COURT INJUNCTION TO SUSPEND L/C PAYMENT

QUESTION

Dear Mr. Old Man,

Our bank issued a deferred payment L/C. The documents presented were fully compliant. Upon confirming compliance, our bank incurred its deferred payment undertaking and notified the foreign bank accordingly. The buyer accepted the obligation to pay on the due date and received the documents to collect the goods.

However, when the goods were received, they were found to be of poor quality. Negotiations between the buyer and the seller failed, and the buyer initiated legal action in Ho Chi Minh City Court. The court issued an injunction ordering our bank to temporarily suspend payment until a final ruling is issued. We notified the foreign bank, but they rejected this and demanded payment, arguing that they had discounted the documents without recourse.

If the buyer wins the case, will our bank still be obligated to pay the foreign bank? And if the court orders us to refund the buyer, will we need to sue the buyer in return?

Looking forward to your advice. Many thanks!

— H. —

——-

ANSWER

Hi H.,

1. Clarifying the role of the foreign bank:

Your message doesn’t specify whether the foreign bank is the nominated bank under the L/C or just a presenting bank. This distinction matters significantly.

If the foreign bank is the nominated bank and has incurred its own deferred payment undertaking (per UCP 600 Art. 12(b)), it has the right to discount that undertaking and claim reimbursement from your bank at maturity. In this case, the foreign bank is acting on its own commitment and is entitled to payment regardless of the buyer-seller dispute.

However, if the foreign bank is not the nominated bank and merely forwarded the documents on behalf of the beneficiary, it cannot discount the issuing bank’s deferred payment undertaking without your bank’s approval. This is because a deferred payment undertaking is not universally recognized as a negotiable financial instrument. Without explicit consent, the discounting bank assumes legal and credit risk—especially when a court injunction halts payment.

2. Legal priority:

A court order from a competent authority takes precedence over UCP 600. Once a payment suspension is ordered, your bank must comply—even if the L/C terms or ICC rules suggest otherwise. Payment can only resume when the injunction is lifted or the court delivers its final ruling.

3. Risk of legal action:

As long as your bank follows local law and formally notifies the foreign bank (with a copy of the court’s order), it is protected from liability. Any threat of legal action from the foreign bank would likely be unsuccessful, particularly if it discounted the L/C proceeds without full legal standing or consent.

4. If the buyer wins the case:

Your bank must comply with the final court ruling. If the judgment orders, for example, that your bank pay 50% of the L/C amount to the beneficiary and refund 50% to the buyer, you must do exactly that. There’s no need to sue the applicant unless they have failed to fund the L/C or caused a financial loss to your bank—which doesn’t appear to be the case here.

5. Additional note:

In court-related L/C disputes, the issuing bank’s best approach is to remain neutral—block or hold the funds, notify all parties involved, and await the final judgment to avoid legal exposure.

Best regards,

Mr. Old Man