Invoice Higher than the LC Amount – Can the Bank Pay More?

In documentary credit operations, one of the recurring issues is when the presented commercial invoice shows an amount higher than that permitted under the letter of credit. Should the bank pay the full invoice value or restrict payment to the LC amount? Sub-article 18(b) of UCP 600 provides important guidance in this regard.

Question

Dear Mr. Old Man,

We appreciate your opinion on the following scenario:

Our bank issued an LC for an amount of USD 100,000. The presented documents, including the invoice, showed the total amount of USD 100,500. We refused the documents citing the discrepancy “LC overdrawn (invoice amount higher than LC amount)”. However, the applicant accepted the discrepancy.

Should we pay the full invoice amount (USD 100,500) or just the LC amount (USD 100,000) as per sub-article 18(b) UCP 600?

By the way, would you kindly clarify sub-article 18(b) UCP 600?

Thank you in advance for your prompt advice.

Best regards,
H.

________

Answer

Hi,

Thank you for your question. Here is my response:

If the applicant waives the discrepancy and undertakes to reimburse your bank in full, and if your bank agrees, the issuing bank may decide to pay the full invoice amount, including the excess. However, this is done strictly outside the LC framework and may cause some difficulty in accounting, given that the LC amount differs from the actual payment.

Alternatively, your bank can accept the documents and pay the amount equal to the LC value only (USD 100,000), provided that the presenter agrees. A bank cannot unilaterally reduce the claimed amount without the beneficiary’s consent.

Clarification of Sub-article 18(b) UCP 600

Sub-article 18(b) of UCP 600 states:

“A nominated bank acting on its nomination, a confirming bank, if any, or the issuing bank may accept a commercial invoice issued for an amount in excess of the amount permitted by the credit, and its decision will be binding upon all parties, provided the bank in question has not honoured or negotiated for an amount in excess of that permitted by the credit.”

Example

Let us take an example to illustrate:

• LC confirmed by Bank C states:
Field 39 (Maximum Credit Amount): USD 100,000
Field 41a (Available with … by …): with Bank C by payment

• Documents presented to Bank C include an invoice  showing claim amount of USD 100,500.

• The discrepancy is ‘LC overdrawn’. Based on sub-article 18(b), Bank C may accept that invoice but must not pay more than the LC amount (USD 100,000). The remaining USD 500 can be settled outside the LC, if agreed between applicant and beneficiary. Importantly, Bank C should pay only upon receipt of the presenter’s agreement; it cannot decide unilaterally to pay less.

Additional Comment

It is important to note the distinction between banks:

• A nominated bank or confirming bank should only pay up to the LC amount, since the issuing bank will not reimburse any excess.

• The issuing bank, however, may (if the applicant instructs and undertakes reimbursement) pay the full claim including the excess. This, however, is strictly outside the LC framework and relies on the applicant’s undertaking.

I hope this clarifies sub-article 18(b) for you.

Best regards,
Mr. Old Man