Discrepancy on Draft

akomolpa · Post by **akomolpa** » Fri Mar 19, 2010 4:05 pm

Dear all,
If LC available by Draft drawn on the Issuing Bank, beneficiary presented Draft with typing error but all other documents are complied.
Does the Issuing have the right to refuse to pay against all other complied shipping documents?

Rgds,
akomolpa

picant · Post by **picant** » Fri Mar 19, 2010 6:58 pm

Hi Pal,

we have already spoken in this forum about draft. If draft is not requested in field 46A of SWIFT MSG 700, it must not be checked being a mere receipt of payment and not a document.
If the issuing bank lists the draft in this field 46A, it must be checked as a normal document.
Other comments appreciated
Ciao

Negotiator · Post by **Negotiator** » Fri Mar 19, 2010 9:39 pm

Dear all,
I agree with picant's comment in principle. I think that recent opinions tend to support beneficiary's position with regard to a small mistake made on its draft.

For example, although this is not an exact case, ICC Official Opinion TA703 states :
For the purposes of a clause such as "all documents must be issued in English", a draft is not to be considered as one of those required documents unless the credit requires the presentation of a draft drawn on the applicant under "documents required".

And ICC Official Opinion R592 states :
The draft was drawn on the confirming bank at sight. This draft acts as the formal claim mechanism from the beneficiary to the drawee and as such would merely be placed in the file of the confirming bank with other correspondence. For a sight draft there would be no need for an endorsement by the beneficiary.
(In this respect, ICC DOCDEX Decision No. 260 concluded that the issuing bank should reimburse confirming bank despite a sight draft was not dated.)

However, personally I think that the DC practitioners must approach such cases very carefully. Sometimes a draft may be used as an important instrument, and a draft still needs to be examined by banks. Even ICC Official Opinion TA703 says right after the anaysis quoted above :
A draft is to be examined to the extent required by the terms and conditions of the credit, the UCP and applicable local law.
Some kinds of defect on a draft may make a valid discrepancy, but some may not. It would be a case-by-case problem.

More comments welcome. Thanks.
Lee.

iLC · Post by **iLC** » Sat Mar 20, 2010 10:41 am

very good analysis dear Lee. i agree with you. but my approach is bit different. draft is a very important document, especially for a credit available by acceptance. please consider banco santander case here. i would certainly examine a document (?) with such importance. there may be some exception of course depending on the clause.

as far as 703 is concerned, its full of confusion and interest for me.

1. For the purposes of a clause such as "all documents must be issued in English", a draft is not to be considered as one of those required documents unless the credit requires the presentation of a draft drawn on the applicant under "documents required".

2. A draft is to be examined to the extent required by the terms and conditions of the credit, the UCP and applicable local law.

first it says "for the purpose of clause such as....draft is not considered as required document"
this has two meaning to me;
1. draft is considered as a required document for clause unlike "all documents in English"

or 2. Draft is not considered as a required document for any clauses in credit.
the chance for the 2nd one is very low as its too wide.

it continues further "....drawn on the applicant". why applicant? it appears that ICC believes that if a draft is drawn on the issuing bank, then a defective draft is unlikely to affect the right of the issuing bank to be reimbursed by the applicant and in fact it is the drawer who is suppose to be in problem with a defective draft.

point 2 is even more interesting;
it says "required" and not "specifically required". that means general terms and condition may also apply to it. if we need to apply terms and condition on a draft, it has to be drawn on the applicant (As per 1) and for to be drawn on the applicant, it has to be in the documents required field. that is draft will be treated as other document.

if this is correct, then point 2 also says that an other document is to be examined under local law

im totally confused now. time for a tea break

Negotiator · Post by **Negotiator** » Sat Mar 20, 2010 8:13 pm

Many thanks iLC.

I believe that your analysis is much better.

To discuss about whether some minor defect on a draft makes a valid discrepancy, I think it should be a prerequisite for this matter that i) the draft in question is a sight draft, and ii) there should be no possibility of the draft being used other than the purpose of formal claim. All the DOCDEX Decisions that I have ever read (which are concerned to a draft) appear to be based on such a prerequisite most of all.

