WHEN A REFUSAL NOTICE BACKFIRES

INTRODUCTION

In documentary credit practice, issuing banks sometimes issue discrepancy notices too quickly, only to later realize that the alleged discrepancies are not valid under UCP 600 or ISBP.

But what happens if the applicant has already relied on that first refusal notice and now refuses to reimburse the issuing bank after the bank changes its mind and decides the presentation is actually complying?

Can the applicant legally refuse payment?
And can the applicant sue the issuing bank?

Here is an interesting real-life style question.

QUESTION

Dear Mr. Old Man,

The issuing bank sent a notice of discrepancies to the applicant. However, afterward, the issuing bank realized that the discrepancies were wrongly raised and then informed the applicant again that the documents were actually compliant and payment must be made.

In this case, does the applicant have the right to refuse reimbursement based on the first discrepancy notice issued by the issuing bank?

Can the applicant sue the issuing bank, and on what basis?

Please advise urgently.

Thank you.

PT

_______

ANSWER

Dear PT,

Thank you for your question.

If the presentation is complying, the issuing bank must honour the presentation and the applicant is obligated to reimburse the issuing bank under the LC issuance agreement signed between them.

Mr. Old Man does not believe that the applicant can refuse reimbursement merely because the issuing bank initially issued a discrepancy notice and later corrected its conclusion after further review.

An incorrect initial assessment by the issuing bank does not change the actual status of the presentation under UCP 600. If the documents are ultimately determined to be complying, the issuing bank’s honour obligation to the beneficiary still exists.

The applicant would normally only have grounds to refuse reimbursement if the documents were genuinely discrepant or if the issuing bank breached the terms of the LC issuance agreement between the bank and the applicant.

It should also be noted that disputes between the issuing bank and the applicant are not governed directly by UCP 600, but primarily by the LC issuance agreement and the applicable local law governing that agreement.

The applicant may still sue the issuing bank if it believes the bank breached its contractual obligations. However, the mere fact that the issuing bank first sent a mistaken discrepancy notice and later corrected itself would not normally be sufficient to release the applicant from its reimbursement obligation if the presentation is ultimately complying.

Bonus

Mr. Old Man would like to share a very interesting real-world scenario:

The market price of the goods dropped sharply by the time the cargo arrived at the discharge port. The applicant then encouraged the issuing bank to refuse the documents based on several alleged discrepancies in order to gain leverage to negotiate a discount with the beneficiary.

Later, however, the applicant refused to take up the documents, while the negotiating bank rejected the alleged discrepancies and debited the issuing bank’s account maintained with them for reimbursement.

In this situation, the issuing bank unfortunately fell into the applicant’s little “do me a favour” trap

Kind regards,
Mr. Old Man