Fundamental Breach in Documentary Sales Contracts: The Doctrine of Strict Compliance in Letters of Credit Law and the Underlying Sales Contract

Documentary Sales Contracts including “CIF” and “FOB” sales as the typical case, impose twofold separate and independent obligations on the sellers: the obligation to the delivery of conforming goods, and obligation to present complying documents. Fulfilling each of these obligations does not discharge the other. Consequently, the breach of each of them confers on the buyer remedies specific to the breached obligation. When the contracting parties use letters of credit in documentary sales contract as a payment method of price, the seller as the beneficiary of the credit must comply strictly with terms and conditions of the letter of credit to pay the amount of credit. This requirement is known as “standard of strict compliance” in letters of credit law. As a result of applying the standard of strict compliance in letters of credit law, the most trivial discrepancy allows, even requires, a bank to reject the documents for non-conformity with the letter of credit. This paper seeks to answer this question whether the standard of strict compliance, as applied in letters of credit, must have effect in sales contract as well. Furthermore, in the event that seller presents non-conforming documents to the bank, and does not cure the non-conformities of documents in proper time, whether his action could be characterized as fundamental breach of sale contract in the sense of this concept in CISG, and consequently, whether we can confer the relevant remedy, i.e. the right of avoidance on the buyer are discussed.