I have also concerned about the same questions you pointed out. TA703 mainly mentions the 'language" problem indeed. I agree with your opinion that "meaning 2" you mentioned may be too wide interpretation, however I wonder on the other hand considering purpose of a draft, "Why just a language must be a problem of all occasions??"

Moreover, I also totally agree with your opinion about Ananysis 2 of TA703. If a credit neither stipulate a draft on the field 46A nor require it to be drawn on applicant, what principles should be applied to examine such a draft? UCP itself does not rule over a draft, and most of us are not familiar with foreign laws. (even with local law of my own country!!) Then ISBP 681 Paragraphs 43 thru 54 would be only reference, but is this sufficient?

I guess the arguements about draft will be everlasting, unless ICC makes some guidelines about it.
(I personally assert that the applicant or the issuing bank should not require a draft in L/C, unless it is a vital instrument to the transaction.)

Many thanks again

Lee

nesarul · Post by **nesarul** » Sat Mar 20, 2010 9:32 pm

Dear,
I am delighted to be a PART OF THIS DISCUSSION.
Considering DOCDEX decision 260... under A CREDIT available by acceptance with nominated bank.
my confusion:
Will the decision of 260 remain unchanged?
Awaiting for reply
regards
Nesar

Negotiator · Post by **Negotiator** » Sun Mar 21, 2010 8:14 pm

Dear Nesar,

In my opinion, if a credit were available by acceptance with nominated bank, the beneficiary or nominated bank would not even submit the case to DOCDEX just for reason that draft was not dated.
If a credit is available by acceptance with nominated bank, the credit may also indicate drawee as the nominated bank. Therefore, if the nomiated bank determines that beneficiary's presentation is complying, it may accept beneficiary's draft and forward the docs except the draft to the issuing bank. As a result, there would be no dispute - at least over the draft - between beneficiary and issuing bank or between nominated bank and issuing bank.

However we may assume a situation that the nominated bank (which is not a confirming bank) refuses beneficiary's presentation for any reason, and the beneficiary presents docs to issuing bank directly for acceptance. I'm not sure whether the draft which is not dated will be discrepant or not in this case. Keeping in mind that such a draft can be used as a negotiable instrument, it may be difficult to judge this case based on same principle with that of original DOCDEX No. 260 case.
I cannot say that the beneficiary will surely lose, however, personally I guess that the beneficiary will have less chance of winning than that of the original case.

Sorry I spined a yarn without a conclusion..

Lee

akomolpa · Post by **akomolpa** » Mon Mar 22, 2010 4:28 pm

Many thanks for all comments, I think I should take more study on these cases especially DOCDEX case.

Rgds,
akomolpa

ofei · Post by **ofei** » Mon Mar 22, 2010 5:20 pm

Wait a minitue, dear all.

The draft issue is always troublesome. In fact, I have an joint article with Kim Christensen typically for account of TA703 rev.It will appear in the next issue of DCI(Spring). When I finished it, I also noticed that ICC has some contradictory analysis towards drafts.

We may find it from R528/TA480, the analysis states: The statement "The required draft is not a document to be examined according to sub-Article 13(a) (a draft on the applicant should have been regarded as 'an additional document'), sub-Articles 9(a) and (b)(iv)" is not correct. UCP 500 does not treat ALL drafts as additional documents when presented under a credit.

The conclusion takes the drafts as discrepant.

So, too much to talk on drafts but it should be the members of ISBP681 drafting group to make it much clearer.

Time to have tea.

Jackie · Post by **Jackie** » Tue Mar 23, 2010 5:11 pm

Dear all

I agree whole heartedly with the last post. We are talking about a financial instrument for payment.

Under acceptance credits, drafts which are accepted by the confirming bank or issuing bank may be sold in the secondary market for forfaiting purposes. Obviously if this is the case, then the draft must be correctly drawn. I think there has been some confusion as to the nature of the drafts discussed which as per the last post should not be drawn on the applicant. In any event, the correct name of this document should be a "Bill of Exchange" which in the UK is subject to the Bill of Exchange Act 1882.

