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 would rather settle this without going to court if the law allows it, but I need to know my rights before I sign anything. Please tell me what to do first and what document to keep.

MyVakeel Legal Desk · Accepted Answer

Under Indian law, Uniform Customs and Practice for Documentary Credits (UCP 600) is the starting point for this banking law question. What follows is the position in substance, together with the steps that usually make the difference in practice.

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 this means for you: 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.

Where the facts are disputed, what usually decides a letter of credit discrepancy matter is the paper trail — dated complaints, acknowledgments and written replies under Uniform Customs and Practice for Documentary Credits (UCP 600). 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 banking law.