What happens if a bank refuses to honour a letter of credit citing discrepant documents?

Question

I shipped goods to my buyer's country and presented documents under the letter of credit, but the issuing bank has refused payment citing minor discrepancies. What are my options? Before I spend money on it, I want to know whether Indian Contract Act 1872, Section 126 gives me a remedy here and what proof I would need. Any Section numbers I can quote when I write to them would be useful.

MyVakeel Legal Desk · Accepted Answer

Indian Contract Act 1872, Section 126, Uniform Customs and Practice for Documentary Credits (UCP 600) and Negotiable Instruments Act 1881, Section 5 is what decides this question in India. Read it alongside the provisions named, because the relief available to you turns on the facts you can prove on paper.

A letter of credit operates as an independent payment undertaking similar in principle to a bank guarantee under the general law of guarantees found in Section 126 of the Indian Contract Act 1872, though its detailed mechanics are governed by internationally adopted trade practice.

In India, letters of credit are almost universally issued subject to the Uniform Customs and Practice for Documentary Credits (UCP 600), which requires the issuing bank to examine documents on their face for strict compliance within five banking days of presentation.

The doctrine of strict compliance means even a minor discrepancy, such as a spelling variation or a missing endorsement, entitles the bank to refuse payment, but the refusal must be communicated with a specific, itemised list of discrepancies within the prescribed time.

If the issuing bank fails to raise discrepancies within the time and manner prescribed under UCP 600, it is precluded from later claiming that the documents did not conform, and it becomes bound to honour the credit.

Disputes over wrongful dishonour of a letter of credit are typically litigated as breach of an independent payment contract, and Indian courts recognise that letters of credit, like guarantees, cannot ordinarily be enjoined absent fraud.

In practice, in this order: 1) Review the bank's discrepancy notice to check if it was issued within the UCP 600 timeline and specifies each discrepancy clearly; 2) If the discrepancy notice was late or vague, formally assert that the bank is precluded from dishonouring the credit; 3) Attempt to cure genuine discrepancies swiftly through amended documents if the credit is still open; 4) If payment is wrongfully refused, issue a legal notice and pursue recovery through a commercial suit for breach of the letter of credit.

Timing matters here: Indian Contract Act 1872, Section 126 works on limitation periods, so a letter of credit dispute claim that is right on the merits can still fail if it is brought late. 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.