A documentary credit is an autonomous banking undertaking: the bank pays against documents that appear on their face to be conforming, without concerning itself with the actual performance of the commercial contract (Articles 4 and 5 of the ICC Uniform Customs and Practice, UCP 600). The bank has a maximum of five banking days following the day of presentation to examine the documents and decide (Article 14(b)). If it refuses, it must send a single notice stating that it is refusing to honour, each discrepancy relied on, and what it is doing with the documents; failing which it is precluded and must pay (Article 16(c) and (f)). For the beneficiary the response is almost always the same: check the formal regularity of the refusal, correct and re-present the documents if the expiry date and the presentation period allow, or ask the buyer to waive the discrepancies.
The seller has shipped, presents his documents to the bank, and three days later receives a SWIFT message listing seven discrepancies: a bill of lading dated one day late, a certificate of origin signed but not legalised, an invoice describing the goods as cotton yarn where the credit said cotton yarn 100 percent. Payment of 800,000 dollars is suspended, the goods are at sea, and the buyer begins to negotiate a discount. What follows explains how the examination of documents really works, what a discrepancy is worth, how quickly to react, and how to defend on either side.
What a documentary credit really is
A documentary credit is an undertaking given by a bank, at the request of the buyer as applicant, to pay the seller as beneficiary against the delivery of documents conforming to the terms of the credit. It is almost always subject to the ICC Uniform Customs and Practice for Documentary Credits, in their 600 version in force since 2007, which apply where the text of the credit so provides, as every SWIFT-issued credit does. Those rules are not legislation: they take effect as contractual terms, and French courts construe them as such, supplemented by the general law of obligations.
Two principles command everything else. Autonomy: the credit is a transaction separate from the sale contract on which it may be based, and banks are in no way concerned with or bound by that contract (Article 4). A buyer who has received defective goods cannot therefore, in principle, stop the payment. And strict compliance, tempered by Article 14(d): the data in a document need not be identical to the data in the credit or in the other documents, but must not conflict with them.
The banks’ roles, and why they are not interchangeable
The issuing bank is irrevocably bound to honour from the moment of issue. The confirming bank adds its own irrevocable undertaking, which protects the seller against country risk and bank risk; the Court of Cassation recalled that effect in holding that a confirming bank setting off against the beneficiary a debt it holds against him is not imposing a non-documentary condition but performing its obligation to pay (Cass. Com., 15 March 2023, No 20-23.552, published, under Articles 2 and 8 of UCP 600). The advising bank, by contrast, undertakes nothing: it transmits.
A seller who believes he holds a confirmation when he has only an advice discovers his mistake on the day the issuing bank does not pay. Confirmation costs a few tens of basis points and operates as insurance against country risk, which makes it a decision to be taken consciously at the negotiation stage rather than a line item to be cut. The same applies to whether the credit is transferable, which matters when the seller is a trader who must pay his own supplier out of the proceeds.
Examination of the documents: five days, and the documents alone
On receipt of a presentation the bank must determine, on the basis of the documents alone, whether or not they constitute a complying presentation, and it has a maximum of five banking days following the day of presentation to do so (Article 14(a) and (b)). That period is a maximum, not a minimum: the bank may answer in two days. It is not extended by the expiry date of the credit or the last day for presentation, which means that a presentation made on the final day still opens the five days of examination but leaves no margin at all to re-present corrected documents.
The examination follows precise rules a seller does well to know before shipping. Documents must be presented within twenty-one calendar days after the date of shipment where the credit requires a transport document and fixes no other period, and in any event within the expiry date of the credit (Article 14(c)). The description of the goods in the commercial invoice must correspond with that in the credit, whereas in the other documents a general description suffices provided it does not conflict with the credit (Articles 18(c) and 14(e)). And if a credit contains a condition without stipulating the document to show compliance with it, banks will deem such condition as not stated (Article 14(h)), which is the sanction for non-documentary conditions.
The refusal: a single notice, in time, and complete
Where the bank decides to refuse, Article 16 imposes a strict discipline. It must give a single notice to the presenter, no later than the close of the fifth banking day following the day of presentation, stating that it is refusing to honour, each discrepancy in respect of which it refuses, and what it is doing with the documents: holding them pending further instructions, holding them until it receives a waiver from the applicant, returning them, or acting in accordance with instructions previously received from the presenter (Article 16(c)). The sanction is radical: a bank which fails to act in accordance with those provisions is precluded from claiming that the documents do not constitute a complying presentation (Article 16(f)). A late refusal, a refusal that does not list every discrepancy, or a refusal silent on the fate of the documents therefore obliges the bank to pay.
That is the beneficiary’s first reflex: date the presentation precisely, count the banking days at the place of presentation, check that the notice is single, since a second notice adding discrepancies is ineffective, that it gives each discrepancy, and that it states what the bank is doing with the documents. These checks often pay, because refusals drafted under time pressure are frequently incomplete. The second reflex is to contest on the merits those discrepancies that are not discrepancies at all: a divergence which does not make the documents conflict is not an irregularity, and a non-documentary condition cannot found a refusal.
Correct, re-present, or obtain a waiver
Where the discrepancies are well founded, three routes open. Correct and re-present, if the presentation period and the expiry date allow: it is the safest solution, and it explains why documents should never be presented on the last day. Ask the buyer for a waiver: the issuing bank may in its sole judgement approach the applicant for a waiver of the discrepancies (Article 16(b)), but it is not obliged to, and a buyer who agrees to waive agrees at the same time to pay. Or negotiate payment under reserve or against an indemnity, which banks practise between themselves, or a switch to documentary collection, which turns the security of a credit into a simple mandate to collect and is the least protective outcome for the seller.
