An LC has been issued with the following details :
Amount: USD 100000
Goods description and quantity : 10000 boxes of widget
Unit price : USD 10 per a box CFR Dubai
Partial shipment : Not Allowed
- There is not any indication concerning tolerance in the LC.
- LC is subject to UCP 600
- There is not any amendment for LC .
A set of required documents is presented to the confirming bank for USD 94000 and according to B/L full quantity of goods has been shipped .
The confirming bank rejected the documents for the following discrepancy :
" Tolerance in amount exceeds 5% less than the amount of credit "
On the other hand negative tolerance is more than 5 % which authorized according to sub-article 30.c of UCP 600.
Is the confirming right ?
Dear Sam and Peter, can we come back to the initial case?
Mehdik needs our help for the current case and your discussion is leading to intellectual nitty-gritty which is very interesting but which maybe confusing for the most members.
His case is: 10000 boxes of widget
Unit price : USD 10 per a box CFR Dubai
So Art. 30 a) doesn't apply as there was no such tolerance,
Art. 30 b) doesn't apply as we have a definitive quantity in pieces and
Art. 30 c) would not apply for a unit price of USD 9.40 if stated so in the invoice at all, as a unit price of USD 10.00 was detailed in the credit.
But we do not know, which unit price was used in the invoice. There are three possibilities:
a) the unit price is not indicated. Then it is discrepant as the unit price is part of the goods description.
b) the unit price differs from USD 10.00. Then it's discrepant too!
c) The unit price is USD 10,00 and there is a discount stated in the invoice (I tend to negate the possibility that the beneficiary is too stupid to calculate correctly, I know! ;-o)
Under the UCP 500 I used to pick such discount not supported by the credit as a discrepancy (The discount is made for inferior quality of the goods which is not in accordance with the credit!)
However, the UCP 600 incorporate the wording of the ISBPs and Para 60 states:
"60. An invoice must evidence the value of the goods shipped or services or performance provided. Unit price(s), if any, and currency shown in the invoice must agree with that shown in the credit. The invoice must show any discounts or deductions required in the credit. The invoice may also show a deduction covering advance payment, discount, etc., not stated in the credit."
So I can't pick it as a discrepancy any longer.
Dear Mehdik, Sam and Peter, what do you think?!
-Each long journey starts with a small step-
Best regards
Frammi
Dear friends
Dear friends
Sorry it was my fault. I should have added the following details before:
unit price in the LC :
USD 10 including USD 8 as fob and USD 2 as freight
unit price in the Invoice :
USD 9.4 including USD 8 as fob and USD 1.4 as freight
Taking into consideration above and previous information please comment it is discrepancy according to UCP 600( article 30 ) or not ?
If the answer is yes why in a situation , like this case , in which both beneficiary and applicant are consent to payment less than the credit amount ( less than %95 )the confirming or issuing bank must take it as discrepancy ?
Regards
It is discrepant, USD 9.5 would have been complying!
Dear Mehdik,
Art. 30 a) and b) do not apply. Art. 30 c) rules:
"Even when partial shipments are not allowed, a tolerance not to exceed 5% less than the amount of the credit is allowed, provided that the quantity of the goods, if stated in the credit, is shipped in full and a unit price, if stated in the credit, is not reduced or that sub-article 30 (b) is not applicable. This tolerance does not apply when the credit stipulates a specific tolerance or uses the expressions referred to in sub-article 30 (a). "
So, this means that a drawing of 95 to 100 % of the credit would have been okay. Unfortunately, you only claimed 94 % making the claim discrepant as " the amount is shortdrawn".
-Each long journey starts with a small step-
Best regards
Frammi
TO AVOID SUCH DISCREPANCY......
Dear L/c experts,
Due to some penalty clause on account of quality variations, our invoices are very often lower than 10% of L/c amount. To avoid such discrepancy, we usually request the applicant to write as under:
“Tolerance in quantity & value : Plus or Minus 10%. Invoice value / draft value lower than 10% are also acceptable.”
Anup Kr Sinha
anupsinhammtc@yahoo.co.in
Lower than 10 % or did you mean lower than 90 %???!!
