An issuing bank refuses the L/C for documentary discrepancies — a familiar shock in trade: goods shipped, payment stuck, and the time to cure counted in banking days. What decides the outcome is rarely the goods; it is the document set and how the first five days are handled.
What the bank checks, and on what basis it may refuse
Under the ICC’s UCP 600, banks deal with documents, not goods, and examine only the apparent compliance of the presentation against the credit’s terms, the UCP and international standard banking practice in the ISBP. The bank has a maximum of five banking days to determine compliance, and a refusal must be a single notice listing every discrepancy and stating how the documents are held. Classic discrepancies include late presentation, unclean or unendorsed bills of lading, goods descriptions diverging between invoice and credit, insurance missing required risks, and signatures or chops not as specified. If the refusal notice itself breaks the rules — incomplete listing or out of time — the bank may be precluded from relying on those discrepancies.
Three routes after a refusal
The first route is to cure and re-present within the credit’s validity where the discrepancy is fixable. The second is to have the seller’s bank cable the issuing bank and the buyer for a waiver — many formal discrepancies are waived where the goods conform to the contract. The third, where the dispute turns into refused goods or unpaid price under the underlying sale contract, is that contract’s own dispute machinery: negotiation, arbitration such as VIAC, or court, on the buyer’s obligations under the sale contract and the 1980 Vienna Convention where applicable. Keep the fronts separate: the documentary dispute with the bank and the goods dispute with the buyer are different battles.
Prevention for the next shipment
- Field-check every document against the credit before presentation — goods description, quantities, ports, shipment date, signatures — using a two-person checklist.
- At credit opening, screen for impractical document conditions (buyer-signed documents, impossibly short presentation periods) and demand amendment before shipping.
- Preserve every cable and the refusal notice with timestamps — that correspondence file is the central evidence if the dispute escalates to arbitration.
Frequently Asked Questions
Why do banks refuse L/C documents?
Banks check surface compliance under UCP 600 and the ISBP against the credit’s terms; frequent grounds are late presentation, adverse clauses on transport documents, diverging goods descriptions, deficient insurance, or documents not matching signature and original/copy specifications.
Can discrepancies be cured?
Fixable discrepancies can be cured and re-presented while the credit and its presentation period remain valid; unfixable ones must move to the waiver route through the banking chain.
What if the refusal notice is defective?
If the notice fails to list all discrepancies or arrives beyond the five-banking-day limit under UCP 600, the bank may be precluded from relying on them — have counsel review the notice itself before accepting the outcome.
How is the buyer dispute handled?
Under the underlying sale contract’s dispute clause: negotiation, commercial arbitration such as VIAC, or the competent court; the buyer’s payment duty under the contract and the Vienna Convention 1980 is a front separate from the documentary dispute.
This article has been quality-reviewed by the FLAW AI Legal Council