Discrepancy Rates under UCP 600

In documentary credit operations, the advising of discrepancies in documents is probably the most contentious issue that a bank will face with its clients or another bank.

Global statistics differ but it is estimated that the percentage of documents refused on first presentation ranges between 65-80%, although there are many regional/national differences. This does not necessarily mean that a beneficiary will not receive payment; but it does mean that, at the very least, there will be a delay in receiving settlement or financing and an increase in bank fees.

One perplexing issue is that the revision of UCP in 2007 did not, and still has not, reduced discrepancy rates. Why have not discrepancy rates on first presentation not improved under UCP 600? Identifying and understanding the factors contributing to persistently high discrepancy rates is absolutely critical to charting a sensible path for taking the ICC rules forward.

See also: Should "Negotiation" Continue to be a Form of Availability within UCP?

What are the problems?

Complexity of documentary requirements:
Documentary credits often have very detailed and specific documentary requirements that can be challenging for beneficiaries to fully comply with. Even minor errors or omissions can trigger discrepancies. A simple documentary credit format must be applied.

Lack of education and training:
Many beneficiaries and those who prepare documents may not be fully aware of, or trained on, the intricacies of UCP 600 and proper document preparation; this knowledge gap contributes to ongoing and repeated discrepancies.

Inconsistent document examination practices:
Despite UCP 600 and ISBP guidelines, there can still be variations in how different banks examine documents, leading to discrepancies cited by some banks but not others.

Tight timeframes:
The short timeframes for document preparation and presentation after shipment can lead to rushed work and errors.

Overly strict interpretation:
Some banks may take an excessively strict approach to document examination, finding discrepancies for very minor, inconsequential matters.

Lack of standardisation:
While UCP 600 provides industry rules, there is still a lack of full standardisation in document formats and requirements across different trades and regions.

Commercial pressures:
In some cases, discrepancies may be used as leverage for renegotiation of terms, incentivising strict document examination.

How can the problems be remedied?

Banks and financial institutions have a duty to educate their clients. When a client is faced with discrepancies, providing an explanation of where the presentation has gone amiss can prove beneficial to the client for future presentations.

However, most banks merely cite discrepancies as if they were inevitable and inescapable; this is not so. The manner in which a bank expresses a discrepancy, and explains it clearly to a beneficiary, can demonstrate an operational excellence that will set them apart from their competition.

Whether or not a bank refuses documents is based upon the content of the documents themselves, and their conformity to the terms and conditions of the credit, UCP, and international standard banking practice. At the end of the day, the decision to accept or reject often depends on an individual document examiner in assessing compliance and based on their individual knowledge, experience, and judgement.

However, any discrepancy should stand one particular test: Would you feel comfortable defending that discrepancy before a judge in a court of law? Remember, in a worst-case scenario, a court will be asked to render judgement if a discrepancy dispute cannot be amicably resolved.

The Definitive Guide to UCP600

Exhaustive rule-by-rule handbook with analysis for sound drafting

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Solutions

There are a number of simple solutions that can be adopted reduce discrepancy rates:

• Improved drafting of credits by issuing banks.
• Thorough review of credits by advising / confirming banks to understand risks and implications.
• Beneficiaries to clearly and realistically understand their ability to provide certain documents and meet timeframes and deadlines.
• Closer and constant communication between beneficiaries and logistics / document providers.
• Better coordination between all parties in case of unforeseen problems.
• Address problems prior to presentation of documents.
• Avoidance of credits that exclude specific articles and sub-articles of UCP as much as possible.

Ultimately, if a presentation is refused due to one or more discrepancies, there are three options available to secure payment under the credit. In order of suggested preference:

1. Correct the discrepancies, at least as far as is possible.
2. Request that the nominated bank contact the issuing bank for its agreement that the documents may be honoured or negotiated despite the noted discrepancies. The documents will be held with the nominated bank until the issuing bank responds indicating that the applicant has provided an acceptable waiver of the discrepancies.
3. Request that the nominated bank forward the documents to the issuing bank for settlement. The documents are sent to the issuing bank as a presentation under the credit and honoured following the applicant issuing an acceptable waiver of the discrepancies.