Mr Old Man Payment Q&A Drafts under Letters of Credit: Common Confusions and Practical Answers By Mr Old Man Posted on 18 hours ago 9 min read 0 0 7 Share on Facebook Share on Twitter Share on Google+ Share on Reddit Share on Pinterest Share on Linkedin Share on Tumblr Intro Drafts (bills of exchange) are among the most misunderstood elements in documentary credit practice. Although UCP 600 and ISBP 821 provide guidance, inconsistent LC drafting and legacy habits continue to cause confusion—especially when drafts are mentioned in some fields of the LC but not listed as required documents. In the Q&A below, Mr. Old Man responds to a set of practical questions concerning overdrawn claims, draft requirements, examination standards, and refusal rights, based on a real-life LC case. QUESTION Dear Mr. Old Man, I have known you for a long time through your blog and greatly admire your profound knowledge of trade finance. We are currently facing a case where we are unsure whether discrepancies exist, and we would very much appreciate your valuable opinion. LC details: 32B: GBP 14,770.739 – NOT EXCEEDING 42C: Draft at sight for 70% of invoice value 42A: Drawee: VNIBVNVX 45A: Goods as per Sale Contract No. 123 Total contract amount: GBP 21,101.00 46A: No request for draft – Commercial Invoice signed by beneficiary in 03 originals 47A: All drafts and documents to be made in English and quoting LC number Documents presented: No draft presented Commercial invoice shows full amount of GBP 21,101.00 Covering letter claims full amount of GBP 21,101.00 Questions: Can we raise a discrepancy for overdrawn? If yes, which UCP article applies? Must drafts be presented under sight LCs and acceptance LCs when fields 42A and 42C are completed, but field 46A states “No request for draft”? If drafts are stipulated as required documents in field 46A, must they be presented together with other shipping documents? Are drafts examined against the Uniform Law for Bills of Exchange (ULB)? Can a bank refuse documents based on discrepancies arising from drafts? Thank you very much in advance for your support. Best regards, Nhung _______ ANSWER Dear Nhung, Thank you for your detailed questions. I will address them one by one. Overdrawn claim – is it a valid discrepancy? Yes. The credit is issued for an amount not exceeding GBP 14,770.739, which represents the maximum payment obligation of the issuing bank. While the commercial invoice amount of GBP 21,101.00 is consistent with the sale contract stated in field 45A and is not, by itself, a problem, the claimed amount shown in the covering letter exceeds the credit amount. This constitutes an overdrawn drawing. Your refusal may be based on UCP 600 sub-article 30(b), which states that: “…the total amount of the drawings does not exceed the amount of the credit.” Are drafts required when fields 42A and 42C are completed, but field 46A is silent as to drafts? Yes. Fields 42A (Drawee) and 42C (Drafts at …) define the availability of the credit and, when completed, indicate that the credit is available by (negotiation of) draft. In such circumstances, the requirement to present drafts arises from the availability terms of the credit, even if field 46A does not expressly list drafts as required documents. While ICC guidance discourages the unnecessary use of drafts under documentary credits, best practice does not override the express terms of the credit. Accordingly, where fields 42A and 42C are completed, drafts are required, notwithstanding the absence of any reference to drafts in field 46A. If drafts are required in field 46A, must they be presented? Yes. When drafts are expressly stipulated as required documents in field 46A, failure to present them constitutes a discrepancy under UCP 600 Are drafts examined against the Uniform Law for Bills of Exchange (ULB)? No. Banks do not examine drafts for compliance with the Uniform Law for Bills of Exchange or local bills of exchange legislation. Drafts are examined solely in accordance with ISBP 821 paragraphs B1–B18, which set out documentary examination standards for drafts under LCs. Can banks refuse documents based on discrepancies arising from drafts? There are divided views as to whether discrepancies on drafts may constitute valid grounds for refusal, particularly in cases where drafts are not expressly required in field 46A but arise from issuing-bank practice or habit. Those who take the view that such discrepancies are not valid grounds for refusal argue that only documents expressly required by the applicant under the credit should be subject to discrepancy examination, and that drafts introduced by the issuing bank as a matter of practice should not, by themselves, justify refusal. Nevertheless, where drafts are required by the terms of the credit—whether expressly listed as required documents or arising from the availability provisions of the credit (e.g. fields 42A and 42C)—or where discrepancies on drafts may give rise to legal or financial implications for the issuing bank (such as wrong tenor, wrong drawee, or an overdrawn amount), such discrepancies may form a valid basis for refusal. In practice, issuing banks often exercise tolerance with respect to minor discrepancies on sight drafts. However, material discrepancies on drafts, particularly time drafts, are commonly addressed by requesting corrected drafts. Such a request does not release the issuing bank from its obligation to honour the credit once compliant drafts are re-presented. For further guidance on the use of drafts under documentary credits, readers are encouraged to refer to the ICC Guidance Paper – The Use of Drafts under Documentary Credits, which explains the policy rationale for discouraging unnecessary drafts while recognising that LC terms, where clearly stated, remain determinative. I hope the above clarifies your questions regarding drafts under letters of credit. Best regards, Mr. Old Man