By S&S Co. Advocates & Solicitors · Published 22 May 2026 · Informational content, not legal advice: see our disclaimer
What a Letter of Credit Is, and Why It's Autonomous
A letter of credit is an independent undertaking by an issuing bank, at the request of a buyer (the applicant), to pay a seller (the beneficiary) upon presentation of documents that comply with the credit's terms: regardless of any dispute that may exist between buyer and seller under their underlying sale contract. This principle of autonomy, sometimes called the 'independence principle', means the issuing bank's payment obligation is triggered by compliant documents, not by whether the goods actually shipped match what was ordered; disputes about the goods themselves belong to the sale contract, and ordinarily have to be pursued separately.
The Doctrine of Strict Compliance
Banks examining documents presented under a letter of credit apply the doctrine of strict compliance. Documents must, on their face, conform strictly to the terms of the credit; near enough is not good enough. Common discrepancies include mismatched descriptions of goods between the invoice and the credit, late shipment beyond the credit's shipment deadline, missing or improperly endorsed transport documents, and insurance documents that do not cover the required risks or period.
UCP 600's Examination and Notice Timeline
The Uniform Customs and Practice for Documentary Credits, 2007 Revision (UCP 600), which governs the vast majority of internationally issued letters of credit including those used in Indian trade finance, gives a bank a maximum of five banking days following the day of presentation to determine whether documents comply. If the bank decides to refuse, it must give a single notice stating every discrepancy it relies upon and its disposition of the documents: a bank that misses this window, or that raises additional discrepancies later that it did not mention in its timely notice, loses the right to refuse payment on those grounds.
What to Do If Payment Is Refused
A beneficiary who receives a discrepancy notice should first check whether it was issued within the five-banking-day window and whether each discrepancy is precisely and individually stated, as required by UCP 600 Article 16. A generic or untimely notice can itself be challenged. Where discrepancies are genuine but minor, beneficiaries can often cure them by re-presenting corrected documents within the credit's validity, or request the applicant's waiver of the discrepancy, which the issuing bank can then act upon.
Frequently Asked Questions
Can a bank refuse to pay under a letter of credit because the buyer complains the goods were defective?
Ordinarily no. A letter of credit is independent of the underlying sale contract, and complaints about the quality or condition of goods actually shipped are matters between buyer and seller, not grounds for the issuing bank to refuse payment against compliant documents, except in limited cases involving established fraud in the transaction.
How long does a bank have to check documents under a letter of credit?
Under UCP 600, a maximum of five banking days following the day of presentation, regardless of the credit's own expiry date, to determine whether the documents comply and to issue any discrepancy notice.
What happens if the bank raises a new discrepancy after the five-day window?
A bank that fails to give notice of a discrepancy within the prescribed timeline, or that fails to state a particular discrepancy in its notice, is generally precluded from later relying on that discrepancy to refuse payment.
References & Further Reading
This article references the following statutory provisions and regulatory materials. Readers should always verify current rules, circulars and timelines against the applicable statute, regulation or RBI direction as amended, since these are revised from time to time.
- Uniform Customs and Practice for Documentary Credits, 2007 Revision (UCP 600), International Chamber of Commerce.
- Foreign Exchange Management Act, 1999, and related RBI trade finance directions (for cross-border transactions).