Discrepant Documents Under an Import Letter of Credit
Bank A, Mumbai, has issued an irrevocable import letter of credit for USD 250,000 in favour of an overseas supplier, for 500 metric tonnes of cotton yarn, CIF Nhava Sheva, available with any bank by negotiation. The credit states: latest shipment 10 April 2025; expiry 30 April 2025 at the counters of the negotiating bank; presentation within 21 days of the bill of lading date but within validity; partial shipment not allowed; documents to include a signed commercial invoice in triplicate, a full set of clean on board ocean bills of lading made out to order of Bank A marked 'freight prepaid', an insurance policy for 110% of the CIF value in the credit currency covering Institute Cargo Clauses (A), and a packing list. The negotiating bank presents documents on 5 May. The bill of lading shows on-board date 12 April, freight marked 'collect'; the insurance policy is dated 15 April and is for 105% of CIF value; the invoice is dated 22 April. The applicant's sanctioned import limit is USD 300,000 with USD 210,000 outstanding.
1. List the discrepancies and explain why each is a discrepancy rather than a matter of taste.
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| Element | Presented | Required | Why it is discrepant |
|---|---|---|---|
| Shipment date | On board 12 April | Latest 10 April | Late shipment is a breach of a credit term, not a document defect; the credit obligation is not engaged for a shipment outside the stated window |
| Presentation period | Presented 5 May | Within 21 days of 12 April = by 3 May, and within expiry | Presentation is late on two independent grounds: outside the 21-day period and after the 30 April expiry |
| Freight notation | 'freight collect' | 'freight prepaid' | A direct conflict with a stated data element in the credit; CIF terms are inconsistent with freight payable at destination, so the discrepancy is substantive |
| Insurance amount | 105% of CIF | 110% of CIF | The credit fixes the minimum cover; a shortfall leaves the applicant under-insured on a loss |
| Insurance date | 15 April | Cover effective no later than 12 April (date of shipment) | Cover that begins three days after the goods were shipped leaves an uninsured transit gap |
The invoice dated 22 April is not a discrepancy on these facts, and 500 tonnes against a non-partial-shipment clause is consistent. The invoice amount should still be checked against the credit amount on presentation.
2. The negotiating bank argues the applicant has already accepted all the discrepancies in writing. Can Bank A now pay? Explain how the refusal mechanics work and what the bank must do.
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The applicant's waiver does not convert discrepant documents into complying ones. Under UCP 600, the issuing bank examines the presentation independently and must act on the documents as presented; a waiver from the applicant is a commercial comfort, not a cure. Bank A may, if it chooses, honour against the waiver, but it is not obliged to - and if it does, it does so on the strength of the applicant's undertaking to reimburse, which is exactly the credit risk the discrepancy has just exposed.
Refusal mechanics. Bank A has a maximum of five banking days following the day of presentation to examine and to give a single notice of refusal stating (a) each discrepancy on which it refuses, and (b) the disposal of the documents (e.g. holding them at the presenting bank's disposal, or returning them). All discrepancies must be in that one notice - later notices are barred. If the bank fails to send the notice within the period, or sends an incomplete one, it is precluded from claiming that the documents do not comply, and must honour as if they complied. That is a hard deadline and must be diarised on the day of receipt, not the day of examination.
What Bank A should do on the facts. Refuse in writing within five banking days listing all five discrepancies, state that documents are held at the presenting bank's disposal, and separately ask the applicant whether it wishes to accept on a collection basis. Keep the two tracks distinct in the file - the UCP track and the credit track - because mixing them is how banks end up honouring by accident.
3. The applicant asks Bank A to pay notwithstanding the discrepancies, and to debit its limit. Assess the credit decision and recommend terms.
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Exposure arithmetic. Drawn limit USD 300,000 with USD 210,000 outstanding leaves headroom of USD 90,000. Paying USD 250,000 takes utilisation to USD 460,000 - an overrun of USD 160,000, or 53% above the sanctioned limit (460/300 = 1.533). Paying without approval is a limit violation regardless of the applicant's good intentions.
Risk assessment.
- Independence cut both ways. Because the documents are discrepant, Bank A is free to refuse; but if it elects to pay, it loses the discipline the credit imposed and is lending against goods whose insurance is 5% short and whose freight may still be payable at destination - an unquantified landed-cost increase.
- Late shipment and stale documents suggest the applicant needed the goods and could not meet its supplier's terms; that is a symptom of cash strain, not a rounding error.
- Reimbursement risk is now the applicant's credit, unfiltered by documentary compliance. If the applicant cannot fund the goods, Bank A holds a bill of lading to order of a bank in a falling yarn market.
Recommendation. Take a one-time overrun approval from the competent authority before payment, do not allow the branch to debit the limit and sort out paperwork later. Conditions: cash margin of at least the overrun amount USD 160,000 (or proportionate collateral), a written undertaking from the applicant to clear the excess within 90 days, an endorsement of the insurance to 110% of CIF in the credit currency, and a warehouse/stock inspection on arrival. If the applicant cannot fund the margin, do not pay - direct the negotiating bank to present the documents on a collection basis, where the applicant pays against documents rather than Bank A paying ahead of a customer who is already at 70% utilisation.