I’m quite sure that all members have fully understood what LC means and how it operates in international trade. All members are also savvy of what seller and buyer should do when LC is used as a method of trade settlement.
What will happen if the seller tendered discrepant documents to the bank? According to studies, discrepant documents consist of 60% of the total documents tendered under LC worldwide. It simply means that, majority of documents handled by banks are discrepant documents. I personally have handled hundreds of thousand of them.
Under UCP 600, the Issuing bank has the absolute right to reject and refuse payment when documents are found discrepant, without prior reference to the buyer as per article 16(a) UCP 600. This means, the bank will list down all discrepancies, indicate statement of refusal and send it to the seller’s bank via SWIFT MT734 format. The documents will also be returned to the seller’s bank. End of the process.
When seller tenders discrepant documents, he locks dead the situation, he would not get his payment and the buyer on the other hand, would not get the shipment. In this case, the bank is the only party who can unlock this grave situation.UCP 500 article 16(b) permits the Issuing bank to seek for waiver from the buyer whether or not the buyer agrees to accept the discrepant documents.
Bear in mind that seeking for waiver or obtaining agreement to accept the discrepancy from the buyer is not an obligation on the part of the Issuing bank. This clearly indicates that the best way to avoid further risk to the bank is to reject and refuse the payment. This is the first priority for the Issuing bank.
I personally, during my career, always seek for waiver from the buyer. I mean all the time, whenever I received a discrepant documents. The main reason for doing this is because of the purpose and function of the LC itself. It is very clear that the LC is an instrument of PAYMENT.
Secondly, the main considerations in trade are payment and goods. Buyer is absolutely in need of the shipment. The moment the Issuing bank issues the LC, it signifies the intention of the buyer to purchase and to pay. When seller tenders the required document, he agrees to accept the payment. So, in most cases, payment is still be made. But of course, when buyer accepts the discrepant documents, it must be accompanied with an indemnity because who knows what lies in the container at the port.
Having said this, it doesn’t mean that seller is permitted to tender discrepant documents. The right of the bank under this situation is to reject and refuse the payment.