Discrepancy pointed out by issuing bank or confirming bank

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kapiltanna
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Joined: 06/19/2007
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Dear All,

If issuing bank or confirming bank of the LC has pointed out some discrepancies and communicated to us. What are the solutions available to us?

In this case, cover of the LC remains there or it gets removed?

Within what time they are supposed to advise discrepancies to beneficiary?

If within the reasonable time issuing or confirming bank fails to communicate discrepancies to us can they claim discrepancies after that?

Can issuing bank or confirming bank on their own ask our buyer for acceptance of the discrepancies without informing us (beneficiary) and on acceptance by buyer charge discrepancy charge to beneficiary?

Can we send amended documents to them duly corrected for the discrepancies or our buyer only can approve these discrepancies and we are supposed to pay discrepancies charges?

Rgds,

Kapil

Frammi
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Joined: 08/17/2007
Comments in respect to UCP 600

First of all many thanks to Armagedo and LC_Sam for their sophisticated comments.

What I would like to do now is to highlight the effects under a credit submitted to the UCP 600:

"If issuing bank or confirming bank of the LC has pointed out some discrepancies and communicated to us. What are the solutions available to us?"

As per art. 16 c they have to state how they will handle the presentation, especially whether

"Art. 16 c) iii. a) the bank is holding the documents pending further instructions from the presenter; or

b) the issuing bank is holding the documents until it receives a waiver from the applicant and agrees to accept it, or receives further instructions from the presenter prior to agreeing to accept a waiver; or

c) the bank is returning the documents; or

d) the bank is acting in accordance with instructions previously received from the presenter. "

Irrespective of the aforesaid you could still try to make a compliant presentation: Let's say just a beneficiary's certificate was not complying, you could get it reissued and send it to the nominated/issuing bank. However in most  cases, you would be too late.

Another possibilty would be to sell the goods to someone else. I would only do this if the docs were definitely rejected. Usually I would wait for the waiver of beneficiaries which is usually issued within a week after the notice of refusal.

"In this case, cover of the LC remains there or it gets removed?"

LC_Sam has already given you a very good reply. If you think of the credit lines and securities the applicant maintains with the issuing bank, they will only be released after no more compliant drawing is possible at the issuing bank, i.e. either after payment or after expiry of the credit.

"Within what time they are supposed to advise discrepancies to beneficiary?"

As per Art 14 b, discrepancies have to advised to the party from whom an issuing or nominated bank has received the presentation within five banking days after receipt of the docs.  These days subsequently arise for any nominated/ issuing bank.

"If within the reasonable time issuing or confirming bank fails to communicate discrepancies to us can they claim discrepancies after that?"

No! As per Art. 16 d and f) they then have to honour the presentation.

"Can issuing bank or confirming bank on their own ask our buyer for acceptance of the discrepancies without informing us (beneficiary) and on acceptance by buyer charge discrepancy charge to beneficiary?"

As per Art 16 b. an issuing bank is authorized to do so.
As a confirming bank they should ask you for proper docs in the first place and then suggest to send the docs on approval basis.

"Can we send amended documents to them duly corrected for the discrepancies or our buyer only can approve these discrepancies and we are supposed to pay discrepancies charges?"

The first parts were already answered above. If you have presented docs with disrepancies, of course you have to pay discrepancy fees as you cause extra work to the issuing/nominated bank.

  -Each long journey starts with a small step-

Best regards

Frammi

Armagedo's picture
Armagedo
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Joined: 09/10/2007
Hi! Step by step. Question

Hi!

Step by step.

Question 1: 

<code> If issuing bank or confirming bank of the LC has pointed out some discrepancies and communicated to us. What are the solutions available to us? </code>

Answer 1:

I would say nominated bank/confirming bank/issuing bank....

You have 2 opprtunities to nevertheless utilize LC:

  1. To substitute discrepant documents in order them to be credit conform. Otherwise
  2. To send documents to the issuing bank on basis of approval instructing (throug nominated/confirming) to realease the docs only against applicants and then issuing bank agreement to pay against discrepant docs (waiver of discrepancies).  And then to start negotiate this issue with applicant not waiting when the same will be sent to him  through the bank channel.

Question 2:

<code> In this case, cover of the LC remains there or it gets removed? </code>

Answer 2:

I'm not familiar with this so leaving this for the answer of more experienced in this collegues.

Question 3:

<code> Within what time they are supposed to advise discrepancies to beneficiary?</code>

Answer 3:

Not later than the end of the 5th working banking day from the date of presentation of documents. See, UCP600 Article 14(b).

Question 4:

<code> If within the reasonable time issuing or confirming bank fails to communicate discrepancies to us can they claim discrepancies after that? </code>

Answer 4:

No. Failing do this within above mentioned 5 working banking days it's no longer Your baby. Documents to be considered as credit conform and bank obliged to reimburse You as per LC terms.

