CAN THE TRANSFERRING BANK REFUSE DISCREPANT DOCUMENTS PRESENTED BY THE SECOND BENEFICIARY?

Mr. Old Man answers a student’s question on transferable L/C practice

 Transferable credits often create tricky situations – especially when documents are presented by a second beneficiary under a transferred LC. Recently, a student wrote to Mr. Old Man about a practical scenario involving discrepancies in the  second beneficiary’s presentation  and the role of the transferring bank. Below is the full question and Mr. Old Man’s response.

QUESTION

Dear Mr. Old Man,

I am currently a student and I have some questions about transferable L/Cs. Although I have researched many sources, I still cannot find a satisfactory answer. I learned about Mr. Old Man’s blog and saw that you have many insightful answers, so I hope you can help me with this issue.

A transferable L/C with a value of USD 500,000 was issued by Bank A in favor of Company X.

Company X transferred this L/C to Company Y by MT720 through Bank B (the bank designated as the transferring bank in the original L/C) for a value of USD 450,000.

Company Y presented documents to Bank B.

After examination, Bank B considered the presentation non-complying and informed Company X.

However, Bank B also told Company X that under UCP 600, they do not have the right to refuse payment under the credit—even if the documents are discrepant—and that only the issuing bank has that right.

Question:

Do you consider Bank B’s action correct or incorrect? If correct (or incorrect), why? Please provide your reasoning and cite the relevant UCP provisions.

Thank you, and I’m sorry for troubling you.

Wishing you good health and continued success.

Respectfully,

BQ

_____

ANSWER

Hi,

Regarding your question, Mr. Old Man answers as follows:

UCP 600 Article 38 does not define whether the transferring bank may refuse or dishonour discrepant documents, nor under what circumstances it may do so. However, in practice and under UCP principles, we need to distinguish when the transferring bank has a payment obligation and when it does not.

1. Cases where the transferring bank may refuse documents

The transferring bank may refuse discrepant documents only when it has undertaken an obligation to honour or negotiate, for example:

a) When MT720 states that documents must be presented to the transferring bank for payment or negotiation, and the transferring bank has expressly agreed to act on the nomination (i.e., to honour or negotiate complying documents).\

b) When the transferring bank has confirmed the transferred credit.

A confirming bank must examine documents and can refuse under Article 16.

In these situations, the transferring bank must act like any nominated/confirming bank and may issue a notice of refusal under UCP 600 Article 16.

2. But in most transferable L/Cs, the transferring bank has no payment obligation

This is the crucial point.

In the vast majority of cases, the transferring bank:

• does not confirm the credit,
• does not agree to honour or negotiate,
• only substitutes the first beneficiary’s invoice and draft, and
• forwards the documents to the issuing bank.

Accordingly, MT720 usually includes wording such as:

“The transferring bank will pay the second beneficiary only upon receipt of payment from the issuing bank.”

This means the transferring bank is not responsible for honour.

It acts primarily as a forwarding/substitution bank, not an examining bank.

3. So what should the transferring bank do when documents are discrepant?

In these common cases, the transferring bank has no need to issue a formal Article 16 notice of refusal.

Why? Because Article 16 applies only to banks that are obliged to honour or negotiate.

Instead, the transferring bank should simply give a notice of discrepancies to the second beneficiary so that discrepancies can be corrected (if possible) before forwarding the documents to the issuing bank.

This is the correct approach in real LC practice.

The bank is not refusing the presentation — it is merely identifying problems.

The issuing bank remains the party responsible for the final examination and the actual refusal or acceptance.

4. Summary

• Can the transferring bank refuse documents?

Yes — but only when it has assumed an obligation (e.g., confirming or honouring via MT720).

• Does it normally need to refuse?

No — because in most transferred credits it has no payment obligation.

• What should it do instead?

Issue a discrepancy notice, not a formal Article 16 refusal, and allow correction.

5. Final word from Mr. Old Man

“Sure, the transferring bank can refuse…

But in most cases, there’s really no need to.

Just point out the discrepancies, let the beneficiary fix what can be fixed, wait for the first beneficiary to substitute their invoice and drafts, and then forward the documents to the issuing bank.”

Please read Article 38 carefully — especially its silence on the obligations of the transferring bank.

That silence is intentional.

Best regards,

Mr. Old Man