-Each long journey starts with a small step-
Best regards
Frammi
Definitely a discrepancy
Hi mehdik,
This is definitely a discrepancy, however the bank should have noted the discrepancy of the reduced unit price as well.
So for article 30, here is how it would break down:
30 (a) - since there is are no words like "about" or approximately, this can not be used to have a tolerance in the letter of credit.
30(b) - since there is an exact number of units, this can not be used to have a tolerance in the letter of credit.
30(c) - since the unit price was shown in the credit and it was reduced in the documents, this can not be used to have a tolerance in the letter of credit.
Therefore a tolerance from the letter of credit amount would not be permitted in this case.
As to why a bank would note this, you have to remember that banks deal in documents, so they are not aware of any approval by the applicant to the reduction. And the assumption that is behind the rule regarding the unit price is that it may be an inferior good that the applicant may not want.
I hope this helps you out.
LC Sam
p.s. - Frammi - Thanks for getting us back on track.
Tolerance in L\C amount
Dear All
The confirmaing bank is right the documents considered a discrepancy.
The tolerance is exceed 5% less than the amount of the credit . Despite the fact that the quantity shipped in full
Article 30(c) is apply in this case.
In such example , it would not be discrepant if commercial invoice and the draft-if any- submitted by USD95000.
This tolerance applies provided that:
There is no different between article 30(b)and (c) regarding the tolerance .sub article(c) just making a clarification that if the L\C stated a quantities such quantities are not reduced and so the unit price is not requced.
Sub articles (b) and (c) clarify that the tolerance is not related the reducing of the quantities it is called ancillary charges:
Best regards to all
Mohammed Imam
mohdimam@yahoo.com
Tolerance - Its a discrepancy
Mehdik, it is a discrepancy.
Please refer article 30(c)
It is a discrepancy
UCP600 Art 30 (b) states:
"A tolerance not to exceed 5% more or 5% less than the quantity of the goods is allowed, provided the credit does not state the quantity in terms of a stipulated number of packing units or individual items....................."
The goods description states "10,000 boxes of widgets"
AS this is a number of packing units or individual items there is no tolerance allowed at all. The only drawing you can make is 10,000 boxes at $10 per box. The discrepancy should be shown as "L/C underdrawn".
This should not be a problem for the buyer as he is getting the goods at $9.40 per box instead of $10 - seems a strange way of doing business to me.
sub- article 30.c
Dear peter
please consider sub- article 30.c in your comment not sub- article 30.b
Hi Mehdik
Pleae re-read article 30 (c) "or that article 30 (b) is not applicable"
As the document is proved discrepant by the application of 30 (b) then article 30 (c) is, in this case, irrelevent. In this instance the full quantity of goods has ben shipped and therefore partial shipment is not at issue - the L/C has been underdrawn as the unit price of the goods has been reduced.
It is a discrepancy
Hi Peter,
I agree with you that the discrepancy is that the letter of credit is underdrawn, but be careful of your reasoning.
There was no mention in the above as to the unit price on the invoice, only that the invoice totaled $94,000.00, which makes the tolerance greater than the 5% less.
It is possible to have a full unit price and then a discount that is not mentioned in the letter of credit. As long as the unit price is $10 and the total invoice value less any discounts is between $100,000 and $95,000, the documents would comply.
Best regards,
LC Sam
Sam - can you explain further?
I believe you are referring to the tolerance as mentioned in 30 (c) but please note that 30 (c) cannot be applied if 30 (b) is applicable.
As the goods description states the quantity "in terms of a stipulated number of packing units or individual items" then no tolerance is allowed at all.
sub-article 30.b & 30.c of UCP 600
Dear LC SAM
Do you have examples for sub-articles 30.b & 30.c of UCP 600 ?
I would be grateful if you would raise them here.
Thanks
Examples
Here are examples to explain the process.
Art 30b-
*LC Requirements*
Amount: USD 100000
Goods description and quantity : 10000 KG of Widget Material
Unit price : There is no unit price
Partial shipment : Not Allowed
- There is not any indication concerning tolerance in the LC.