Question 5:

<code> Can issuing bank or confirming bank on their own ask our buyer for acceptance of the discrepancies without informing us (beneficiary) and on acceptance by buyer charge discrepancy charge to beneficiary? </code>

Anwer 5:

No. In case of discrepancies found, the full list of discrepancies to be advised to the beneficiary and the docs presented to be at disposal of the presenter (beneficiary). Then Your instructions to follow (pls, see answer 1).

Yes, sometimes issuing banks are putting the following clause into LC:

<code> NOTWITHSTANDING THE PROVISIONS OF UCP 600, IF WE GIVE NOTICE OF
REFUSAL OF DOCUMENTS PRESENTED UNDER THIS CREDIT WE SHALL HOWEVER
RETAIN THE RIGHT TO ACCEPT A WAIVER OF DISCREPANCIES FROM THE
APPLICANT AND, SUBJECT TO SUCH WAIVER BEING ACCEPTABLE TO US, TO
RELEASE DOCUMENTS AGAINST THAT WAIVER WITHOUT REFERENCE TO THE
PRESENTER PROVIDED THAT NO WRITTEN INSTRUCTIONS TO THE CONTRARY
HAVE BEEN RECEIVED BY US FROM THE PRESENTER BEFORE THE RELEASE OF
THE DOCUMENTS. ANY SUCH RELEASE PRIOR TO RECEIPT OF CONTRARY
INSTRUCTIONS SHALL NOT CONSTITUTE A FAILURE ON OUR PART TO HOLD
THE DOCUMENTS AT THE PRESENTER'S RISK AND DISPOSAL, AND WE WILL
HAVE NO LIABILITY TO THE PRESENTER IN RESPECT OF ANY SUCH
RELEASE
 </code>

which mean that if You/nominated bank/confirming bank will fail to properly instruct issuing bank (in case of discrepancies) they will by themself apply to the appliant for acceptance of this descripancies. And if they will receive such an acceptance they will release the docs to the applicant, but will have no any obligations to reimburse You with countervalue of the docs presented.

So be care of such a condition.

Question 6:

<code> Can we send amended documents to them duly corrected for the discrepancies or our buyer only can approve these discrepancies and we are supposed to pay discrepancies charges? </code>

Answer 6:

Think that Answer #1 and 6 fully answer this question. But You will pay discrepancy fees in any case, if this is on Your account and such a provision is in LC, whether docs will be accepted by applicant or not. Such fees are not in concern with applicant, but with issuing bank.

 Good luck.

Frammi
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Joined: 08/17/2007
Not longer necessary under the UCP 600

Dear Armagedo, 

quote

Yes, sometimes issuing banks are putting the following clause into LC:

<code> NOTWITHSTANDING THE PROVISIONS OF UCP 600, IF WE GIVE NOTICE OF
REFUSAL OF DOCUMENTS PRESENTED UNDER THIS CREDIT WE SHALL HOWEVER
RETAIN THE RIGHT TO ACCEPT A WAIVER OF DISCREPANCIES FROM THE
APPLICANT AND, SUBJECT TO SUCH WAIVER BEING ACCEPTABLE TO US, TO
RELEASE DOCUMENTS AGAINST THAT WAIVER WITHOUT REFERENCE TO THE
PRESENTER PROVIDED THAT NO WRITTEN INSTRUCTIONS TO THE CONTRARY
HAVE BEEN RECEIVED BY US FROM THE PRESENTER BEFORE THE RELEASE OF
THE DOCUMENTS. ANY SUCH RELEASE PRIOR TO RECEIPT OF CONTRARY
INSTRUCTIONS SHALL NOT CONSTITUTE A FAILURE ON OUR PART TO HOLD
THE DOCUMENTS AT THE PRESENTER'S RISK AND DISPOSAL, AND WE WILL
HAVE NO LIABILITY TO THE PRESENTER IN RESPECT OF ANY SUCH
RELEASE
 </code>  

unquote

Please read article 16 c) iii. b)! Finally a very good amendment under the UCP 600!

   -Each long journey starts with a small step-

Best regards

Frammi

Armagedo's picture
Armagedo
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Joined: 09/10/2007
Not so simple, IMHO

Dear Frammi!

Thanks for the references and Your comments.

But I would like to clarify some points and I have big doubts that the issuing banks will deem those articles as guidance that such a clauses are no longer necessary under the UCP 600.

As we well aware that UCP (500 AND 600) are rules, which can be modified by terms appearing in the doc. credit, with the agreement of the parties (applicant, beneficiary, issuing bank, advising bank....)!

So, inserting such a clause issuing bank expressly states what he will do with discrepant presentation.

Moreover, IMHO, by this he limits himself in the choices what he will do with discrepant docs: if instructions from presenter will follow earlier then release then he is obliged to follow such an instructions whatever there will be stated.

It means that, if we, as presenter, will (and we, of course, will)state that in case of discrepancies docs to be held at our disposal without notifying applicant then issuing bank has no other option.

Rules are modified and issuing bank is irrevocably bound by such a clause.

Without our consent issuing bank is no longer allowed to act either with 16 (iii) (a) or (b) or (c)....

16 (iii) (d) is his only choice.

Without such a clause in LC he has 4 option on his own choice.

