Refunds and reimbursement in banking

The Sale of Goods 

In banking there are several procedures which have to be followed or which have to comply with certain rules. The banking procedure is sometimes complicated and may involve several contracts between the parties. If one of the terms of the contract is breached this may have an effect on the performance of the rest of the contracts. Taking the example of the sale of goods, the Buyer and the Seller will engage their banks in relation to providing credits to one another. There are several contracts between the parties. Upon the presentation of the correct documents the bank will pay out, this is however not the case if the documents are faulty.

Documentary credits

Documentary credits are arrangements whereby an issuing bank, upon the request of the customer, will make a payment to third party (which is called the beneficiary) or will accept and pay bills of exchange. Issuing bank may authorise another bank to make such payments or negotiate against documents. Such a definition is codified in the Uniform Customs and Practice for Documentary Credits (UCP). UCPs are a set of rules which give guidelines and rules on all aspects of documentary credits. They were issued by the international Chamber of Commerce (ICC). As in accordance with the UCP, branches of one bank which are situated in different countries are considered as different banks.

E.G. Contract of the sale of goods

The parties to such a contract are the Buyer and the Seller. There are however other contracts with the issuing and confirming bank. There is a contract between the Buyer and the issuing bank. The issuing bank will agree to issue a credit or through a confirming bank to make the necessary payment on the presentation of the relevant documentation. The buyer hereby agrees to reimburse the issuing bank for the credit which has been given to him. If those payments are made through the confirming bank, there is a contract between the issuing and the confirming bank. The confirming bank agrees to issue the credit and the issuing bank agrees to reimburse the confirming bank. There is also a contract between the Seller and the confirming bank. The confirming bank agrees to pay to the Seller up to the amount of the credit on the presentation of the relevant documents.  

Discrepancy and Reimbursement

There may be a case that the documents do not appear to comply with the terms and conditions and that they are discrepant. Such documents will not be accepted and will instead be refused. There are different procedures and rights if the discrepancy is discovered by the issuing or confirming bank. If such a discrepancy is discovered by the confirming banks, the beneficiary will have some rights against the applicant. If the confirming bank pays out without the authority of the issuing bank and the documents contain discrepancy, the confirming bank is not entitled to be reimbursed from the issuing bank. The confirming bank is only entitled to pay against the presentation of the documents which comply with all terms and conditions, as soon as any discrepancy occurs the bank is not allowed to make ay payment. If one of the banks detects the discrepancy it is obliged to issue a notice of rejection of the documents. Specific procedure must be followed otherwise the banks will not be able to claim that there was a discrepancy discovered. In some circumstances it is common that the issuing bank contacts the applicant before sending rejection notice, if the applicant gives immediate waiver the issuing bank will take the documents.

Refund of Reimbursement

If an issuing bank will authorise the confirming bank to reimburse itself on the payment to the beneficiary and the issuing bank after this rejects the documents, it will claim a refund of any such reimbursement.