ICC Briefing Addresses Topic of Reducing Discrepancy Rates

As has been frequently emphasized in the past, education of industry rules and practices is essential if discrepancies under documentary credits are to be curtailed. In the latest of its ongoing series of technical advisory briefings released on 27 June 2022, the ICC Banking Commission addressed the subject of “Reducing Discrepancy Rates under Documentary Credits” (TAB-3).

Although discrepancies cited in documents refused on first presentation – impacting 65-80% of documentary credits by some estimates — may not ultimately prevent a beneficiary from receiving settlement, discrepancies introduce unnecessary delays, additional costs, and inefficiencies to the DC process. TAB-3 first categorized refusals in three groupings: Those refusals relating to beneficiary-issued documents and DC timing requirements; Those refusals relating to documents issued by entities other than beneficiaries; and Those 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 15-year study of ICC Opinions demonstrate that a lack of understanding of the application and practice of UCP600 among both bankers and corporate DC users is the root cause of many discrepancies. TAB- 3 also broached the matter of discrepancy fees and indicated that perhaps the charging of discrepancy fees by banks is being abused in certain cases. ICC or practice rules cannot eliminate or control 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 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 documentary credits and avoidance of non-documentary conditions. The Briefing also draws attention to ill-conceived efforts to exclude or modify specific UCP600 Articles and urges that these occasions 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 ISBP.

Given high discrepancy rates on first draws on commercial letters of credit, 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. 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.” By “explanation”, this seems to mean an educational outreach separate from the notice of refusal. Even then, such effort, although well-intended, could put a bank in a tough spot if a beneficiary makes use of the advice next time and documents are still discrepant or if the applicant considers that the bank’s explanation was made without the applicant’s consent and that it effects an amendment or waiver of the LC’s terms or conditions.

Additional feedback on TAB-3 suggests that the Briefing may weaken the ICC’s emphasis on ascertaining and applying international standard banking practice (isbp) rather than applying breach of contract concepts with which lawyers and judges are more familiar.