As has been frequently emphasised in the past, education on industry rules and practices is essential for discrepancies under documentary credits (DC) to be curtailed.

In the latest of its ongoing series of technical advisory briefings released on 27 June 2022, the International Chamber of Commerce (ICC) Banking Commission addressed the subject of ‘Reducing Discrepancy Rates under Documentary Credits’ (TAB-3).

Although discrepancies cited in documents which were refused upon first presentation–impacting 65-80% of documentary credits–may not prevent a beneficiary from receiving a settlement, discrepancies introduce unnecessary delays, additional costs, and inefficiencies to the DC process.

TAB-3 first categorised refusals into three groupings: refusals relating to beneficiary-issued documents and DC timing requirements; refusals relating to documents issued by entities other than beneficiaries; and refusals that are not valid.

TAB-3 pointed out, “The more common discrepancies are due to timing issues (expiry, shipment and presentation period), with a significant number deriving from poorly prepared documents or presentations.”

In its analysis of the discrepancy scourge, TAB-3 referenced that feedback from ICC National Committees and a fifteen-year study of ICC Opinions demonstrate a lack of understanding of the application and practice of the UCP 600 among both bankers and corporate DC users is the root cause of many discrepancies.

UCP 600, Letters of Credit, ICC, Trade FInance

TAB-3 also broached the matter of discrepancy fees and indicated that perhaps the charging of discrepancy fees by banks is being mishandled in certain cases. ICC or practice rules cannot eliminate or control the assessment of discrepancy fees.

Various ICC Opinions offering guidance regarding discrepancy fees are mentioned, but TAB-3 stated that the most appropriate response to concerns over discrepancy fees is “to concentrate on educational and guidance aspects and to find ways to actually reduce the discrepancy rate.”

In summary, TAB-3 concluded that each bank has a duty to educate its own staff and an incentive to educate its clients. The briefing then outlined various ways discrepancy rates could be reduced.

Topping the list is the need for issuing banks to improve their drafting of DCs by taking an optimal, methodical, and detail-oriented approach toward sound construction of 4 Documentary Credit World (DCW) DCs and avoidance of non-documentary conditions.

The briefing also emphasises that efforts to exclude or modify specific UCP 600 Articles should be avoided as much as possible.

Other tips are directed at confirming banks to thoroughly review DCs for “any risks and areas of possible contention” and at beneficiaries to carefully evaluate their ability to perform under the credit, present documents, furnish appropriate information on required documents, and request any needed amendments in a timely fashion.

TAB-3 ended with a call for broader accessibility to, and greater understanding of, International Standard Banking Practice (ISBP).

Since commercial letters of credit tend to have high discrepancy rates on first draws, some believe that the ICC’s briefing is a step in the right direction.

Other reviewers of TAB-3 have observed that the opening paragraph of its concluding summary may run counter to a bank’s own interests.

Safeguards to consider when using documentary credits

The summary states, “Where a beneficiary has faced discrepancies in a presentation, an explanation of what caused the discrepancy, and what can be done next time to avoid it re-occurring, can only prove beneficial for future presentations.”

“Explanation” seems to mean an educational outreach separate from the notice of refusal. In spite of such efforts, a bank may be left in a tough position if a beneficiary uses the advice next time and the documents are still at variance, or if the applicant considers that the bank’s explanation was made without the applicant’s consent and that it affects an amendment or waiver of the letter of credit’s (LC’s) terms or conditions.

Additional feedback on TAB-3 suggests that the briefing may dilute the ICC’s emphasis on ascertaining and applying ISBP rather than applying breach of contract concepts with which lawyers and judges are more familiar.

This article was first published in Documentary Credit World.