Using Fintech to protect the strict compliance principle in letter-of-credit law

Abstract

The focus of this paper is on the uncertainty and controversy associated with the substantial compliance standard as part of the strict compliance principle in the letter of credit law, as well as the possibility of applying new technology to solve such problems. The letter of credit confirms a payment under international sales contracts and contains a promise from the bank to pay the seller if they can present the complying documents as required in the letter of credit. Thanks to the basic principles of a letter of credit, it is stable and trustworthy. Such basic principles as well as the practice of letters of credit are recognized in the Uniform Customs and Practice for Documentary Credit of the International Chamber of Commerce. To retain the commercial utility of the letter of credit, the strict compliance principle should be revitalized and consistently applied. However, this principle is not associated with exact standards, which leads to the scenario that courts apply different standards. Such a situation might reduce the commercial utility of letters of credit. Hence, the financial industry is trying to apply new technologies such as blockchain, smart contracts, and the Internet of Things to support the strict compliance principle, and try to reduce the uncertainty related to the substantial compliance standard.