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

Zeta Ltd sells machinery to Orion Co under an irrevocable documentary credit. Before shipment, Orion Co tells the issuing bank that the machinery contract has been breached and instructs it to refuse payment. Zeta Ltd later presents fully complying documents. What is the bank's position?

The bank must honour the credit. A documentary credit is independent of the underlying sale contract, so a buyer's allegation of breach does not excuse the bank where the documents comply. The buyer must pursue the seller separately for any breach.

  1. AIt may refuse payment because the buyer has alleged breach of the underlying contract
  2. BIt must honour the credit because it is independent of the underlying sale contractCorrect
  3. CIt must first obtain a court ruling on whether the sale contract was breached

Explanation

The autonomy principle makes the credit separate from the sale contract. An irrevocable credit with complying documents must be honoured, whatever disputes exist between buyer and seller. Orion Co's remedy is against Zeta Ltd under the sale contract, not against the bank.

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