Article-16, UCP-600-Discrepant Documents, Waiver and Notice

Credit subject to UCP, is an undertaking, issues to honour the complying presentation, which means presentation of the documents must be as per terms and conditions of the credit, UCP-600 and ISBP-745, however, if documents are not as per that, then it is considered a non-complying presentation. 

The process of document examination is independent of the beneficiary’s relationship with the applicant, sale or other contract upon which the documentary credit may be based and independent of the goods, services or performance to which the documents relate.

Document examination is on the basis of the documents alone and on their face. A determination as to whether the documents comply or not is not based on information gained from other source.

There may be several types of discrepancy in various documents, we will look into the basic characteristic as per below article 16 of UCP-600.

Article-16, UCP-600-Discrepant Documents, Waiver and Notice

a. When a nominated bank acting on its nomination, a confirming bank, if any, or the issuing bank determines that a presentation does not comply, it may refuse to honour or negotiate.

A nominated bank obligation’s are limited and they are free to choose whether to act on their nomination or not, though, if a nominated bank decides to act on its nomination or a confirming (if any) or the issuing bank find any discrepancy upon document examination process, it may refuse to honour or negotiate, so the point to note here is, it can be still honoured or negotiated on the basis of approval from the applicant through issuing bank, as the final fund will come from applicant. However, if it decides to refuse, a refusal notice must be sent to the presenter which may be either beneficiary or their bank.

b. When an issuing bank determines that a presentation does not comply, it may in its sole judgement approach the applicant for a waiver of the discrepancies. This does not, however, extend the period mentioned in sub-article 14 (b).

An issuing bank, in its sole judgement, may approach the applicant for a waiver of the discrepancies. There is no requirement on part of the issuing bank to seek a waiver and any decision to do that is completely within its discretion.

If the issuing bank decides to seek a waiver, prior to issuing its refusal notice, it must still have 5 banking days only, that period will not be extended, however, practically an issuing bank usually settle the presenter or provide the acceptance within that period; as per instruction from the applicant, it is a good practice to send the refusal notice first in case of discrepant presentation and make the payment upon applicant’s waiver or debit authority or transmit the MT752 (acceptance message) to presenter in case of USANCE cerdit.

The issuing bank is not bound by an applicant’s decision to waive the discrepancies, reason may be regulatory requirements, no limit in case of overdrawn or any other additional risk.

c. When a nominated bank acting on its nomination, a confirming bank, if any, or the issuing bank decides to refuse to honour or negotiate, it must give a single notice to that effect to the presenter. The notice must state: 

A nominated bank acting on its nomination or a confirming bank or the issuing bank decides to reject the presentation then, it must give a notice of refusal to the presenter, multiple notices of refusal within the same day or within the five-banking-day period are not acceptable. In such circumstances, the first notice of refusal will be the one that is binding on the issuing bank. That particular notice must state one of the below:

i. that the bank is refusing to honour or negotiate; and

The notice must state that the bank is refusing to honour or negotiate, however, if the refusal notice in the form of dedicated swift MT734, then inclusion of this sentence is not mandatory.

ii. Each discrepancy in respect of which the bank refuses to honour or negotiate; and

Bank must include the discrepancies in respect of which documents are being refused, those discrepancies must be valid. 

iii.a) that the bank is holding the documents pending further instructions from the presenter; or

It means that the bank is holding the documents until no instruction is received for the refusal notice for further handling of the documents, from the presenter.

b) that 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

If the presentation is made on issuing bank counter then the issuing bank may seek waiver from the applicant and sends the refusal to presenter simultaneously; if before receiving the waiver, an instruction is being received from the presenter either to return the document or for handling, whichever is earlier; bank will act on that.

c) That the bank is returning the documents; or

Bank may include this if decides to return the documents, there is no obligation to honour a non-complying presentation by any bank and that can be returned at any time as per bank’s discretion.

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

There is a possibility that the presenter has already provided the instruction regarding the presentation to handle the documents further if discrepant, which may be reach out to applicant for waiver or likewise.

d. The notice required in sub-article 16 (c) must be given by telecommunication or, if that is not possible, by other expeditious means no later than the close of the fifth banking day following the day of presentation.

A notice of refusal must be sent or given no later than the close of the fifth banking day following the day of presentation.

A notice of refusal may also be conveyed to a presenter by free format SWIFT messages such as MT799, MT199 or by telecommunication, like fax, email, telex or telephone. When conveying a notice of refusal using one of these methods, we should ensure compliance with the three basic requirements:

1. An indication of refusal of the presentation.

2. A list of the applicable discrepancies, and these should be clearly stated.

3. One of the status of the documents whether hold/return/wait for further instruction/taking action as per previous instructing.

e. A nominated bank acting on its nomination, a confirming bank, if any, or the issuing bank may, after providing notice required by sub-article 16 (c) (iii) (a) or (b), return the documents to the presenter at any time.

A nominated bank, confirming bank or an issuing bank can return the document at any time (even if applicant provides waiver) there is no obligation to honour a non-complying presentation and accept the discrepancy waiver, its bank discretion.

f. If an issuing bank or a confirming bank fails to act in accordance with the provisions of this article, it shall be precluded from claiming that the documents do not constitute a complying presentation.

Preclusion means, the action of preventing something from happening, because the issuing bank or a confirming bank, ie the banks that have provided the beneficiary with an undertaking to honour or negotiate a complying presentation, would not be able to claim that they are not liable to pay if do not act according to this article to provide the notice of refusal in case of discrepant documents within 5 banking days following the day of the presentation, if they fail to do so, presentation deemed to be complied and must be honour as per undertaking.

g. When an issuing bank refuses to honour or a confirming bank refuses to honour or negotiate and has given notice to that effect in accordance with this article, it shall then be entitled to claim a refund, with interest, of any reimbursement made.

Upon examination of the document by a nominated or a confirming bank if presentation determines clean in accordance with the terms and conditions of the documentary credit and if that has already been reimbursed or debited the account of the issuing bank to make the payment to beneficiary, and forwarded the documents to the issuing bank and if the issuing bank finds discrepancies in the documents received from a nominated bank or confirming bank, in addition to issuing its notice of refusal the issuing bank may also request a refund of the amount that has been paid to the nominated bank or confirming bank together with interest covering the period commencing the day on which the issuing bank’s account was debited to the date on which the funds are returned.

In most cases, a refund is not requested. However, if the applicant decides not to provide a waiver of the discrepancies or the issuing bank decides not to approach the applicant for a waiver or refuses to accept a waiver, a request for refund and interest is to be expected.

Points to Remember:

1.     A good practice is to convey the notice of refusal in the form of MT734 dedicated swift message.

2.     When using the SWIFT MT734 message, a bank may indicate the status of the documents, in field 77B, by the use of a code word as, ‘HOLD’, ‘NOTIFY’,  ‘RETURN’ or ‘PREVINST’.

3.     If a notice of refusal is being conveyed in other means then an indication of refusal of the presentation, a list of the applicable discrepancies, one of the above stated status of the documents must be use.

4.     Even if an issuing bank goes for a waiver, one must to convey the refusal notice first rather than waits for waiver to receive.

5.     Technically, an expired credit is not a discrepancy, but a non-existent documentary credit. To facilitate the documentary credit and as an accommodation to the presenter, however, most banks treat ‘credit expired’ as a discrepancy and advise the presenter accordingly.