In-depth analysis on UCP600 Article 16 Discrepant Documents, Waiver and Notice
Understanding UCP 600 Article 16
A single misspelling can jeopardize a multi-million dollar trade deal.
This guide demystifies the crucial rules banks MUST follow when they find errors in Letter of Credit documents.
Your Roadmap
We will cover the 5 critical steps of handling "discrepant documents" under UCP 600 Article 16:
- What "discrepancy" means
- The bank's 5-day deadline
- The mandatory notice of refusal
- How "waivers" from the buyer work
- The penalty for banks that fail
The 5 Core Themes
1. The Discrepancy Discovery
Before Article 16 applies, a bank must review documents (per Article 14). A "discrepancy" is any mistake, error, or non-compliance with the Letter of Credit (LC) terms. Banks only deal with documents, not the goods, so the paperwork must be perfect.
2. The Strict Deadline
Time is critical. A bank (issuing, confirming, or nominated) has a maximum of five banking days following the day of presentation to examine the documents and decide if they comply.
They don't have to wait 5 days—the decision can be made on day one—but they cannot exceed this limit. Once the decision to refuse is made, they must act immediately.
3. The Mandatory Notice (Art. 16c)
If a bank refuses, it MUST give a single notice to the presenter. This notice is not optional and must include three things:
- A clear statement that it is refusing to honour/negotiate.
- A complete list of every single discrepancy. A vague reason like "documents conflicting" is not allowed.
- A statement of what it's doing with the documents (e.g., "holding pending waiver," "returning documents," or "holding per presenter's instructions").
4. The Waiver Process
A "waiver" is when the bank asks the buyer (the applicant) to overlook the discrepancies and approve payment. The buyer might agree if they need the goods urgently and the error is minor.
However, the issuing bank can't just pay a different amount (e.g., a lower amount) without the seller's (presenter's) explicit agreement.
5. The Preclusion Rule (Art. 16f)
This is the "penalty box" for banks. If an issuing or confirming bank fails to follow Article 16's rules *exactly* (e.g., they miss the 5-day deadline or send a notice with an incomplete list of errors), they are precluded (stopped) from claiming the documents were discrepant.
The consequence is severe: The bank loses its right to refuse and MUST pay, even though the documents were flawed.
Frequently Asked Questions
Q1: Does a bank have unlimited time to refuse documents?
No. The maximum period for examination is five banking days following the day of presentation (UCP 600 sub-article 14(b)). The refusal (Article 16) must happen within this timeframe.
Q2: Can a bank send multiple emails listing different errors?
No. UCP 600 Article 16(c) requires the bank to give a single notice of refusal that lists each discrepancy.
Q3: Is a vague reason like "conflicting data" good enough for refusal?
No. General reasons are insufficient. The notice must be specific (e.g., "Invoice shows 'Blackstar' instead of 'Blackstars'").
Q4: What happens if a bank fails to follow these rules?
The bank is "precluded" (stopped) from claiming the documents were non-complying. It must honor or negotiate the presentation, effectively forcing them to pay.
Key Takeaways
- Article 16 is the rigid procedure for handling document errors.
- Banks have a max of 5 banking days to examine.
- A refusal notice must be singular and specific, listing all errors and document disposal.
- Failure to follow the procedure perfectly triggers the Preclusion Rule, forcing the bank to pay.
Given how strict these rules are, what's one step a seller could take *before* an LC is even issued to prevent small errors from causing big problems?
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