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ACCA Applied Skills · Corporate and Business Law (Global) · Transportation documents and means of payment

Kessan Co sells goods to Orland Ltd under an irrevocable documentary credit. The goods are shipped and Kessan presents documents. The issuing bank discovers that the goods delivered are of lower quality than the contract required, though the documents on their face comply with the credit. What is the bank's correct position?

The bank must pay. A documentary credit is independent of the sale contract, and banks deal only with documents, not goods. If the documents comply on their face, payment is due, and the buyer must pursue the seller separately for any quality breach.

  1. AIt must pay, because banks deal in documents and not in the goods to which they relateCorrect
  2. BIt may refuse to pay until the buyer inspects the goods
  3. CIt must refuse to pay, because the bank guarantees the quality of the goods
  4. DIt may pay only half and hold the balance until the dispute is resolved

Explanation

Under the autonomy principle, the credit is separate from the underlying sale contract. The bank examines documents only and is not concerned with the actual condition of the goods. Orland's remedy for poor quality lies against Kessan under the sale contract.

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