Short answer: in letter of credit (L/C) payment, the bank bears a payment undertaking independent of the sale contract — it must pay against a complying presentation and may only refuse in strict compliance with UCP600 procedures. A dispute with the bank is therefore entirely different from a goods dispute: the bank may not refuse payment to the exporter on grounds of “bad goods or late shipment”. This article analyzes bank liability — the independence undertaking, the document-examination standard, rightful vs. wrongful refusal and consequences — under UCP600 (current version) and the Vietnamese framework: Circular 21/2024/TT-NHNN and the 2024 Law on Credit Institutions.
1. Legal framework: UCP600 plus Vietnamese law
UCP600 (Uniform Customs and Practice for Documentary Credits, ICC Publication No. 600, effective 01/7/2007, 39 articles) is the current version — the ICC has not issued a UCP700; eUCP v2.1 is only a supplement for electronic presentations. Note its legal nature: UCP600 is ICC-issued practice, not Vietnamese law — it applies only when the parties incorporate it into the credit.
Vietnamese law opens the door to such incorporation:
- Article 3 of the 2024 Law on Credit Institutions (32/2024/QH15, effective 01/7/2024): parties may agree to apply ICC-issued international commercial practice and other practice not contrary to fundamental principles of Vietnamese law;
- Circular 21/2024/TT-NHNN (effective 01/7/2024): Art. 3 defines letter-of-credit operations (issuance, confirmation, negotiation, reimbursement); Art. 6 requires incorporated practice to state the version — e.g. “UCP600”; Art. 19 sets out bank obligations (perform as committed to the customer); Art. 20 sets out customer rights and obligations.
Validity note: Decision 226/2002/QD-NHNN on letter-of-credit operations expired on 01/3/2015 — do not cite it as current authority.
2. The independence undertaking: banks look at documents, not goods
This is the foundational principle of the entire L/C mechanism:
- Article 4, UCP600: a credit is independent of the sale contract and other contracts forming its basis;
- Article 5, UCP600: banks deal with documents, not with goods, services, or performance of the contracts to which the documents may relate.
Practical consequence: a bank may not invoke goods disputes (poor quality, late shipment, short quantity) to refuse payment against a complying presentation. The exporter (beneficiary) need only present correctly — goods issues belong to the buyer-seller relationship under the underlying sale contract (governed by the CISG, Arts. 53–59 on the buyer payment obligation — independent of the L/C undertaking).
The payment undertaking is specified at:
- Article 7, UCP600: the issuing bank must honour a complying presentation — an independent undertaking made directly to the beneficiary, regardless of whether the applicant reimburses the bank;
- Article 8, UCP600: the confirming bank assumes a second, parallel independent undertaking.
3. How banks examine documents: the Article 14 standard
On receiving the documents, the bank examines them under Article 14, UCP600:
- Examination on the face of the documents — the bank need not verify the underlying authenticity behind them;
- Data in a document need not be identical word-for-word but must not conflict with the credit, with that document itself, or with other documents in the presentation;
- ISBP 745 (ICC Publication 745, 2013) applies — the detailed document-examination practice;
- Time limit: a maximum of five banking days for examination following presentation (Art. 14(b)).
A “discrepancy” is any point in the documents conflicting with the credit or among the documents — e.g., a materially misspelled beneficiary name, a discharge port differing from the credit, shipment beyond the deadline.
4. Refusing payment: the Article 16 procedure and the preclusion sanction
A bank may refuse a discrepant presentation — but must strictly follow Article 16, UCP600:
- On refusal, the bank must send a single notice stating: (i) the refusal to honour or negotiate; (ii) each discrepancy relied upon; (iii) the disposition of the documents (held pending instructions, returned, etc.);
- The notice must be sent no later than the close of the fifth banking day following presentation (Art. 16(d)).
Consequence of procedural breach — preclusion (Art. 16(f)): the bank loses the right to claim non-compliance and must honour. In other words: a substantively correct refusal delivered through a defective procedure (late, or omitting discrepancies) still results in a payment obligation.
5. Wrongful refusal scenarios and bank liability
- (a) Refusing a presentation that is actually complying (nitpicking non-existent discrepancies): breaches Arts. 7/8 UCP600 and Art. 19 of Circular 21/2024, so the bank must pay and compensate losses (basis: Arts. 360 and 419, 2015 Civil Code — liability for breach of obligation, compensable contractual damages);
- (b) Refusal notice beyond five banking days: preclusion applies — the right to refuse is lost, payment is mandatory;
- (c) Notice omitting some discrepancies: the bank may not later invoke additional discrepancies;
- (d) Refusing on applicant instructions over goods issues (e.g., the buyer says “goods are defective, do not pay”): breaches the independence principle in Art. 4 — the bank must still pay the beneficiary against a complying presentation;
- (e) Confirming bank refuses while the issuing bank accepts (or vice versa): the confirming banks undertaking is independent (Art. 8) — each bank answers for its own undertaking.
