Article

by Glenn Ransier

When discussing document refusals due to "discrepancies", I am reminded of the arguments my sisters and I had growing up. When differing opinions were the cause of the argument, the inevitable phrase was: "Oh yeah, prove it!" Who knew that all those arguments were just preparing me for my chosen career in trade finance?

Discrepancies, leading to the refusal to honour/honor or negotiate letters of credit/demand guarantees (collectively undertakings), are generally the reason people cite for the demise of undertakings. Undertakings, it is said, will soon be replaced by "the next best product", whatever that happens to be.

Having worked in trade finance for 30 years, and hearing this for all that time, I am happy to report that undertakings remain a viable business, i.e., to warranty underlying sales contracts valued in the trillions of dollars globally. In the majority of cases, the result of a document presentation that contains valid discrepancies is usually just a payment delay though, in some more serious cases, the payment may be permanently refused under the undertaking (but even then, the underlying sales contract generally provides recourse in this eventuality).

Improper document refusals certainly hurt all of the trade parties. Delayed payments hurt beneficiaries, who lose time and interest. Applicants lose time and will often pay higher merchandise/ contract costs in the long run, as beneficiaries will often add delayed payment costs to their future pricing bids. Banks' processing costs are significantly increased and they lose revenue, since the fee related to discrepancies does not offset the time it takes to stop processing, contact parties, await decisions, trace, etc.

Rule sets

Rule sets have been developed to help offset discrepancies and document "International Standard Banking Practice" for undertakings. Banks' examiners worldwide generally adhere to these rules, and contained in them is a snapshot of the international standards in effect at that time. This article will focus on these: UCP 600, URDG 758 and ISP98 (ISP98 dealing exclusively with standbys). These are meant to closely align the examination practices of the international trade community and reduce the number of document presentation refusals.

However, based on informal surveys I have taken with others across the globe, it would appear that documents presented against UCP undertakings still have initial refusals of at least 60%-75%. If I were to guess, I would say that undertakings subject to URDG and ISP98 would have somewhat lower rates of refusal, but would still be inordinately high. Given the amount of time that goes into preparing these rule sets (each revision generally takes years to create and adopt) and the number and variety of parties involved in the drafting process, shouldn't discrepancies be eliminated or, at the very least, very substantially reduced?

The short answer, sadly, is "maybe" and certainly not without difficultly. The reasons are varied and are often discussed. They include the following:

1. Examiners and/or document preparers have different skills and experience levels. In the preparation and/or examination of documents, experience counts. Examiners, all too often, are asked to "prove it";

2. Undertakings are often poorly worded or contain conflicting information. Unclear undertakings more readily lend themselves to closer scrutiny and often allow an examiner an opportunity to refuse a presentation;

3. Generally, examiners name something/anything as a discrepancy and then contact the next party in the chain to seek their waiver of discrepancies rather than make a mistake. They fear for their livelihoods and fear being "precluded" (a significant penalty imposed by all the discussed rule sets) from receiving reimbursement should they miss a discrepancy;

4. The trade community itself does not always agree on what is or is not a discrepancy. Many would prefer that their specific market practice or interpretation be named in the International Standard Banking Practice (ISBP). Also, there is not always an international practice in effect at the time documents are presented. The first time there is something new, a best approach must be applied. However, who decides what that best approach is?;

5. The banking industry's rule sets cannot dictate practices to other industries such as the transportation or insurance industry, which follow their own rules. These industries are invited into the process of drafting revisions, but typically participation is low;

6. Market practices normally evolve faster than the examination rules are updated;

7. Local laws may override a rule;

8. Language barriers;

9. Etc., etc.

Avoiding discrepancies

So how can one avoid discrepancies? I would like to share some practical approaches:

1. Have a set undertaking format and incorporate it in only the "relevant" aspects of the underlying purchase order/sales contract. Keep it simple and concise, i.e., beneficiary's commercial invoices in XX original(s) and XX copies stating: "XX"; a copy of the beneficiary's invoice(s) addressed to (applicant, other) marked "unpaid" reflecting goods as: "XX"; a copy of the health certificate in original and one copy issued by XX company, stating: "Goods are fit for human consumption", etc.

2. Ensure that you have a full understanding of the undertaking's terms. Ask questions of the party issuing, confirming or advising it. Seek amendment(s) as needed.

3. Different rule sets mandate different approaches to examining documents. While UCP 600 and URDG 758 generally follow similar examination standards, ISP98 follows a more forgiving approach toward discrepancies. For example, consider an undertaking covering 500 gallons of oil that contains three document drawing requirements: 1) a copy of an invoice marked unpaid; 2) a copy of a bill of lading; and 3) a beneficiary statement indicating that the amounts indicated on the attached invoice copies remain unpaid and are due and owing. Based solely on these facts, if you receive a drawing in which the invoice copy shows 500 gallons of "number 2 heating oil", and the B/L copy reflects 500 gallons of "olive oil", would you consider these documents to be discrepant? Under UCP and URDG undertakings, the "conflicts" between the two documents would be a reason for refusal. However, under ISP98 no refusal would be permitted unless a particular undertaking mandated a different type of examination than the default standards provided in ISP98 (refer to rules 4.03 & 4.20).

4. One company I provided training for had a novel approach. It maintained a master spreadsheet with its line banks running horizontally and "discrepancies" running vertically. Against each discrepancy it kept a check mark representing which banks would refuse documents for that particular discrepancy and which would not. As the overwhelming majority of the undertakings it received were available with "any bank", the company would simply send its documents to a bank that would not refuse them.

5. The oil and gas industry has also developed an interesting approach. It issues undertakings with a clause saying, in effect: "Payments made outside this Undertaking by the issuing bank to the beneficiary which reference this Undertaking number will result in the immediate decrease of the Undertaking balance and/ or the cancellation of the undertaking when the payment(s) total the Undertaking amount or any remaining balance". The overwhelming majority of these undertakings never see a document drawing, because the payments are made and the undertaking is cancelled. This practice evolved to avoid the whole issue of discrepant documents and has allowed the industry to ensure prompt payments when due.

6. Escalate a refusal you believe to be improper to the Operations Department or your Relationship Manager. Typically, a valid discrepancy is easily justified by a reference to a rule set and/or a correlation with the ICC booklet International Standard Banking Practice for the Examination of Documents under Documentary Credits and/or an existing ICC Banking Commission Opinion.

7. Educate yourselves and your staff. Attend seminars. Join a forum such as the one on DC-Pro at focus.dcprofessional.com, where a question concerning discrepancies can be asked and various opinions received.

Other remedies

One final thought on the "prove it" aspects discussed here. When the parties cannot ultimately agree on whether a presentation is discrepant and the undertaking will not be honoured or negotiated, rather than go directly to court to settle the dispute, it may benefit the parties to know that ICC offers a fast, inexpensive solution called DOCDEX.

DOCDEX Decisions, rendered by expert panels, can be binding (if the parties agree to be bound) or non-binding, and are offered for UCP and URDG-related disputes. Further information can be found on www.iccdocdex.org.

Glenn Ransier is the Trade Finance and Operations with ABNAMRO Capital USA. He was the former Global Trade Products Operations Manager for American Express Bank Ltd and was a member of the URDG Drafting Group and the Demand Guarantee Task Force.

His e-mail is glennransier@loc.cc