Late Payment Interest Claim under a Sight Letter of Credit

Under a sight letter of credit, the issuing bank is required to honour a complying presentation. However, UCP 600 also grants banks up to five banking days to examine the documents. The question often arises whether an issuing bank that effects payment after the expiry of the five-day examination period is liable to pay late-payment interest, particularly when the credit itself is silent on this issue.

Question

Dear Mr. Old Man,

Hope you are doing well.

I seek your expert opinion regarding an interest claim submitted by a presenting bank due to delayed settlement under a sight letter of credit.

Please find the core transaction details below:

• Issuing bank: Bank A
• Presenting bank: Bank B (South Korea)
• LC payment term: At sight
• Date of document receipt by Bank A: 7 July
• Date of payment released to Bank B: 16 July
• Interest claim: Bank B is claiming interest for two days of delayed payment.

Case background:

Bank A received a complying presentation on 7 July. Excluding the intervening weekend (11–12 July), the maximum five-banking-day examination period stipulated in UCP 600 article 14(b) expired on Tuesday, 14 July. Payment was released on 16 July, resulting in a two-day delay beyond the examination period.

Bank B has formally requested compensation for the two-day delay. However, the letter of credit is silent regarding late-payment interest.

I would appreciate your opinion on the following questions:

1. Does Bank B have a valid legal or regulatory basis under UCP 600 to claim interest for the two-day delay, despite the LC being silent on the matter?
2. Does the five-banking-day period serve merely as an examination ceiling, or does “at sight” require payment to be made immediately once the documents are found to be compliant?
3. What is Bank A’s potential financial liability?

Regards,

C.T.

_____

Answer

Dear C.T.,

Thank you for your question.

1. Does UCP 600 regulate late-payment interest?

UCP 600 contains no provision requiring an issuing bank to pay interest or any penalty for late payment under a sight credit. Such an obligation exists only if the letter of credit expressly provides for it.

For example, the credit may contain a clause such as:

“The issuing bank shall pay interest at the rate of 5% per annum for any delayed payment, calculated on the basis of the actual number of delayed days.”

In your case, the credit is silent on late-payment interest. Therefore, Bank B does not have an explicit contractual basis under UCP 600 to compel Bank A to pay interest for the two-day delay.

From a practical perspective, short delays of one or two days are not uncommon. In many cases, the issuing bank may require additional time to arrange the necessary foreign-currency funding or complete internal processing. Although nominated banks occasionally submit interest claims for such delays, issuing banks often reject or simply ignore those claims, particularly when the delay is minimal.

In practice, interest claims are more likely to be seriously considered when the delay is substantial rather than merely one or two days.

2. Does “at sight” require payment before the expiry of the five-banking-day examination period?

Under article 7(a) of UCP 600, an issuing bank must honour a complying presentation.

This means that, in principle, payment may be effected as soon as the issuing bank determines that the presentation complies with the terms and conditions of the credit. The bank is not required to wait until the fifth banking day.

However, article 14(b) gives the issuing bank a maximum of five banking days following the day of presentation to determine whether the documents comply.

Accordingly, the five-banking-day period is an examination ceiling rather than a mandatory waiting period. If compliance is established on the second or third banking day, payment may be made immediately.

That said, in practice many banks use the entire examination period and release payment on the sixth banking day following presentation. In most such cases, nominated banks do not pursue interest claims for the short delay.

3. What is Bank A’s potential financial liability?

Strictly speaking, Bank A may be criticised for failing to honour the credit immediately after the expiry of the five-banking-day examination period.

However, because UCP 600 does not provide for automatic interest or penalties, and because the credit itself is silent on this issue, Bank A’s financial liability is uncertain and may ultimately depend on:

• the governing law applicable to the credit;
• any bilateral agreement between the banks;
• established banking practice between the parties; and
• whether Bank B can demonstrate actual financial loss arising from the delay.

From a practical perspective, claims for late-payment interest are generally more common in cases involving substantial delays. In the case of a delay of only two days, especially where the credit is silent on interest, such claims are often disputed or disregarded by issuing banks.

Therefore, under UCP 600 alone, Bank B’s claim for two days’ interest appears to have limited legal support, particularly where the credit itself is silent on late-payment interest.

Best regards,

Mr. Old Man