Bank disclaimers (not every risk falls on the bank): Arts. 34, 35, 37, UCP600 — banks assume no liability for the form, sufficiency, accuracy, genuineness or legal effect of documents; for delay or loss in transmission; or for acts of instructed parties.
6. The issuing bank — applicant relationship
This relationship is governed by the letter-of-credit issuance contract between the bank and the applicant — independent of the banks undertaking to the beneficiary. Adjudication illustration: Judgment 07/2020/KDTM-PT (Nam Dinh Provincial Peoples Court, 28/8/2020) — an L/C of USD 235,440, 90-day deferred payment after B/L date, 15% cash margin; the applicant undertook to reimburse the bank in all cases where the bank had paid under the L/C; missing the reimbursement deadline triggered breach penalties plus 150% overdue interest.
On foreign exchange: settling L/Cs in foreign currency through credit institutions is permitted (Art. 22, Foreign Exchange Ordinance; Circular 32/2013/TT-NHNN as amended) — subject to restrictions on foreign exchange use within Vietnam.
7. Checklist for businesses using L/Cs
- Require the credit to expressly incorporate “UCP600” (Art. 6, Circular 21/2024) — never leave the applicable version open;
- Prepare documents per ISBP 745, checking every line against the credit before presentation;
- Present within the credits validity and within the presentation period;
- On refusal, immediately check three things: was the notice within five banking days; did it list each discrepancy; are the stated discrepancies real — a procedurally defective refusal is grounds to demand payment under preclusion;
- For importers (applicants): understand that instructing the bank “not to pay because the goods are bad” is ineffective against a complying presentation — protect yourself through the underlying sale contract, not through the L/C.
FAQs
May a bank refuse payment because the goods are defective?
No, against a complying presentation. Under Arts. 4 and 5, UCP600, banks deal only with documents — goods disputes belong to the underlying sale contract, not to L/C refusal grounds.
How many days does a bank have to examine and refuse?
A maximum of five banking days covering both examination (Art. 14(b)) and the refusal notice (Art. 16(d)) — counted from presentation.
What if the refusal notice does not specify the discrepancies?
That breaches Art. 16 — the bank may not invoke further discrepancies later, and a notice beyond five banking days triggers preclusion: payment becomes mandatory.
Can an exporter sue the confirming bank in Vietnam?
It depends on the agreed governing law and dispute-resolution clause in the credit or contract. Limitation periods for cross-border L/C disputes follow the governing law of each relationship — there is no blanket “2 years under Art. 319 of the Commercial Law” for every L/C dispute.
Legal sources
- UCP600 (ICC Publication No. 600, effective 01/7/2007, 39 articles) — current version: Art. 4 (independence), Art. 5 (documents only), Art. 7 (issuing bank undertaking), Art. 8 (confirming bank undertaking), Art. 14 (examination standard; five banking days), Art. 16 (refusal and preclusion), Arts. 34, 35, 37 (disclaimers). Provisions paraphrased; no lengthy verbatim quotes (ICC-copyrighted publication).
- 2024 Law on Credit Institutions (32/2024/QH15, effective 01/7/2024): Art. 3 (agreement to apply ICC practice), Art. 4.4 (letter of credit as credit extension).
- Circular 21/2024/TT-NHNN (effective 01/7/2024): Arts. 3, 5, 6 (incorporation of practice, version stated), Arts. 19, 20 (bank and customer obligations).
- 2015 Civil Code: Arts. 360, 419 (compensation for wrongful refusal).
- CISG (Vietnam acceded 18/12/2015, effective 01/01/2017): Arts. 53–59 (buyer payment obligation — independent of the L/C undertaking).
- Foreign Exchange Ordinance (consolidated document 07/VBHN-VPQH): Art. 22; Circular 32/2013/TT-NHNN.
- Judgment 07/2020/KDTM-PT (Nam Dinh Provincial Peoples Court, 28/8/2020) — illustrating the issuing bank–applicant relationship.
Has your bank refused payment under an L/C, or are you disputing payment obligations with an issuing or confirming bank? Reach us via the Contact page of FLAT Law Firm for advice under UCP600 and Vietnamese law.
The legal content of this article is reviewed by the FLAW AI Legal Council and submitted to the owner for approval; it is not an opinion of a licensed lawyer and does not replace legal advice for specific cases.
For reference only, not legal advice.
