Discrepancy Waiver By Applicant - Letter of Credit

This is UCP 600 Article 16 concept. It is the most litigated area in trade finance.

1. Definition

Under Letter of Credit, banks deal in documents, not goods. Even minor spelling mismatch allows bank to refuse payment.

Discrepancy = Any deviation between documents presented and terms of LC, UCP 600, ISBP.

Example:

• Invoice says "Cotton Textiles" LC says "100% Cotton Textiles"
• Late shipment, late presentation, short shipment
• Bill of Lading missing signature

Waiver By Applicant = When issuing bank finds discrepancy, in its sole judgment, it may approach applicant (buyer) to ask if buyer is willing to waive discrepancy and accept documents anyway.

• Applicant is buyer who opened LC.
• Issuing bank is buyer's bank.

Legal wording in refusal notice:

"DISCREPANT, WE MAY SEEK A WAIVER OF SUCH DISCREPANCIES FROM THE APPLICANT. SHOULD SUCH A WAIVER BE OBTAINED, WE MAY RELEASE THE DOCUMENTS AND EFFECT PAYMENT"

2. Procedure Under UCP 600 Article 16

Article 14: Each bank has max 5 banking days following presentation to examine.

Article 16(b)-(c):

1. Issuing bank determines presentation does not comply
2. May in its sole judgment approach applicant for waiver - Not obligatory
3. Approaching applicant does NOT extend examination period. 5 banking days run independently of waiver discussions
4. If issuing bank refuses to honour, it must send single refusal notice listing every discrepancy
5. If applicant waives, issuing bank may still refuse - waiver is not binding on bank. Bank receives and agrees. Text in UCP: "waiver the bank receives and agrees" - two steps
6. If bank agrees to waive, it releases documents to applicant and pays beneficiary

Letter Format Applicant Sends:

"We have been notified of following discrepancies. We hereby waive all listed discrepancies and authorize you to effect payment to beneficiary for full value and debit our account plus discrepancy fees."[1][2][3]

Discrepancy Fee: Issuing bank usually charges $50-150 per discrepancy to beneficiary or applicant as per agreement.

3. Legal Effect of Waiver

• Waiver is intentional relinquishment of known right. Once waived, discrepancy no longer exists for that presentation
• Applicant cannot later say "you paid against discrepant documents, I will not reimburse bank". If he waived, he must reimburse issuing bank under Art 7
• Beneficiary cannot assume waiver will be granted. Waiver introduces applicant discretion back into structure designed to provide documentary payment certainty
• If LC expires, waiver does NOT extend expiry date. Expiry is final deadline for presentation

4. Case Laws

Case 1: ICC Opinion TA 782 - Applicant Waiver Does Not Extend Examination Period

Facts: Bank found discrepancy on Day 2, approached applicant, applicant waived on Day 7, bank then sent refusal on Day 7 citing late waiver.

Held: Bank was late. 5 banking days expired on Day 5. Waiver discussion does not stop clock. Bank precluded from claiming discrepancies under Art 16(f) and must pay. Must give refusal notice within 5 days even if waiting for applicant.

Case 2: Negotiating Bank Argument - Waiver as Intentional Relinquishment - ICC Digital Library Case 2010

Negotiating bank argued: "By email dated 30th March 2010, applicant has acknowledged discrepancies and agreed to waive them. As waiver is intentional relinquishment of known right, discrepancy no longer exists."

ICC agreed: Once applicant waives and issuing bank agrees, beneficiary cannot be refused. Payment must be made.

Case 3: Voest-Alpine Trading USA Corp v. Bank of China (S.D. Texas 2000) - Leading US Case

LC required "FOB" shipment. B/L showed "FOB Stowed". Issuing bank refused. Applicant waived. Issuing bank still refused citing its own discretion.

Court held: Under UCC 5-108, issuing bank's right to refuse is limited to discrepancies listed in timely notice. If bank sought waiver, it implies it found presentation otherwise complying. If bank then receives waiver and still refuses without new basis, it breaches.

Case 4: Indian Case - Canara Bank v. Standard Chartered Bank (1998) - Supreme Court of India on LC Discrepancy

Though pre-UCP 600 (UCP 400), principle same. SC held bank must examine documents with reasonable care, not with hyper-technical approach. If discrepancy is trivial and applicant waives, bank cannot refuse to reimburse negotiating bank. Banks deal in documents, but not to extent of absurdity.

Case 5: Malaysian Case - Issuer Honoured Then Sought Refund - Invalid

Judge noted: "The right of recourse does not arise because Issuer as issuing bank did honour LC at first instance. Telegraphic transfer and remittance of payment RM 194,605 into beneficiary's account was made on 22.7.1993 upon deduction of commission. It was only on 24.7.1993 that Issuer, citing discrepancies, sought refund from Negotiating Bank"

Held: Once issuing bank waives and pays, it cannot later claim discrepancy to get refund from negotiating bank. Waiver is final.

Case 6: Indian - Federal Bank Ltd. v. VM Jog Engineering (2000) SC - Applicant's Waiver and Fraud Exception

SC held: Even if applicant waives discrepancy, issuing bank may still refuse if documents are forged or fraud apparent. Applicant waiver cannot compel bank to finance fraud. Independence principle has fraud exception.

Case 7: UCC Section 5-108(c) Preclusion Rule - US

Court rejected argument that discrepancy relates only to presentation for draw. Preclusion rule applies only if issuing bank asserts as basis for dishonor a discrepancy of which it did not give timely notice. If bank did not list discrepancy in refusal notice, it is precluded, even if applicant later refuses waiver.

5. Risks - Why Waiver is Dangerous

For Applicant (Buyer):
If you waive, you lose right to reject goods based on document defect. Example: You waive late shipment discrepancy, you cannot later claim goods late to avoid payment. You must still pay bank.

For Beneficiary (Seller):
Never ship relying on applicant's oral promise: "Such discrepancy would not affect LC in any way". ICC case: Applicant gave wholesaler written promise discrepancy would not affect LC - still bank refused. Only amendment to LC protects you, not private promise.

For Issuing Bank:
If you pay after waiver but documents have fraud, you may be liable to applicant.

6. Best Practice Checklist

1. Exporter: On receiving refusal notice, immediately call buyer, explain discrepancy does not affect goods, request waiver in writing to issuing bank, ask negotiating bank to hold documents pending waiver
2. Importer: Before waiving, inspect goods status - ask for copy of B/L, airway bill - waiver means you accept documents as presented
3. Bank: Always send refusal notice within 5 banking days listing ALL discrepancies, even if you are seeking waiver. Use SWIFT MT734. Do not extend deadline waiting for applicant.