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UNDERDRAWN?

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QUESTION

Hi,

Please find below the case related to LC amount underdrawn:

LC extracts:

LC amount USD 45,250.00
Partial shipment is allowed.
LC doesn’t states about the tolerance in quantity and amount.

Description of goods:

1000 Leather hand bags made out of sheep leather with following colour:

Black: 250 pcs – Unit price: USD 40 per pc
Brown: 250 pcs Unit price: USD 45 per pc
Tan: 250 pcs – Unit price: USD 47 per pc
Aqua bluse: 250 pcs – Unit price: USD 49 per pc

The commercial invoice evidences full shipment of goods as per field 45A and evidences Total amount USD 45,200.00, Less deposit 20% USD 9050.00 and mentioned as net amount payable as USD 36,200.00. Please note the draft is also drawn for the amount USD 36,200.00.

Nowhere in the LC evidences discount or Less deposit will be allowed.

The issuing bank rejected the documents stating that LC amount is underdrawn. But nominated bank contested the refusal stating that it complies according the ISBP para C7 which states: An invoice may indicate a deduction covering advance payment, discount, etc., that is not stated in the credit.

Please comments your views whether the issuing bank is correct in rejecting the documents citing the discrepancy LC amount is overdrawn.

Regards
Vijay
——-

ANSWER

Dear Vijay,

Last week I answered a question similar to yours.

1) Is it a discrepancy if the invoice indicates a deduction covering advance payment, discount etc. that is not stated in the LC?

I agree with the nominated bank’s view that there is no discrepancy as per paragraph C7 ISBP 745, which says an invoice indicate a deduction covering advance payment, discount, etc., that is not stated in the LC
The deduction in your case is a form of discount which could be up to any amount. There’s no discrepancy.

2) Is the discrepancy “underdrawn/short drawn” raised by the issuing bank valid?

On DCPro Discussion Forum there have been at least two discussions on this topic, and of course there have been divided opinions on the issue.

Some opine that as the invoice showing a deduction is acceptable, the amount claimed less than the amount permitted by the LC is acceptable. There is no discrepancy (short drawn), whereas some others say it is a discrepancy (underdrawn or short drawn).

I am on the side of those who say that there is no discrepancy. Underdrawn or short drawn in this specific case is acceptable.
If full shipment is made and full amount of goods shipped is indicated, why does the issuing bank/applicant refuse to pay just because the beneficiary claims for the amount less than that permitted by the LC.

Just ask yourself: If you were the applicant, would you like to pay full amount or pay less than full amount?

Perhaps, you know the answer already.

Kind regards,
Mr. Old Man

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9 Comments

  1. UNDERDRAWN? | MR. OLD MAN

    March 16, 2014 at 8:43 pm

    […] UNDERDRAWN?. […]

    Reply

  2. KM

    April 1, 2014 at 7:30 am

    hi Sir..
    what if invoice is stating a bonus instead of a discount?
    LC did not state that bonus/penalty is allowed but due to the quality of the goods – such price adjustment is common in the market..
    of course if included the bonus adjustment,it will still be within the LC value.

    Reply

    • mroldman

      April 1, 2014 at 2:23 pm

      Based on para C7 ISBP ISBP 745 which says an invoice may indicate a deduction covering advance payment, discount, ETC.,[emphasized]…, I would like to say that an invoice indicating a deduction covering bonus discount is acceptable.

      If full shipment is made, I don’t think the applicant should refuse bonus.

      Reply

    • lanchi

      June 29, 2014 at 5:32 pm

      May i ask you, have you ever seeked answer from ICC members who composed ISBP. They must have had reason adding paragraph C7 in Isbp, mustn’t they?

      Reply

      • mroldman

        June 29, 2014 at 8:01 pm

        Dear Lan Chi,

        I do not think it’s necessary to ask for ICC members’s explanation why ICC provides (paragraph C7) in ISBP 745 that an invoice may indicate a deduction covering advance payment, discount, etc., that is not stated in the LC.

        The fact that ICC provides paragraph C7 ISBP 745 may be based on international trade practices where the buyer and the seller may agree that an advance payment is to be made outside LC and the remaining amount of the contract is to be paid by LC or where the seller, for some reason, grants the buyer a discount.

