1. Honouring the Beneficiary’s Presentation
    Chapter IX explains the effect of honour, i.e. the way that the issuer moves funds by way of the nominated bank to the seller/beneficiary’s account. Chapter XI explains the strict compliance rule under which the nominated bank or the issuer may insist that documents comply strictly with the documentary conditions in the credit. There are other forms of activity at the counters of the nominated bank or the issuer that honours. They relate to the terms of the credit and the buyer/applicant’s waiver of documentary discrepancies.

  1. “Conditions” and “Terms”
    It is not enough that a seller/beneficiary’s documents comply with the documentary conditions of the credit. They must also satisfy the credit’s terms. Chief among these terms is the credit’s expiry. Although a documentary credit is irrevocable once issued (see UCP 600 art. 7(b)), it expires on the stated expiry. All credits should state an expiry, and complying documents must be presented on or before that date (see UCP 600 art. 6). Under letter of credit practice, banks enforce the expiry strictly. If the seller/beneficiary’s presentation is late, the bank dishonours.
    There is a second important time-related term. Unless the credit provides otherwise, UCP 600 article 14(c) renders transport documents non-compliant 21 days after the date of shipment. Nominated banks and issuers treat transport documents presented later than permitted by the credit and article 14(c) as discrepant and dishonour the seller/beneficiary’s presentation.
    Letters of credit may include additional conditions, such as the condition that presentation be made at a branch other than the branch that issued the credit or that documents must be presented electronically rather than on paper. In all events, the seller/beneficiary must comply with those terms just as it must comply with the documentary conditions.


  1. Buyer/Applicant Waiver
    In Illustration 12-1, the seller/beneficiary has knowingly or unknowingly sent discrepant documents to its bank, which presented the documents to the issuer. The issuer’s document examiner found the discrepancies but waited to dishonour until the buyer/applicant had the opportunity to waive the discrepancies. Often, the buyer wants the goods badly enough to waive a missing signature on a certificate, a missing date stamp on a transport document or the like. While the document examiner is generally not in a position to evaluate discrepancies, the buyer knows whether the discrepancies devalue the underlying contract. Many reimbursement agreements require the applicant to reimburse the issuing bank if the bank pays over discrepancies that are, in fact, immaterial. Though the issuer is not obligated to honour a defective presentation, the issuer will usually honour the seller/beneficiary’s presentation if the buyer waives the discrepancies.


  1. Dishonouring the Seller/Beneficiary’s Presentation
    In Illustration 12-2, the issuer has elected to dishonour the seller/beneficiary’s presentation. In that event, the issuer must give the presenting bank a notice of refusal. Under UCP 600 article 16, there are several rules that benefit the disappointed seller/beneficiary.
    1. The Five-Day Rule
      First, the bank that dishonours on the grounds that there are documentary discrepancies must give a notice of refusal to the presenting bank within five banking days following the day of presentment.
    2. Notice of Refusal Content
      Second, the notice of refusal must state unequivocally that the bank is refusing to honour the presentation, though it may also indicate that the bank is seeking a waiver from the applicant.
    3. Detailing Discrepancies
      Third, the notice must describe each and every documentary discrepancy on which the bank bases its dishonour. It is not enough for the notice to say “discrepant invoice”. It must state in what respects each discrepant document fails to meet the requirements of the credit, the UCP or international standard banking practice.
    4. Disposing of the Documents
      Fourth, the notice must tell the presenter what the dishonouring bank is doing with the documents that were presented. The bank may (1) hold the documents at the presenter’s disposal or per the presenter’s earlier instructions; (2) return them to the presenter; or (3) hold them pending the applicant’s decision to waive the discrepancies.
    5. The Preclusion Rule
      Fifth, the issuer is precluded from justifying its dishonour on the grounds that a document is discrepant if the issuer fails to comply with UCP 600 article 16 as summarized in the four preceding rules. This is a strongly pro-beneficiary rule.

  1. Summary
    Letter of credit practice relies on documents. Generally, a seller/beneficiary’s presentation to the nominated bank or the issuer must comply strictly with the conditions and terms of the credit. This strict compliance rule is essential to the low cost and proper functioning of the letter of credit, but the UCP balances this strict rule with strict procedural rules against the issuing bank. The bank must act promptly. Within five banking days, it must decide whether to honour or dishonour. If it decides to dishonour, it must give a notice of refusal that complies strictly with the four requirements listed above. If it fails to comply with these requirements, it may not justify its dishonour on the basis of documentary discrepancies, the only basis for dishonour allowed by the UCP.