ISSUE 17 Apr2008 To refuse or not to refuse! By Gary Collyer Background The manner in which banks have refused, or, should I say, have attempted to refuse presentations under documentary credits has been a problematical area for some time. Under UCP 500, article 14 was the recipient of the most requests for an ICC opinion and I do not see that changing too much under article 16 of UCP 600. In April 2002, the ICC Banking Commission issued a paper entitled "Discrepant Documents, Waiver and Notice" to try and highlight the issues that need to be considered when refusing documents and to try and stem the flow of poorly constructed refusal notices. This document, although written with UCP 500 in mind, has equal value under UCP 600 credits. Referrals to the ICC and numerous court cases that have arisen around the world continue to highlight that there are significant grounds for improvement when it comes to issuance of the correct form of refusal notice. Sub-articles 16 (c) and (d) provide the requirements that need to be adhered to by a nominated bank acting on its nomination, a confirming bank or an issuing bank, namely: c. When a nominated bank acting on its nomination, a confirming bank, if any, or the issuing bank decides to refuse to honour or negotiate, it must give a single notice to that effect to the presenter. The notice must state: i. that the bank is refusing to honour or negotiate; and ii. each discrepancy in respect of which the bank refuses to honour or negotiate; and iii. a) that the bank is holding the documents pending further instructions from the presenter; or b) that the issuing bank is holding the documents until it receives a waiver from the applicant and agrees to accept it, or receives further instructions from the presenter prior to agreeing to accept a waiver; or c) that the bank is returning the documents; or d) that the bank is acting in accordance with instructions previously received from the presenter. d. The notice required in sub-article 16 (c) must be given by telecommunication or, if that is not possible, by other expeditious means no later than the close of the fifth banking day following the day of presentation. Form of refusal In bank to bank refusals, the notice is usually sent using the structured SWIFT MT734 message. However, it is often the case that a bank will use a SWIFT MT799 for this purpose and it is generally when sending such unformatted messages that problems arise. In refusals between a bank and the presenter; telephone, fax and email are usually the preferred methods of advising discrepancies. Banks must remember that when refusing documents, the conditions outlined in sub-article 16 (c) apply in all circumstances, including refusals made to a beneficiary. I have known of numerous occasions where banks have provided a refusal to the presenter (beneficiary, freight forwarder or agent) and not given expressly stated one or more of the 3 requirements of the UCP. These are (1) that the bank is refusing, (2) the listing of the discrepancies that have been observed, and (3) the status of the documents. Where banks have provided a telephone advice of discrepancies, they would be well advised to follow this up with a fax or email confirmation so that there can be no ambiguity as to the discrepancies that were or were not relayed during the conversation. I know of banks that have the fax prepared and ready to be sent as soon as the telephone conversation ceases. When sending a SWIFT MT799, a fax, an email or when relaying discrepancies via the telephone, the bank must clearly indicate that they are refusing the documents. It has often been seen on SWIFT MT799 messages and on fax advices to a beneficiary that the bank has stated "We have noted the following discrepancies" or "We have observed discrepancies in the documents, details as follows". Neither of these statements constitutes an indication of refusal for the purposes of UCP 600. The SWIFT MT734 is labeled as an "Advice of Refusal". Discrepancy language The manner in which discrepancies are described in the refusal notice is critical. The ICC Banking Commission have previously determined that discrepancies such as "Invoice not as per LC", "Data differs between documents" or similar loose forms of description are not a valid indication of a discrepancy. If you take "Invoice not as per LC", the discrepancy is correct if the invoice presented by the beneficiary is not the one for the particular credit (highly unlikely). The actual discrepancy, that should be described by the bank, is what is specifically wrong with the invoice i.e., is it that the goods description is incorrect or incomplete? is it that the name of the applicant is incorrect?, is it that the invoice shows the wrong Incoterm? etc. A discrepancy of "invoice not as per LC" is not valid under UCP 600. The writers view is that the content of any discrepancy should also provide the basis for, or understanding of, the refusal. For example, invoice shows shipping marks as XYZ whereas the LC requires AB C. To merely state "Invoice shows shipping marks as XYZ" provides no indication as to what it should have been or what the words are being compared to. Document status Sub-article 16 (c) (iii) (a)-(d) provide the 4 options that are available to indicate the status of the documents. In most cases, it is expected