ContractsProf Blog

Editor: Myanna Dellinger
University of South Dakota School of Law

Tuesday, February 7, 2006

"Strict Compliance" Doesn't Mean "Exact Compliance"

Alabama_flag_1 Alabama follows the “strict compliance” standard governing letters of credit.  But “strict compliance” doesn’t necessarily mean “exact,” according to a recent decision by the state’s Supreme Court.

In the case, SouthTrust Bank issued a letter of credit on behalf of Skilstaf Inc., for the benefit of Skilstaf’s workers’ comp carrier, Continental Casualty.  The LOC listed “Continental Casualty Company, c/o Risk Management Group, CNA Plaza, 333 S. Wabash, Chicago, IL 60685, Attn: Contract Administration,” as the beneficiary.  It stated also that “This credit is subject to the Uniform Customs and Practice for Documentary Credits (1993 Revision), International Chamber of Commerce, Publication No. 500.”

The LOC was renewable.  Prior to the renewal date, December 14, SouthTrust notified Continental that it would not renew the credit.  On December 10, after getting this notice, Continental presented a sight draft for $810,000 -- the entire amount of the LOC.  The draft was to the order of “Continental Casualty Company,” with no address stated.  SouthTrust rejected it on the ground that it did not include the address, as required.  The relevant Alabama statute provides:

[A]n issuer shall honor a presentation that, as determined by the standard practice . . . appears on its face strictly to comply with the terms and conditions of the letter of credit.  Except as otherwise provided . . . and unless otherwise agreed with the applicant, an issuer shall dishonor a presentation that does not appear so to comply.

But the failure to include the address specified in the beneficiary line wasn’t fatal, said the court.
The beneficiary of the sight draft was "Continental Casualty Company," at whatever address it might be using at the time it might seek to submit a sight draft drawn on the LOC.  Taking SouthTrust's argument to its logical extreme, said the court, if Continental had changed its physical or mailing address in any way subsequent to its listing its address as beneficiary on the LOC and before the issuance of a sight draft, in order to comply strictly with the LOC in submitting a sight draft drawing against it, Continental would have to state its original, but now incorrect, address.

Continental Casualty Co. v. SouthTrust Bank, N.A., 2006 Ala. LEXIS 1  (Jan. 6, 2006).

[Frank Snyder]

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