        An invoice that shows a deduction due to an advance payment or a ‘discount’ being granted would not be a reason, in itself, to reject the documents.

        Kind regards,
        Mr. Old Man

        Reply

      • lanchi

        June 29, 2014 at 10:16 pm

        Thanks for your kind reply. However, i am still not able to clear my mind thoroughly. If there is any change in lc terms (especially about lc amt), why dont ben and appl arrange an amendment. It is safer than taking risk of presenting set of docs which could be refused by the issuing bank. And, it is clearly that not many bank clarks fully understand this matter. Kindly keep me updated if you have any interesting information about this issue. Thanks again!

        Reply

  3. Ka

    April 17, 2014 at 2:00 pm

    Dear Mr.Old Man
    Let me have your advice on this situation:
    L/C value: USD10,000.00
    partial shipment: allowed
    First lot: USD5,000.00 and the balance no longer to be shipped until L/C expires
    Am I right when saying that the issuing bank cannot raise any discrepancy but accept the short-shipment? How can issuing bank be protected from this?

    Reply

    • mroldman

      April 17, 2014 at 2:09 pm

      Yes, there is no discrepancy. The issuing bank’s liability under LC is released when LC expires notwithstanding that no further shipment is made.

      Reply

  4. mroldman

    June 30, 2014 at 7:46 am

    Dear Lan Chi,
    For further information, please thoroughly read my following answer to the question of Vijjay:

    QUESTION

    Hi,

    Please find below the case related to LC amount underdrawn:

    LC extracts:

    LC amount USD 45,250.00
    Partial shipment is allowed.
    LC doesn’t states about the tolerance in quantity and amount.

    Description of goods:

    1000 Leather hand bags made out of sheep leather with following colour:

    Black: 250 pcs – Unit price: USD 40 per pc
    Brown: 250 pcs Unit price: USD 45 per pc
    Tan: 250 pcs – Unit price: USD 47 per pc
    Aqua bluse: 250 pcs – Unit price: USD 49 per pc

    The commercial invoice evidences full shipment of goods as per field 45A and evidences Total amount USD 45,200.00, Less deposit 20% USD 9050.00 and mentioned as net amount payable as USD 36,200.00. Please note the draft is also drawn for the amount USD 36,200.00.

    Nowhere in the LC evidences discount or Less deposit will be allowed.

    The issuing bank rejected the documents stating that LC amount is underdrawn. But nominated bank contested the refusal stating that it complies according the ISBP para C7 which states: An invoice may indicate a deduction covering advance payment, discount, etc., that is not stated in the credit.

    Please comments your views whether the issuing bank is correct in rejecting the documents citing the discrepancy LC amount is overdrawn.

    Regards
    Vijay
    ——-

    ANSWER

    Dear Vijay,

    Last week I answered a question similar to yours.

    1) Is it a discrepancy if the invoice indicates a deduction covering advance payment, discount etc. that is not stated in the LC?

    I agree with the nominated bank’s view that there is no discrepancy as per paragraph C7 ISBP 745, which says an invoice indicate a deduction covering advance payment, discount, etc., that is not stated in the LC
    The deduction in your case is a form of discount which could be up to any amount. There’s no discrepancy.

    2) Is the discrepancy “underdrawn/short drawn” raised by the issuing bank valid?

    On DCPro Discussion Forum there have been at least two discussions on this topic, and of course there have been divided opinions on the issue.

    Some opine that as the invoice showing a deduction is acceptable, the amount claimed less than the amount permitted by the LC is acceptable. There is no discrepancy (short drawn), whereas some others say it is a discrepancy (underdrawn or short drawn).

    I am on the side of those who say that there is no discrepancy. Underdrawn or short drawn in this specific case is acceptable.
    If full shipment is made and full amount of goods shipped is indicated, why does the issuing bank/applicant refuse to pay just because the beneficiary claims for the amount less than that permitted by the LC.

    Just ask yourself: If you were the applicant, would you like to pay full amount or pay less than full amount?

    Perhaps, you know the answer already.

    Kind regards,
    Mr. Old Man

    Reply

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