- LC is subject to UCP 600
- There is not any amendment for LC
*Invoice shows*
Shipment of 9500 KG of Widget Material
Unit price 10 per KG
Total Invoice USD 95,000
Art 30C-Example A
*LC Requirements*
Amount: USD 100000
Goods description and quantity : 10000 Widgets
Unit price : There is no unit price
Partial shipment : Not Allowed
- There is not any indication concerning tolerance in the LC.
- LC is subject to UCP 600
- There is not any amendment for LC
*Invoice shows*
Shipment of 10,000 Widgets
Unit price 9.50 per Widget
Total Invoice USD 95,000
Art 30C-Example B
*LC Requirements*
Amount: USD 100000
Goods description and quantity : 10000 Wigets
Unit price : USD 10 per Widget
Partial shipment : Not Allowed
- There is not any indication concerning tolerance in the LC.
- LC is subject to UCP 600
- There is not any amendment for LC
*Invoice shows*
Shipment of 10,000 Widgets
Unit price USD 10 per Widget
Invoice Subtotal USD100,000
Less volume discount USD 5,000
Invoice total USD 95,000
***********
All three scenarios would comply with the letter of credit.
Please let me know if you have any questions or comments.
Best regards,
LC Sam
Sorry, still don't agree
I agree with your example for 30(b) but both examples a and b for 30(c) I don't agree with. In both of these cases the goods are described as a number of individual items; 10,000 widgets - and therefore they fall under 30(b) and there is no tolerance allowed.
You can only apply 30(c) if 30(b) does not apply, vis
".....provided that the quanitity of the goods, if stated in the credit, is shipped in full and a unit price, if stated in the credit, is not reduced or that sub-article 30 (b) is not applicable."
Am I misreading this?
More information for the examples
Hi Peter,
I can understand your confusion.
Let me give an explination of each.
Art 30(c) Example A.
This example showed a full shipment of the goods, 10,000 widgets. So there is no partial shipment.
Since the credit did not indicate a unit price, any unit price can be used provided that the total of the invoice is between USD 95,000 and USD 100,000.
This would definitely fit the Art 30(c). See the below checklist:
1. Partial shipments not allowed? - Yes
2. Tolarance does not exceed 5% less in the amount of the credit? - Yes
3. Quantity of the goods if stated in the credit shipped in full? - Yes
4. Unit price if stated in the credit not reduced? - Does not apply, not mentioned in the credit.
5. Sub-article 30(b) not applicable - Yes
6. There is no tolerance as noted in Art 30(a) - yes
Therefore the tolerance amount is allowed.
Art 30(c) Example B.
This example showed a full shipment of the goods, 10,000 widgets. So there is no partial shipment.
The invoice indicates the unit price of USD10.
This would also fit the Art 30(c). See the below checklist:
1. Partial shipments not allowed? - Yes
2. Tolarance does not exceed 5% less in the amount of the credit? - Yes
3. Quantity of the goods if stated in the credit shipped in full? - Yes
4. Unit price if stated in the credit not reduced? - Yes Invoice shows the unit price as USD10 - Same as the letter of credit.
5. Sub-article 30(b) not applicable - Yes
6. There is no tolerance as noted in Art 30(a) - yes
Therefore the tolerance amount is allowed. The confusion may be in the volume discount. Remember that the ISBP states that an invoice may also show a deduction covering advance payment, discount, etc. not stated in the credit.
Please let me know if you have any questions.
Best regards,
LC Sam
My Confusion Continues
In both of your examples you say that sub article 30 (b) does not apply but I think it does as the goods are stipulated as a number of individual items - that is 10,000 - not 10,000 KGS but 10,000 individual widgets. That means that there is no tolerance, either up or down.
What do you think Sam?
I agree
Peter,
I agree with you that there is no tolerance in the number of units. The goods still have to be shipped in full (10,000 widgets).
There is only a tolerance in the currency amount that can be drawn under the credit.
So to review -
The shipment is for 10,000 widgets, so there is no partial shipment.
The unit price is USD9.50 per widget, which is ok, since there is no unit price in the example.
The total amount drawn under the letter of credit is $95,000, which is ok, as there is an acceptable tolerance in the currency amount drawn under the letter of credit as per Art 30(c).
I hope this makes sense now.
LC Sam