Good luck.

Frammi
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Joined: 08/17/2007
Sorry, I think I do not quite understand what you mean

Dear Armagedo,

I'm quite puzzled by what you're writing. The clause was intended to be used by an issuing bank, or not?

In your second comment you wrote:

"So, inserting such a clause issuing bank expressly states what he will do with discrepant presentation. "

Okay the clause is good and what it contains is almost entirely the same as article 16 c) iii. b). Just that it precludes that this choice will be taken after presentation of the goods.

"Moreover, IMHO, by this he limits himself in the choices what he will do with discrepant docs: if instructions from presenter will follow earlier then release then he is obliged to follow such an instructions whatever there will be stated.

It means that, if we, as presenter, will (and we, of course, will)state that in case of discrepancies docs to be held at our disposal without notifying applicant then issuing bank has no other option. "

 

As a presenter you would not agree to the issuing bank search for a waiver and you would specify in your presentation letter that you do not agree to their asking for a waiver? If so, why??! And why not notifying the applicant?! What are your motives?

 

 

"Without our consent issuing bank is no longer allowed to act either with 16 (iii) (a) or (b) or (c)...."

The issuing bank is also a party to the credit. They might nevertheless not agree to a stipulation in your instructions choose 16 c) iii. a) and ask you for further instruction or wait and return the docs to you as per art. 16 e).

Somehow, IMHO it appears that b) is quite in the interest of the presenter, at least I never ever had any problems with the waivers I got from applicants, although  ......  I very scarcely rejected docs before accepting the waivers.

But with the shortened period of five working days there is hardly any time left to get the waiver in due time.

Please come back to this item. I think I completely misunderstood you the one way or the other.

   -Each long journey starts with a small step-

Best regards

Frammi

Armagedo's picture
Armagedo
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Joined: 09/10/2007
Frammi...I'm surrendering :)

Dear Frammi!

Thanks for Your comments.

I think that I've caught the meaning of Your thoughts.

The most important in this clause is that issuing bank will have a right to apply for waiver of discrepancies from applicant IF (read AFTER) THEY GIVE NOTICE OF
REFUSAL OF DOCUMENTS PRESENTED...

And at the moment of giving such a notice Article 16 is in force.

And it's upto the bank to decide what to do with documents.

And our instructions to follow only after such a notice of refuse, but prior to release of the docs.

Frammi...

Excellent ... :)

Thanks a lot for a lesson to be in my beneficiary's pocket.

Good luck

LC Sam
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Joined: 08/09/2007
Step by Step follow up.

Great answers Armagedo.

I will try to answer question number two.  As to the cover of the LC, I am assuming the reference to the confirmation of the letter of credit.  The answer, of course, as always is it depends.

Referring back to question 1 answers...

If corrected documents are presented and the documents become compliant there is cover.

If however a waiver has to be obtained from the applicant cover of the confirming bank would cease to exist and the following would apply.

1. If the confirming bank cabled the issuing bank for approval of discrepancies and they received a cable approval of the issuing bank for the noted discrepancies the cover of the issuing bank would still be in place.

2. If the documents were sent on an approval basis and the issuing bank noted the discrepancies, there would be no cover of the issuing bank either.  In this case, even if the applicant provided a waiver the issuing bank would be under NO obligation to honor the letter of credit.

 Now for the really confusing part....  If the documents are accepted by the applicant, and the letter of credit is a usance letter of credit (acceptance or deferred payment) and the issuing bank, accepting bank or confirming bank creates a banker's acceptance or creates a deferred payment undertaking, the party that creates either of these must cover the payment at maturity.

 I hope this helps out on question 2.

 I also have a comment on the response to question 5.  The mentioned clause is a result of (you guessed it) court litigation.  The clause still states that the issuing bank will notify the presenter of discrepancies.  The basis of the court case best explains it.  I will try to recall it from the cases I have read. 

Apparently a set of documents was presented to a bank in the US for payment under a letter of credit subject to the UCP 500.  The bank in the US refused the documents in accordance with the UCP 500 and held the documents at the disposal of the presenter.  In the meantime, the US bank also contacted the applicant for a waiver.  The applicant provided the waiver and the US bank released the documents to the applicant and made payment to the presenting bank.  We would all think that this would be the end of the transaction, but no......

Upon receipt of the refusal by the issuing bank in the US, the beneficiary located another buyer for the goods with the price of the goods being significantly higher. The beneficiary instructed the presenting bank to contact the issuing bank requesting the return of the documents.  Since the issuing bank had released the documents to the applicant, the beneficiary sued the US bank and won.

Therefore banks in the US have started using this clause to protect themselves in the case that they approach the applicant for a waiver.

Best regards,

LC Sam

Armagedo's picture
Armagedo
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Joined: 09/10/2007
Hi! Thanks to LC Sam

Hi!

Thanks to LC Sam again...

Very, very cognitive....

Good luck

 

kapiltanna
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Joined: 06/19/2007
Thanks

Very well explained!!

Thank you very much to both of you - Armagedo & LC Sam

Rgds,

Kapil

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