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Bank ends up in the deep end.

The Indian Overseas Bank is in trouble after failing to honour 5 letters of credit which were issued to it. Stemcor, one of the claimants, is claiming against loss of storage costs and container demurrage charges. This mishap is thought to have been due to the Indian Overseas Bank’s failure to honour five letters of credit.

Stemcore had entered and agreement for shredded scrap metal to be shipped to an indian company. The payment was to take form in a letter of credit which was agreed and advised by Fortis Bank in London.  The Indian Overseas Bank opened five letters of credit and notificed Fortis.  The first three letters were confirmed by Fortis, and all seemed well.

Every letter of credit needs confirmation of bills of lading in the terms led by the Indian Overseas Bank.  Once the steel was shipped, Stemcor presented the documents for payment to Fortis. They paid out as agreed, for the first three letters of credit then claimed the funds from the Indian Overseas bank. The other two letters of credit were forwareded to the Indian Overseas Bank.

Due to the fall in price of steel, the actual price fell below the price agreed in the contract and the Indian company who the deal was made with refused to take delivery.

The market price for the steel fell dramatically below the
contractual price and the recipient refused to take delivery. The Indian Overseas Bank refused the documents presented by Fortis and refused to pay out under the fourth and fifth letters of credit. They also refused to reimburs Fortis for the funds paid out under the other three.

What an incredible mess!  The court raised a question about the time scales in which banks should be acting on letters of credit. Banks should consider to agree or discharge documents within 3 banking days.

If you need advice about letters of credit, speak to the team at Select Factoring.

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