused to honor them because their customer had indeed ordered 1,000 adzing machines, an ancient wood-working tool.

The bank in Greece held the New York bank responsible and returned the shipment. The New York bank, left holding the bag so to speak, ended up with 1,000 adding machines. Unable to sell them to recover their losses, the bank made a decision to use the adding machines in their next promotional offer.

"COMPARE, NOT INTERPRET"

If the bank had simply instructed their letter of credit staff to compare, not interpret, this story would have had an uneventful ending and would have never made it into this blog.