Just a question. If you as a confirming or issuing bank receive a draft which shows the incorrect letter of credit number or amount in words as figures not agreeing, would you consider this to be a discrepancy?

Thanks for your comments Jackie

ofei · Post by **ofei** » Wed Mar 24, 2010 5:48 am

In banking practice, a confirming or issuing bank won't take the drafts as discrepant if wrong LC No cited. As to amount in words or figures, usually the amount will be based on words as per bill of exchange act 1882 or even the Geneva convention.

Regards

Ofei

nesarul · Post by **nesarul** » Wed Mar 24, 2010 11:22 pm

dear,
Draft has an ancient relationship with the credit. It has been started from ancient traveller's letter of credit where correspondent bank made a formal claim to the issuer by presenting it. similar concept has prabably been incorporated in ucp 82 also. Latter on icc has strived to make draft as less important from one ucp version to another.....but stil ucp continue to make some relationship with a draft........throuh making some reference on ucp 600 itself such as draft and/or document.....it also mentioned in present isbp also on paragraph 43 to 47.......
.
But if we analysis the draft provision either in ucp or in isbp....almost all of the provision has an indication related to payment.....maturity date etc... Moreover in the definition of negotiation, the concept of draft to draw other than nominated bank is also inheritted from negotiable instrument act or BE act.....
Here, in all circumastances, we can confer that presentation of draft under letter of credit transaction has got relevency with the formal claim and should not be considered to determine for complying presentation. Hence the discrepancy what appear on draft such as. Amount in figure and word differ or any other can not make the respective presentation discrepent. It just only loss of formal claim instrument... From my point of view. Still issuing bank or confirming bank must have to effect payment according to sub article 7c or 8c..
Waiting for other comments
Nesar

elly.may · Post by **elly.may** » Thu Mar 25, 2010 5:51 pm

i think It would be a case-by-case problem
Some kinds of defect on a draft may make a valid discrepancy, but some may not.
if it relates the amount, it must be a discreption.

mia vervacke · Post by **mia vervacke** » Fri Mar 26, 2010 12:53 am

Hey,

Upon presentation of documents I always check the draft because as per art. 21a of ISBP shipping documents are ALL DOCUMENTS (not only transport documents), EXCEPT DRAFTS, required by the credit. As such I consider the draft being part of ALL DOCUMENTS.

I agree that a typing error (small mistake made on a draft) does not constitute a discrepancy. As such Issuing bank can not refuse to pay if all other shipping documents comply.

shahriar · Post by **shahriar** » Fri Mar 26, 2010 9:20 am

mia vervacke wrote:Upon presentation of documents I always check the draft because as per art. 21a of ISBP shipping documents are ALL DOCUMENTS (not only transport documents), EXCEPT DRAFTS, required by the credit. As such I consider the draft being part of ALL DOCUMENTS.

very good and interesting observation

vivian · Post by **vivian** » Sat Mar 27, 2010 9:47 am

it is not a discrep, fisrt of all, darft is not a document, it is not under field 45A, if having a typer error, you sent a SWIFT message to nego/presenting bank. looking for their re-cofirm with the draft, i.e. if amout is different woth invoice or wording ,

it is not a discrep

shahriar · Post by **shahriar** » Fri Apr 02, 2010 8:57 pm

elly.may wrote:i think It would be a case-by-case problem
Some kinds of defect on a draft may make a valid discrepancy, but some may not.
if it relates the amount, it must be a discreption.

docdex 226
The experts are of the unanimous opinion that, while as a matter of principle a difference in the draft between the amount in figures and the amount in letters is a discrepancy that justifies the rejection of the document, in the case at hand the discrepancy identified by the Respondent is an obvious typographical error that does not justify the rejection of the documents. Indeed, because the amount " four hundred forty seventy" [emphasis added] does not exist, it should be considered as meaning "four hundred forty seven", which conforms to the amount in figures and to the amount indicated on the remaining documents presented under the documentary credit.