The buyer, for his part, should resist the temptation to use discrepancies as leverage to renegotiate the price. A seller who has delivered in conformity and is refused payment on a technicality has an action on the sale contract, and the correspondence in which the discount is proposed makes remarkably effective evidence of bad faith. The credit is a payment mechanism, not a bargaining instrument, and courts treat attempts to use it as one accordingly.
Fraud: the only true exception to autonomy
The UCP do not deal with fraud, but French law has always sanctioned it: fraud vitiates everything, and a court may prohibit the bank from paying, or the bank from recovering against the applicant, where the beneficiary’s fraud is manifest and proved by immediately available evidence. The bar is high. It is not enough to allege non-conforming goods or a commercial dispute; it must be established that the beneficiary knowingly presented false documents, for instance a bill of lading issued for a shipment that never took place. An interim application founded on a mere challenge to the quality of the goods is dismissed, and a buyer who obtains one by surprise incurs liability.
To that must be added the sanctions filter. A bank may refuse or block an operation in which a party, a vessel or a destination is covered by a restrictive measures regime, and it will do so on its own compliance assessment rather than on the UCP. A seller shipping to a sensitive destination should therefore verify the sanctions position before shipment rather than discover it when the documents are rejected, since by then the goods are already at sea and the leverage has gone.
Prevention: what is decided when the credit is drafted
Most discrepancy disputes are born of a credit badly drafted or badly read. The seller must examine the text of the credit as soon as it is received, before shipping, and ask for an amendment if anything is not achievable: documents impossible to obtain in the time allowed, such as a legalised certificate or pre-shipment inspection by a named body; a presentation period too short; ports or dates incompatible with the freight booking; a description of the goods too detailed for the invoice; or a requirement for documents issued by the buyer himself, which gives him a veto in fact.
The buyer must resist the temptation to pile up conditions: every non-documentary condition is deemed not stated, every additional document is a source of discrepancy, and an unworkable credit ends as a simple collection, that is, without security for anyone. Three points deserve a conscious decision: confirmation, transferability, and the fit with the chosen Incoterm. A credit requiring an on-board marine bill of lading where the sale is concluded FCA with handover to a freight forwarder cannot be performed, and that is one of the most frequent errors in practice.
Timing, costs and what the firm does
A refusal has to be contested quickly: the goods are travelling, the credit is expiring, and the seller’s negotiating position deteriorates every week. The firm acts within hours of a discrepancy message being received, analyses the credit, the presentation and the notice of refusal, establishes whether the bank is precluded or whether the discrepancies are well founded, drafts the response to the bank and, where necessary, the application to the court.
Upstream, it reviews draft credits before shipment, identifies the conditions that cannot be satisfied and the documents that will generate discrepancies, and prepares the amendment requests. It also advises on the choice between confirmed and unconfirmed credit, on transferability, and on the consistency between the credit, the Incoterm and the sale contract. A first assessment of a refused presentation is normally possible within twenty-four hours on the strength of the credit, the documents presented and the SWIFT messages.
What to do in the forty-eight hours following a refusal message is set out, from the seller’s side, on the page the bank refuses my documentary credit, in the series Exporter disputes.
Your bank has raised discrepancies and payment is suspended? The firm checks within hours whether the refusal is valid, and whether the bank is already precluded from relying on it.
Frequently asked questions
How long does the bank have to examine the documents?
A maximum of five banking days following the day of presentation, under Article 14(b) of UCP 600. That period is a maximum and not a minimum, and it is not extended by the expiry date of the credit or by the last day for presentation. A presentation made on the final day therefore still gives the bank its five days of examination but leaves the seller no time to re-present corrected documents.
What happens if the bank refuses late or without giving reasons?
It is precluded. Article 16(f) provides that a bank which fails to act in accordance with the notice requirements of Article 16 may not claim that the documents do not constitute a complying presentation. A refusal sent after the fifth banking day, a refusal that does not list every discrepancy, a second notice adding further discrepancies, or a notice silent on what the bank is doing with the documents each oblige the bank to pay.
Can the bank refuse to pay because the goods are defective?
No. Under Article 4 of UCP 600 the credit is a transaction separate from the sale contract, and banks are in no way concerned with or bound by it. The bank examines documents, not goods. The only true exception is fraud, which requires proof that the beneficiary knowingly presented false documents and cannot be established by a mere dispute about quality. Separately, a bank may block an operation on sanctions grounds.
Is a condition in the credit with no corresponding document valid?
No. Article 14(h) provides that if a credit contains a condition without stipulating the document to indicate compliance with it, banks will deem such condition as not stated. A non-documentary condition therefore cannot found a refusal, which is a frequent and effective answer to a discrepancy notice that relies on one.
What can be done when the discrepancies are well founded?
Three routes. Correct and re-present, if the presentation period and the expiry date still allow it, which is the safest and the reason never to present on the last day. Ask the buyer for a waiver, which the issuing bank may seek in its sole judgement under Article 16(b) and which commits the buyer to pay. Or negotiate payment under reserve or against an indemnity, or a switch to documentary collection, which is the least protective solution for the seller.
Further reading: Incoterms 2020 and the transfer of risk, the Vienna Convention on the international sale of goods, recovering an unpaid invoice from a foreign customer.
Written by Hervé Guyader, avocat at the Paris Bar, doctor of law. This content is general information and is no substitute for advice on your own matter.