Strictly interpreting the terms of a standby letter of credit

A standby letter of credit, or SLOC, “is an agreement by a bank to pay a beneficiary on behalf of a customer who obtains the letter, if the customer defaults on an obligation to the beneficiary.”  SLOCs are used to reduce the risk when  a party extends credit “to strangers in distant places.” 

Courts strictly interpret the terms of a standby letter of credit so that the banks, which are dealing only in documents when deciding whether to pay on the standby letter of credit, will be able to act quickly.  Literal compliance with the credit is also essential so as not to impose an obligation upon the bank that it did not undertake or jeopardize the bank’s right to indemnity from its customer. 

At the same time, the requirements in letters of credit must be explicit and all ambiguities are construed against the bank.  Because the beneficiary must comply strictly with the requirements of the SLOC, “it must know precisely and unequivocally what those requirements are.”  

Mago Int’l, LLC v. LHB AG, No. 15 Civ. 2776 (2d Cir. 2016) (Wesley, J.) involved Mago International, a New York company, that had entered into a contract to sell chicken, beef, and other meat products to a company based in Kosovo.  The company default on four invoices from Mago.

The question was whether Mago strictly complied with the terms of the SLOC that required it to submit a “photocopy of B/L evidencing shipment of the goods to the applicant.”  The beneficiary presented unsigned copies of bills of lading to the bank, LHB AG, but these dcouments were not sufficient to quality as “evidencing shipment of the goods” because they lacked a signature.   Because of the strict terms of the SLOC, they were not evidence of shipment even though copies of bills of lading do not generally require signatures in international transactions.[1] 

The Second Circuit thus affirmed the District Court's grant of summary judgment to bank, which had refused to pay, on the basis of the beneficiary’s failure to comply strictly with the terms of a standby letter of credit.

[1] The beneficiary later tendered a set of documents containing signed bills of lading for each invoice but these were untimely under the terms of the standby letter of credit.