Issuing Bank Had to Pay Despite Discrepancies

By Shahriar Masum
[Republished from LC Monitor with the kind consent of the author.]


1. Issuing bank had to pay despite discrepancies in the presented document.
2. The content of the refusal advice was not in industry standard.

Underlying Facts At the request of Jiangyin Foreign Trade Corporation (JFTC), China, On July 6, 1995, the Bank of China's Jiangyin Sub-Branch issued a LC for $1.2 million in favour of an American Company, Voest-Alpine Trading USA Corporation. The Jiangyin Sub-Branch sent the LC via telex to the Bank of China's New York Branch, requesting that the New York Branch ‘advise’ Voest-Alpine of the letter's issuance and it did so. The LC was subject to UCP 500.

However there was a sudden fall in market price of the commodity and the buyer JFTC requested a discount from Voest-Alpine. Voest-Alpine declined the request, shipped the goods, and presented documents to Texas Commerce Bank ("TCB").

After examination of the document, TCB found several discrepancies. But Voest -Alpine requested TCB to forward the document to the issuing bank. Voest-Alpine felt that the merits of the discrepancies were not enough to allow a refusal to pay. On August 3, 1995, TCB forwarded the documents by courier to the Jiangyin Sub-Branch where they were received on August 9, 1995. On August 11 the issuing bank send a telex message to TCB stating:

Upon checking a/m documents, we note the following discrepancy:
1. Late presentation.
2. Beneficiary's name is different from LC.
3. B/L should be presented in three originals I/O duplicate, triplicate.
4. Invoice, Packing List, and Certificate of Origin not showing 'original.'
5. The date of survey report later than B/L date.
6. Wrong LC no. in fax copy.
7. Wrong destination in Certificate of Origin and beneficiary's cert.
We are contacting the applicant for acceptance of the relative discrepancy. Holding documents at your risk and disposal.

On August 15, 1995, TCB, acting on behalf of Voest-Alpine, refused the discrepancies and demanded payment.

On August 19, the Bank of China restated its position that the documents were insufficient and stated,

‘Now the discrepant documents may have us refuse to take up the documents according to article 14(B) of UCP 500.’

JFTC refused to waive the discrepancies, and the Bank of China returned the documents to TCB on September 18, 1995. In October 20, 1995, Voest-Alpine sued Bank of China in a court of the USA.

During the trial, the most important question was not whether the alleged discrepancies were valid or not. Rather there were two other different questions –

1. Does a USA court have sufficient jurisdiction to address this case?
2. Did the issuing bank serve the refusal notice in a timely manner?

We will deliberately skip question 1 here as the discussion would be a highly legal one.

So the only remaining question now is whether the refusal advice was timely or not. An interesting part of this question is that the motion of the court was never moved as to whether the discrepancies were valid or not despite the fact that TCB initially refused the discrepancies. From this, some may in fact take the liberty to assume that at least one of the discrepancies was va lid.

Now, as per UCP 500 article 14d, in order to reject payment on an LC, an issuing bank must give notice of refusal to the beneficiary ‘no later than the close of the seventh banking day following the day of receipt of the presentation documents.’ The refore, if the Bank of China did not provide timely notice, it must honour the letter of credit despite any discrepancies that may be valid listed in the refusal advice.

If we consider the time sequence, we will see that Bank of China did send a discrepa ncy message on August 11, which was within two days from the date of receipt of the document. But if we consider the content of the discrepancy message and compare it with UCP 600 article 16, we will find something missing; thus is, ‘we are refusing the presentation.’ Rather the telex message merely pointed out the discrepancies and stated that they were contacting the applicant for a waiver. These were exactly the two points considered by the court, which held that the telex of 11 August failed to provide notice of refusal because

1. the bank did not explicitly state that it was rejecting the documents;
2. the bank stated that it would contact the applicant for a waiver which held open the possibility of acceptance upon waiver.

A clear refusal was made on August 19. Apart from the fact that the later refusal failed to comply the seven days deadline by one day, this new message itself to some extent announces that the first discrepancy message was not a refusal.

Considering these points the court concluded first that the August 11 telex was merely a status report on the presentation confirming that the bank would not reject the documents until after it consulted JFTC, and second that the bank did not refuse payment until August 19. Accordingly, the court held that the Bank of China failed to comply the provisions of UCP 500 and was obligated to pay Voest-Alpine.

The judgment of the court relied heavily on the statement of Professor James Byrne, Voest-Alpine's expert witness on international standard bankin g practice and the UCP 500. Mr. Byrne explained that the Bank of China's actions, viewed in light of standard banking practices, were ambiguous. And this is the last interesting point that we found in this case.

The Bank of China refused this ambiguity issue because TCB employees Sherry Mama and Deborah Desilets both testified that they understood the bank's August 11 telex to be a notice of refusal. But the prudent court held the view that the testimony of Mama and Desilets was in fact their personal belief. The court also pointed out that the important question is not whether TCB has understood the message but whether Voest-Alpine understood the message. Since there was no evidence of Voest-Alpine's interpretation of the telex, the court overruled the claim of Bank of China.


In the remaining few lines of this review, we will not try to analyse whether the decision was right or wrong. But we will ask another question; what if the refusal was send by SWIFT 734? Would it have changed the decision of the court?

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