If the seller ships the goods which are not up to the buyer’s expectation, can the buyer get the bank to cancel payment under LC? For example, the letter of credit says, ‘milk powder grade A’ but seller shipped ‘milk powder grade B’. Can the buyer instruct his bank to stop payment of the LC which has been issued to the seller?
Letter of Credits are separate contract from contract of sale and other contracts existing which bind the parties involved in an international trade transactions. This is clearly stated under article 4 and article 5 of UCP600. LC is only concern with payment and absolutely has nothing to do with goods.
The dispute in any of these contracts shall not form grounds for non-payment of an LC. Regardless of any disputes, seller is still entitles to payment under LC. Disputes between parties should be settled by litigation or arbitration or otherwise as stipulated in the contract. This principle is clearly emphasized in one of the popular cases, Hamzeh Malas & Sons v. British Industries Ltd.
The plaintif, a Jordanian firm, had contracted to purchase from the defendant, a British firm, reinforced steel rods to be shipped in two instalments. Payment was to be effected by way of two LCs. The first instalment was delivered and payment was obtained by the seller. The plaintiff then complained that the first instalment was defective and sought to enjoin the defendant from drawing under the second LC.
The court commented:
“…the opening of a confirmed LC constitutes a bargain between the banker and the vendor of goods, which imposes upon the banker an absolute obligation to pay, irrespective of any dispute there may be between the parties as to whether the goods are up to contract or not…A vendor of goods selling under the insurance that nothing will prevent him from receiving the price…”
Based on the judgment passed by the court of law, it is important to understand that in LC transaction, payment is 100% guaranteed but it is not an undertaking to guarantee the goods.