27 February 2009

Discrepancy Fee: The Unnecessary "Evil"

Today, it is impossible to receive a letter of credit without a clause “…a discrepancy fee of USDxx will be deducted…”. This clause becomes popular in pursue to curb discrepant documents being presented to the banks. There was a period where discrepant documents had reached 60% of the total documents presented under letter of credit worldwide.

Most of the documents, in many cases are issued by a third party for example, Bill of Lading, Insurance Certificate, Certificate of Origin, Inspection Certificate and etc. If any of these documents is found to be discrepant, it would take some time for the seller to get it rectified and most probably would not meet the time limit for presentation or expiry date of the letter of credit. It is however agreeable, that the onus to ensure document compliance lies on the seller.

Let us see how the examination process takes place. Issuing bank will receive the documents by air courier. Upon receipt of the documents, the bank officer will retrieve the copy of letter of credit and conduct a document checking against the letter of credit. When the documents are found in compliance with the terms and conditions of the letter of credit, the applicant will be contacted by phone to notify the arrival of the documents. A good banker will send a SWIFT message to the sender bank to confirm that the documents are received and payment will be transmitted in accordance with the reimbursement clause. Consequently, a SWIFT message (MT202) will be effected to remit payment in the case where direct TT claim on the issuing bank is not allowed.

In this case, the charges incurred on phone and electronic fund transfers are debited to the applicant’s account.

The process does not change even if the documents are found to be discrepant. The bank officer must notify the applicant by phone, send a SWIFT message to the sender bank to notify rejection and reimburse the negotiating bank if the applicant accepted the discrepancy. The bank officer would not call the applicant 10 times to notify 10 discrepancies found in the documents or send 10 separate SWIFT messages to notify the sender bank of the discrepancies found in the documents. Only one phone call and one SWIFT message would put the examination process to an end. So, what is this ‘additional’ so called a discrepancy fee between USD20 to USD50 for?

If the objective of this fee is to curb or reduce discrepant documents, it has successfully proven that it failed miserably.

In view of the new UCP 600, the doctrine of strict compliance is seen going beyond 'strict' compliance and reaching the border of ‘substantial compliance’ as evidenced by article 14. From the bank’s point of view, the doctrine of strict compliance is no longer based on ‘mirror image’ but much wider. This indirectly means that the potential risks of wrongful rejection by the banks are higher. To mitigate these risks, banks eventually pass over the ‘non-mirror image’ documents to the applicant for final decision. The applicant will give a final say whether or not to take up the documents and convey the decision to the bank within 5 banking days.

Looking at article 16, it seems that UCP further reduces the risks of the banks by allowing the presenter to arrange how the discrepant documents should be disposed off. This article intentionally allows the presenter and the applicant to sort out the discrepancy problem. Not only the role of the bank has becoming lesser, but the risks in handling non-compliance documents are also reduced.

So, why would the presenter need to pay additional fee if it does not trigger any additional performance by the Issuing bank? What risk can possibly be reduced by charging a discrepancy fee?

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