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What to do if LC is refused?

Posted by: Jenny | 2016-08-26 10:41:39

In fact, if the documents under the letter of credit are dishonored, it does not mean that the purchase price under the export has been sentenced to death. And to lower the price is not the only way to solve the problem. Therefore, we don’t need to talk about the discrepancy. If documents are refused, we must figure out a few questions first:

1.The refusing to pay is the right that the international practice given to the documents that contains discrepancies. We know that letter of credit is the conditional commitment payment of the issuing bank, and as long as the documents is in according with each other, then the issuing bank must pay, but once the documents have discrepancy, the issuing bank has the right to relieve the payment obligation to the submitting documents party which is the protection of the issuing bank. After the bank’s refusing to pay, the discrepancies will be sent to the LC applicant and if he can accept the discrepancies, then the issuing bank will pay the payment.

2. After the documents were refused to pay, the beneficiary has the right of dispose the documents, which means that the beneficiary still has the property in goods, and he can dispose the goods according with the actual situation, but there is a premise that the LC request full set BL, If 1/3 of the bill of lading has been sent to the applicant, and the 2/3 submitted to the bank, then there is a risk of losing money and goods.

3.After the documents are refused, you may get additional benefits. After the documents are refused, in theory, even if the applicant accept the discrepancy, the issuing bank is not allowed to release the BL to the applicant. If the market is good, the exporters can choose to resell at a higher price for a third party to get greater benefits.

4.Quality of the goods is the most critical factor to gain back payment at any time. It is the common desire to make profit, if the quality of the goods is excellent in good market conditions, the importers generally will accepte discrepancies and finish the payment.

So, faced with discrepancies raised abroad, what should we do ?

1.Examine the discrepancies carefully

As we know, it is necessary to examine the export credit terms carefully, but to check the contents of the discrepancies is also important. Some banks with poor reputation may be cooperate to applicant actively on unprovoked charging the documents and refuse to pay for some unreasonable discrepancies. With the uneven quality of the bank, the understanding of towards the international practice is also different. The discrepancies can not withstand scrutiny, which gives us the opportunity to refute it. In general, to audit discrepancies include three parts:

(1)Check whether the discrepancy is reasonable according to the international practice and international standard banking practice.

The issuing bank decide whether to accept the documents under letters of credit according to documents consistence. if they are not consistent, then the bank can refuse to pay. And If consistent, then the bank must fulfill the payment responsibility. In addition, the issuing banks shall not refuse to pay on grounds other than the payment documents.

(2)Check whether the premise of discrepancies raised by the issuing bank is match.

According to international practice, the issuing bank's raising discrepancies must follow these conditions:

a.The discrepancies should be raised within a reasonable period of time, which means that within five working days after the issuing bank receives the documents, and indicates them to the presenter.

b.No delay in telecommunications methods, if not, the discrepancies should be informed to the presenter in the fastest way. 

c.Discrepancies must be put forward once which means if the discrepancies mentioned at the first time are inconsistent, then even there are still other discrepancies, the issuing bank has no right to put forward again.

d.While inform the discrepancies, the bank should explain that the documents will be kept and wait for treatment, or send back to the presenter.

The above conditions must be met at the same time. If the issuing bank misses one of them, then it has no right to refuse the payment by claiming there are discrepancies in the documents.

(3) Check whether the discrepancies mentioned are fuzzy or not. 

Sometimes, the condition of the issuing bank raising the discrepancies have been met and the documents do exist discrepancies, but due to limitations of their  level of English, the discrepancies they raised are differ in the existence. At this point, essentially, the discrepancy raised by the issuing bank does not exist, but the explanation they make to the discrepancies may be correct, but we can require the bank to make the payment as it is the second proposed discrepancies which is invalid charge-back behavior.

2 Check whether the documents can be changed.

According to international practice, if the document does exist discrepancies, and the issuing bank has refused to pay, as long as the beneficiary can submit the correct documents in validity date and negotiating date required by the LC and the new documents have no discrepancies, then the issuing bank must finish the payment. Therefore, once we are informed the discrepancies, we must take response immediately so as to check whether can revise the documents and revise it and send back to the bank at once. 

In order can revise the documents, the followings should be done:

a.When check the LC, pay attention that the effective place of the letter of credit must be in domestic;

b.Try to advance the shipment, do not delivery the goods right before the validity period so as we can have enough time to revise the documents if there is discrepancy.

c.Once the goods are loaded, send the documents to the bank  immediately so as to ensure we have enough time to remake the documents after the issuing bank refuse to pay. 

d.When remake the documents, we must be careful to ensure that there will be no new discrepancies.

3. Pay close attention to the whereabouts of the goods

In the LC business, the relevant parties deal with documents but not the goods or the service. This is because the documents involved in LC, especially the documents related to the property in goods, make the one of the LC have the right to control the goods. The dealing with the documents means the the dealing with the the property in goods. So UCP 600 regulates that after the bank refuse to pay, the bank can keep the documents and wait for the indication, or the bank can send back the documents to the presenter which means after the issuing bank refuse to pay, it can not release the documents to the applicant without the permission of the beneficiary or it must finish the payment.

In addition, when learning the whereabouts of the goods, you can also know whether the applicant has received the goods with the guarantees of the issuing banks. Receiving the goods with the guarantee will not make the issuing bank finish the payment, but if the beneficiary or the negotiating bank requirements charge-back, and ask for the goods to the shipping company while the shipping company can not provide the goods, it must find the  issuing bank, requiring it to fulfill the obligations under the guarantee. The issuing bank will not only bear the loss of credibility but also the economic loss which maybe more than the purchase price. So in this case, once the issuing bank are informed that the customer has received the goods with the guarantee, it will finish the payment immediately.

Tags: L/C, Bank

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