AUTHORIZATION/APPROVAL FOR NEGOTIATION OR PAYMENT OF DISCREPANT DOCUMENTS

Intro:

One of the recurring headaches in L/C practice is what to do with discrepant documents. The beneficiary wants their money, the nominated bank worries about reimbursement, and the issuing bank sits in the middle waiting for the applicant’s word. A common query is whether the issuing bank can “pre-approve” or authorize payment against documents with discrepancies, and what that means for the nominated bank’s risk.

QUESTION

Dear Mr. Old Man,

Sometimes a beneficiary presents documents under an L/C which contain discrepancies. The beneficiary then requests my bank (the nominated bank) to negotiate these documents. In such cases, we forward the documents to the issuing bank, highlighting the discrepancies, and ask whether it authorizes us to negotiate. Occasionally, the issuing bank provides such authorization.

My questions are:

1. Can an issuing bank validly authorize a nominated bank to negotiate or pay against discrepant documents?
2. If the issuing bank grants this authorization, is it then bound to reimburse the nominated bank? Can it still deduct discrepancy fees from the proceeds?
3. Is it mandatory for a nominated bank to obtain the issuing bank’s authorization before negotiating discrepant documents?

Awaiting your reply,

S.

_________

ANSWER

Hi S.,

1. Yes, an issuing bank may authorize a nominated bank to negotiate or honour documents containing discrepancies — but only after it has secured the applicant’s waiver of those discrepancies. Without the applicant’s waiver, the issuing bank itself has no authority to bind the applicant to accept discrepant documents.

2. Once the issuing bank has authorized the nominated bank to negotiate or honour, it must reimburse the nominated bank, provided the documents contain no additional discrepancies beyond those already waived. The issuing bank is entitled to deduct its discrepancy fee from the proceeds, if allowed under the L/C terms.

3. A nominated bank that intends to negotiate or pay against discrepant documents should normally obtain such authorization from the issuing bank. This protects the nominated bank against the risk of non-reimbursement. The only exception is when the nominated bank negotiates with recourse to the beneficiary, in which case the reimbursement risk is shifted back to the beneficiary.

Practical takeaway 

If you want to sleep well at night, don’t bet your money on discrepant documents unless the issuing bank has given you the green light — or you’re ready to chase the beneficiary later.

Best regards,

Mr. Old Man