Having dealt with discrepancies in our blog 7, it seems appropriate to also discuss refusal notices for discrepant documents under documentary credits.
Despite the fact that the procedure is clearly outlined within UCP 600 article 16, a number of banks fail to adhere to the requirements, thereby possibly being precluded from claiming that documents do not comply. The danger in such a situation is that a bank may be forced to honour or negotiation without receiving immediate compensating funds.
In fact the problem was so widespread that, back in 2002, the ICC Banking Commission issued a guidance paper: ICC Document No. 470/952 Examination of documents, waiver of discrepancies and notice. This was a beneficial move but there are signs that, once again, there exists a certain element of misunderstanding in the market.
Clarity is the key. A refusal notice should be of sufficient detail and clarity for it to be understood by the presenter without the necessity of it having a copy of the documentary credit in front of it.
As is known, when documents are presented under a documentary credit, banks examine such documents against the terms and conditions of the documentary credit on the basis of UCP 600 (provided the documentary credit is subject to it), international standard banking practice and data between the stipulated documents. In the event that the documents do not comply, they are considered to be discrepant.
A refusal notice must indicate the discrepancy(ies) in respect of which the notice has been issued. Each discrepancy should be clearly written so as to highlight the exact reason why the presentation has been refused.
If a refusal notice is to be issued, it is to be sent to the presenter no later than the close of the 5th banking day following the day of presentation.
A refusal notice must be sent by telecommunication or, if not possible, by other expeditious means. Telecommunication includes SWIFT, Telex, Telephone, Fax or Email. Each of these options would need to be unavailable before courier or mail could be utilised for delivery of a refusal notice.
A refusal notice to a beneficiary could be made in person, in a verbal manner. However, in this case and also where telephonic advice of refusal is given, a follow up message by fax or email is recommended confirming details of the conversation i.e., a refusal, list of discrepancies and the status of the documents.
A refusal notice must indicate one of the 4 status that are referred to in sub-article 16 (c) (iii) (a-d). When a SWIFT MT734 is used to convey a refusal notice, field 77B may be completed by the use of code words ‘Hold', ‘Notify', ‘Return' or ‘Previnst' which are aligned to options a-d respectively.
It should be noted that article 16 makes no reference to terminology such as "documents held at your risk and disposal". However, as a legacy from UCP 500 article 14, a number of banks still incorporate this wording in their refusal notices.
For banks that still use such wording, it should be noted that UCP 600 sub-article 16 (e) permits a bank that has incorporated sub-article 16 (c) (iii) (a) or (b) in its refusal notice, to return the documents at any time thereafter in the event of no acceptable waiver being received or no further instructions being received from the presenter. If documents were to be held at the 'disposal' of the presenter, the returning of the documents would not be possible without the prior agreement of the presenter.
Further guidance can be found in our Documentary Credits in practice module ‘Discrepant Documents'.