Dealing with Discrepancies under Letters of Credit

Chris Lidberg | June 4, 2006 | Export Finance, Import Basics
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Try as hard as you might, it is not uncommon to receive a call from your bank telling you that they have checked documents against your letter of credit (LC) and that discrepancies have been cited. If you’re an importer and you waive the discrepancy, either the payment process or the acceptance process will begin depending on the tenor of the draft.

Letter_of_Credit-DefinitionTry as hard as you might, it is not uncommon to receive a call from your bank telling you that they have checked documents against your letter of credit (LC) and that discrepancies have been cited. If you’re an importer and you waive the discrepancy, either the payment process or the acceptance process will begin depending on the tenor of the draft.

Before unleashing that process, you may want to check with a number of people before waiving any discrepancies to make sure that everything will be alright. Of course the type of discrepancy will more than likely determine who you might turn to for advice.

For instance, if the port of unloading differs from the LC, you’ll want to contact your customs broker to find out what obstacles this might create, as well as any additional costs. Since this means that the goods more than likely will not arrive at their final destination on time, you may also want to touch base with your logistics or distribution people to see if the delay will cause a problem.

If the letter of credit is overdrawn, you need to know whether the seller shipped more product than you expected, the seller is charging more for the product, or if there was an increase in shipping expenses that was approved by someone in your company who didn’t bother to notify you to have the LC amended. Whatever the case, you’ll want to check with the appropriate parties at your company to make sure this is acceptable before you waive the discrepancy.

Is a key document missing? If, for instance, the insurance document is missing, you’ll want to know whether the seller took out an insurance policy for the shipment and simply didn’t present the document or if they failed to insure the goods. In the latter case, you’ll want to make sure the goods arrived safely. If so, maybe it’s not a big deal this time, but what about next time?

What if the missing document is an inspection certificate by an independent third party? Have you ever received product from this supplier before? If so, was the quality and quantity per your contract terms?

Before a letter of credit is ever issued, the issuing bank more than likely will want to know  Letters of Credit Seminarwho at the company is authorized to deal with discrepancies. It’s so important that all the correct people are contacted on these issues.

I realize that there are occasions when the importer is notified of a discrepancy by the bank, and they know instinctively that the discrepancy is of no consequence and waives the discrepancy on the spot. That’s great, because it speeds up the whole process and everything keeps moving.

There could also be situations where the importer gives the bank a ‘blanket waiver’ for certain discrepancies from specified suppliers or for specific letters of credit. This is usually done with the understanding that if the importer changes their mind or if they anticipate a potential problem, they can rescind their ‘blanker waiver’ in its entirety or just for a specific drawing, which allows the buyer to refuse payment if necessary.

Article 14 of the UCP 500 deals with discrepant documents. It’s this article that tells banks that they must determine if the documents, on their face, comply with the credit terms. No outside influence is allowed. The bank may only determine compliance by looking at the documents required by the letter of credit.

In addition, if the bank calls a discrepancy, they are authorized by the UCP to refuse payment without consulting the buyer. Rarely is this authorization utilized. It is more common for the bank to notify the importer of the discrepancy and to get their input for the waiver/refusal process.

Unfortunately, the UCP doesn’t specify how long an importer has to respond to notification from their bank that they have found a discrepancy. Article 14 of the UCP 500 does say that if payment is going to be refused, it has to be done “…. without delay but no later than the close of the seventh banking day following the day of receipt of the documents.”

At first glance this seems like plenty of time, but if the bank doesn’t examine the documents for the first three or four days, that shortens the timeframe that the importer has to determine whether or not they want to waive the discrepancies. I would venture to guess that most times this isn’t an issue, but in that rare instance where the importer can’t get the information that they need to determine if the discrepancy is going to cause a problem for them, they may want to contact their bank to find out what their policy is for this situation.

My next article will deal with discrepancies from the exporter’s perspective.

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