Dishonoring Letters of Credit

In June 2005, JFTC, a Chinese company, agreed to purchase 1,000 metric tons of fertilizers from VA Trading Corporation (VATC), located in Houston, Texas. JFTC obtained a letter of credit from the Bank of China (BC) for the purchase price of $1.2 million. Payment was to be made to VATC after delivery of the merchandise and presentation of the requisite documents to the Bank of China in accordance with UCP 500.

The market price of fertilizers had declined significantly, and the buyer re­quested a concession. VATC refused to reduce the price. VATC presented the documents specified under the letter of credit (after shipping the goods to JFTC) to Texas Commerce Bank (TCB), which would forward the documents to the BC. Although TCB pointed certain discrepancies between the documents and letter of credit, it did not believe that they would lead to any problems.

The Bank of China notified TCB of the discrepancies and indicated its willing­ness to contact the buyer (JFTC) about acceptance. JFTC refused to waive the discrepancies, and the Bank of China returned the documents to TCB. VATC was not paid for the shipment.

Source: Seyoum Belay (2014), Export-import theory, practices, and procedures, Routledge; 3rd edition.

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