1. Legal Framework - UCP 600

Article 16 - Discrepant Documents, Waiver and Notice:

16(b): When issuing bank determines presentation does not comply, it may in its sole judgement approach applicant for waiver of discrepancies. This does not extend period mentioned in 14(b) - 5 banking days.

16(c): Issuing bank must give notice of refusal within 5 banking days, stating:

• That it is refusing
• Each discrepancy for which it refuses
• Disposition of documents (a) holding pending further instructions, b) holding until waiver, c) returning, d) acting per prior instructions)

16(f): If issuing bank fails to act per Article 16, it is precluded from claiming documents not complying and cannot return documents.

Discrepancy Fee Clause: Most LCs contain clause: "Discrepancy fee of USD 75/100 per discrepant presentation to be deducted from proceeds even if waiver obtained"

Key Question Litigated: Can bank deduct fee if it did NOT send valid refusal notice under 16(c), but directly obtained waiver from applicant and paid?

2. When Discrepancy Fee IS Recoverable

ICC Opinion TA.719rev + TA.844rev:

• Bank notes discrepancies, sends refusal notice per 16(c) listing each discrepancy, holds documents pending applicant waiver.
• Applicant waives discrepancies in writing.
• Bank then honours presentation BUT deducts discrepancy fee as per LC terms.

This is valid - fee is for extra work of handling discrepant docs. Even if waived, discrepancy existed.

Indian Practice: Revised Foreign Exchange Service Charges - Discrepancy Charges: Import documents received with discrepancies under LC - Charges to be levied - US$ 75 per bill from beneficiary

So if proper procedure followed, fee recovery is legitimate.

3. When Discrepancy Fee is NOT Recoverable - The Litigation

Ground 1: No Valid Refusal Notice Under 16(c) = No Fee

ICC Forum Case - Most Cited:

B. On maturity, they deducted discrepancy fee being some USD. C. As they do not follow rule UCP600 Art 16-c, we strongly insisted discrepancy fee is not justifiable since issuing banks did not fulfill duty to advise us of discrepancy at time of acceptance. D. Issuing banks argued they acted per Art 16-b, duty not applicable if discrepancy accepted by own decision.

ICC Opinion: In event issuing bank fails to notify discrepancies as per Article 14.d.i of UCP 500 / 16(c) UCP 600, then as per Article 14.e, it is precluded from claiming documents are not compliant. And as such, issuing bank has no right to recover discrepancy fee without having notified discrepancies to presenting bank first.

Principle: If you pay without sending refusal notice listing discrepancies, you have accepted documents as complying. You cannot later say they were discrepant to deduct fee. Waiver is intentional relinquishment of known right, therefore discrepancy no longer exists.

Ground 2: Discrepancy Not Valid

Bank often cites trivial discrepancy to deduct fee.

Delhi High Court - Justice Prateek Jalan 2023 - Rs 5.23 Crore LC Case:

Exporter presented documents. Foreign bank declined citing discrepancies. Delhi HC held refusal unjustified, strict compliance principle does not mean hyper-technical discrepancies. Directed payment of Rs 5.23 crore with interest. Bank cannot use false discrepancy to both delay payment AND deduct fee.

United Commercial Bank vs Bank of India (1981) 2 SCC - Supreme Court of India:

LC required "Sizola Brand Pure Mustard Oil". Railway receipt stated "Sizola Brand Pure Mustard Oil Unrefined". Issuing bank refused. Supreme Court held - if discrepancy pointed is not material, refusal invalid. Discrepancy fee also invalid.

Ground 3: Bank Acts Outside UCP 600

Heytex Bramsche GmbH v Unity Trade Capital Ltd. EWHC - UK High Court on Article 16 Construction[2022]

Facility agreement clauses 3.8 and 3.9 modified operation of Article 16 UCP 600 such that on applicant's waiver, it was entitled to release documents and communicate waiver outside remit without incurring liability.

High Court held: Article 16 requires either return of discrepant documents by issuer to beneficiary, or waiver and acceptance of issuer's liability. In either case, beneficiary's interests protected. You cannot contract out of Article 16 to create free waiver + fee deduction mechanism. If you release docs without proper notice, you lose right to claim discrepancy.

Fargo Freight Ltd. Case - Calcutta High Court:

Noticing discrepancies in documents, banker did not make payment - High Court found no discrepancies and directed issuing banker to keep alive LC. Arbitrator awarded demurrage charges. Enforcing fee for non-existent discrepancy not allowed.

Ground 4: Sol Infotech Pvt Ltd v. Bank - Delhi High Court UCP 600 Article 16(d) Case

Clause (d) of Article 16 obligates appellant to intimate any discrepancy no later than close of fifth banking day following day of communication. Court held UCP 600 applicable even if not expressly incorporated if parties acted on basis of it. If intimation late, bank precluded - cannot recover fee.

4. Recovery Mechanism - How Banks Recover and How Beneficiary Challenges

Bank's Recovery:

1. Deduct from LC proceeds under reserve - e.g., LC USD 100,000, fee USD 100, pay USD 99,900
2. Claim from applicant - if LC says applicant bears fee
3. Set-off against beneficiary's account

Beneficiary's Defence & Litigation:

File Suit for Recovery of Fee: Argue no valid discrepancy + no 16(c) notice = fee illegal. Cite ICC Opinion TA.848rev: Discrepancy stated by issuing bank is not valid.

Claim Preclusion under 16(f): If bank did not give refusal notice listing each discrepancy, it cannot claim discrepancy at all.

Consumer Forum? No - LC is commercial transaction, not consumer.

Arbitration if LC contains arbitration clause - but UCP 600 disputes usually go to High Court commercial division.

Quantification: Fee is small ($75) but principle matters because:

• If bank deducts fee without notice, it is deemed to have waived discrepancy and must pay full amount without delay
• Repeated deduction = unfair trade practice + can claim interest @ 12-15% per RBI guidelines

5. Drafting Tips to Avoid Litigation

For Issuing Bank - To Ensure Fee Recovery is Valid:

Add clause in LC: "Discrepancy fee of USD XX will be deducted from proceeds even if discrepancies waived by applicant, provided issuing bank has sent refusal notice per UCP 600 Art 16(c) listing discrepancies within 5 banking days"

Always send SWIFT MT734 - Notice of Refusal listing each discrepancy before approaching applicant for waiver.

For Beneficiary/Exporter - To Avoid Fee:

• Ensure strict compliance - use checklist: Invoice description exactly as LC, BL clean, dates within LC validity
• If bank deducts fee without MT734, send legal notice citing Article 16(c) and ICC Opinion: "As per UCP 600 Article 16(f), you are precluded, discrepancy fee not justifiable since you did not fulfill duty to advise discrepancy at time of acceptance"

Case Law Summary Table: