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

Lumina Ltd in Country A sells machinery to Orbis Co in Country B. Payment is by irrevocable documentary credit issued by Orbis Co's bank (the issuing bank). Which statement best describes the issuing bank's position once the credit has been issued?

The issuing bank must pay the seller when documents that comply with the credit are presented. The credit is independent of the sale contract and banks deal in documents, not goods, so a buyer's allegation of defects does not release the bank.

  1. AIt is bound to pay the seller if the documents presented comply with the credit, whatever disputes later arise over the goodsCorrect
  2. BIt may refuse to pay if Orbis Co tells it that the machinery is defective
  3. CIt is only bound to pay once the buyer has inspected the goods on arrival

Explanation

A documentary credit is a separate undertaking from the sale contract. The issuing bank deals with documents, not goods, so it must pay against complying documents. The buyer's complaint about quality is a matter between buyer and seller, which is why the second option is wrong.

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