Can a bank refuse payment under a letter of credit citing document discrepancies?

Question

Our bank refused to honour payment under an export letter of credit alleging minor discrepancies in shipping documents. Is this refusal valid? I have been reading conflicting things online and I would like to understand what Indian law actually says about this, which Act and Section applies, what the realistic timelines and costs are, and what I should be doing right now to protect my position. If the matter can be resolved without litigation I would prefer that route, but I want to know what my rights are before I agree to anything or sign any document.

MyVakeel Legal Desk · Accepted Answer

Can a bank refuse payment under a letter of credit citing document discrepancies? is governed in India primarily by Uniform Customs and Practice for Documentary Credits (UCP 600), Indian Contract Act 1872, Section 126 read with banking custom and Negotiable Instruments Act 1881. The short answer is set out below, followed by the practical steps most people in this situation need to take. Read it alongside the specific provisions named, because the exact relief available to you turns on the facts you can prove on paper.

Letters of credit in India are generally governed by the UCP 600 rules incorporated by reference into the credit terms, and banks must examine documents with reasonable care to determine strict compliance.

Under the doctrine of strict compliance, banks can refuse payment only for genuine discrepancies that are not merely cosmetic, and courts have held that hyper-technical objections to defeat legitimate claims are impermissible.

The issuing or confirming bank must give notice of refusal specifying all discrepancies within five banking days of receiving documents, failing which it is precluded from later claiming the documents do not comply.

Indian courts, following international commercial practice, examine whether the discrepancy is real and material or a pretext to avoid payment obligations under the credit.

Fraud in the underlying transaction can be a valid ground for refusal, similar to bank guarantees, but ordinary commercial disputes between buyer and seller do not affect the bank's independent payment obligation.

What to do next: 1) Obtain the bank's discrepancy notice and check if it was issued within the mandatory five banking day period under UCP 600; 2) Assess whether the alleged discrepancies are genuine and material or merely technical and correctable; 3) Send a formal rebuttal demonstrating compliance or seeking waiver of discrepancies from the applicant; 4) If payment is wrongfully refused, pursue arbitration or civil suit for breach of the letter of credit obligation.

If the other side has already issued a notice, filed a case or set a deadline, treat the matter as time-sensitive — most remedies under Uniform Customs and Practice for Documentary Credits (UCP 600) carry limitation periods, and a delay you cannot explain weakens an otherwise strong case. You can post the details on the MyVakeel forum for a practising advocate to review, or book a paid consultation with a Bar Council verified lawyer in this practice area.