that options (a) or (b) will be utilized. Banks must remember that the 4 options are separate and should not be combined. For example, it has been seen in more than one refusal notice "Documents held pending your instructions. Meanwhile we are contacting the applicant for a waiver to the discrepancies and upon receipt of an acceptable waiver we shall release the documents and effect settlement unless we have heard from you to the contrary". This wording effectively combines the content of (a) and (b) where the rule clearly indicates the word "or" between the 4 options. Where a SWIFT MT734 is utilized, the status may be shown in field 77B as: HOLD = option (a) NOTIFY = option (b) RETURN = option (c) PREVINST = option (d) Where a refusal notice is sent via a SWIFT MT799, a fax, an email or telephone advice then the wording must reflect that in options (a), (b), (c) or (d). Where either option (a) or (b) is used in the initial refusal, the sender may subsequently return the documents (option (c)). The expectation is that banks will provide notice of intent to return the documents prior to the actual sending, although the rule in sub-article 16 (e) does not require this. Option (d) is used where the, beneficiary, other presenter, nominated bank or confirming bank has provided instructions as to the further handling of the documents in the event of discrepancies being observed. Issuing Bank role The issuing bank having determined that the documents are discrepant has two choices as to their next course of action. One, they may choose to provide a refusal notice and subsequently seek a waiver from the applicant. By providing their refusal by the close of the 5th banking day following the day of presentation, they have fulfilled the requirement of sub-articles 16 (c) and (d). Two, they may approach the applicant for a waiver prior to sending any notice of refusal to the presenter. In the case of the latter option, the issuing bank must be cognizant of the fact that they must receive the waiver within the period that ceases no later than the close of the 5th banking day following the day of presentation or they must provide their refusal in this time. Applicant role Whilst the applicant is not a party to the credit, in the event of discrepancies in the documents they may be requested to provide a waiver for the issuing bank to honour notwithstanding the noted discrepancies. It should be remembered that the issuing bank is under no obligation to seek waiver from the applicant and, even when received, they are under no obligation to accept it. Beneficiary role As a recipient of a refusal notice from a nominated bank or confirming bank, the beneficiary has a number of choices at their disposal:- 1. They correct the discrepancies or provide corrected replacement documents within any latest presentation period and/or the expiry date; 2. They request the nominated bank or confirming bank to contact the issuing bank for authorization to honour or negotiate despite the noted discrepancies; 3. They request the nominated bank or confirming bank to forward the documents to the issuing bank as a presentation under the terms of the issuing bank's credit (note, not making any reference to documents "on collection" or "in trust"); 4. They request the nominated bank or confirming bank to consider honour or negotiation against the indemnity or reserve of the beneficiary. If the beneficiary is a customer of another bank, it may be that the indemnity will be required to be issued or countersigned by their bankers. The order shown above should be that in which the beneficiary makes their decision on their next course of action. It should not be forgotten that document examiners within banks are not infallible and the beneficiary may be able to contest one or more of the discrepancies based on the content of the UCP, ISBP or opinions that have been issued by the ICC. The same could be said for a nominated bank or confirming bank that contests discrepancies raised by an issuing bank. Preclusion rule Sub-article 16 (f) provides a preclusion rule where the issuing bank or confirming bank fail to act according to the content of article 16. This rule does not extend to a nominated bank acting on its nomination that may have agreed to examine documents. This is the same position that prevailed in UCP 500. This reflects the fact that only the issuing bank and confirming bank has given any undertaking to the beneficiary regarding honour or negotiation. Summary Extra care needs to be exerted in the creation of any refusal notice. Close attention needs to be made when the refusal is not sent by a structured SWIFT MT734 message. Where an MT734 is not used there must be a clear indication of the bank's refusal of the documents. The refusal must list the discrepancies that have been observed. These discrepancies should be precise in nature and leave no doubt as to the reason for the refusal. The refusal must contain one of the 4 statuses as to the further handling of the documents. Where an MT734 is used, code words may be inserted in lieu of the text but for all other forms the status must reflect the language in sub-articles 16 (c) (iii) (a) or (b) or (c) or (d). Coming in April In the next newsletter, we shall look at some of the requests for opinions that were considered by the ICC Banking Commission.