Who bears the Risk? When the Applicant Rejects Discrepant Documents After Reimbursement

Our friend TF recently shared an interesting case involving an Iraqi bank, a Jordanian issuing bank, and a confirming bank in the USA. The question raised: What happens if the applicant bank finds valid discrepancies after the confirming bank has already been reimbursed?

Here’s how I answered — right after a strong espresso and a quick ride on my trade finance turbo bike :

QUESTION

My dear expert friend,

I recently encountered the following scenario:

I am an Iraqi bank that issued an irrevocable and confirmed letter of credit. I requested the correspondent bank in Jordan to re-issue the credit and mention our bank’s name in field 51a as the Applicant Bank, and to notify the beneficiary via their bank in the USA (the confirming bank).

The bank in the USA inquired about the role of the Iraqi bank in the credit, and we responded that we are the Applicant Bank and requested the Jordanian bank to re-issue it on behalf of our bank.

My question is:

In the event that the Jordanian bank decides that the documents are compliant and settles the value to the beneficiary as per our reimbursement instructions in the original LC — and then sends the documents to us — if we find valid discrepancies, do we have the right to reject the documents under Article 16? And will the Jordanian bank accept our rejection, given that it has already settled the documents and the examination period has expired, and it can no longer reject them back to the beneficiary?

Your answer will be much appreciated.

Regards,

TF

___________

ANSWER

Dear TF,

Thank you for your thoughtful question. Let me summarize what I understand from your scenario:

• You (the Iraqi bank) are acting as Applicant Bank, and the actual applicant is your customer.
• Since you’re unable to issue a confirmed LC, you’ve asked your correspondent bank in Jordan to issue the LC on your behalf. Thus, the Jordanian bank becomes the issuing bank.
• The LC is then confirmed by a bank in the USA.
• You’ve provided reimbursement instructions to the Jordanian issuing bank, and you’re concerned about your rights if discrepancies are found in the documents after they’ve been honored and forwarded to you.

Now, let’s address the key points:

 Can you reject the documents under Article 16 of UCP 600?

Yes — but with clarification. Article 16 applies only to the nominated bank, the confirming bank, and the issuing bank. It does not apply to the applicant (nor to you as the applicant bank).

So technically, you can raise objections or refuse to take up the documents at any time, even after the 5-banking-day rule has expired — but your refusal has no bearing on the LC transaction itself. The LC is independent from the underlying contract.

 Can the issuing bank (Jordanian bank) reject the documents after the 5 banking days?

No. As per UCP 600 Article 16(b), if the issuing bank determines that a presentation is non-compliant, it may, in its sole judgment, approach the applicant for a waiver — but this does not extend the five banking days allowed for examination under Article 14(b).

Once those 5 days pass without refusal, the documents are deemed compliant and the issuing bank is obligated to honor.

Now, your real concern — the risk to your bank (the Iraqi applicant bank)

Here is the practical point:

If you had provided funds or reimbursement instructions to the Jordanian issuing bank, and it honored the documents based on its own determination of compliance, but you later find valid discrepancies, then you may rightfully reject the documents for your own internal purposes.

However, in this case, the Jordanian bank has already paid the confirming bank in the USA. That payment is final under UCP 600 — but your financial exposure may remain.

Therefore, if your rejection is valid and grounded in actual discrepancies, the Jordanian bank — as the issuing bank — may bear the commercial risk of having to reimburse you (the applicant bank), since it acted on your behalf and used your funds.

This risk arises not under the LC, but under the bilateral reimbursement or funding arrangement between you and the Jordanian bank.

 Summary:

• You can reject the documents based on valid discrepancies — but outside the scope of UCP Article 16.
• The issuing bank cannot reject the documents once the 5-day rule lapses.
• If discrepancies are found after payment, the Jordanian issuing bank may be liable to refund you (the applicant bank), depending on your agreement.

I hope this explanation helps clarify both the UCP rules and the commercial reality behind your question.

Mr. Old Man’s Cartoon Take:

Got a trade finance twist of your own? Drop your case or question and let’s pedal through it together!

Best regards,

Mr. Old Man

www.mroldman.net