LC disputes – is DOCDEX the answer?
I am not sure I would read this if I were you. It might take away you illusions. On the other hand - it might also offer ideas that you perhaps had not thought about ... And with that cryptic introduction we move to the topic of this blog post: LC disputes..
On a number of occasions I have stated that the LC is a strong and powerful instrument – if used correctly. I.e. drafted well. However – even the most perfectly drafted LC can become the subject of a dispute. This may be anything; from refusal of a presentation based on spurious discrepancies; or simply stalling payment forever – without responding to any contacts from the presenter or beneficiary. And then what do you do? Of course there are a number of paths to take to solve LC disputes. For example:
If the counterpart is simply wrong, the starting point is to argue why they are wrong. The LC practice is well documented (e.g. in UCP 600, ISBP and ICC Opinions), and most disputes can be solved with the basis in the existing practice. However the existing practice is not law … it is not binding on the parties. I have been involved in a number of disputes where the counterpart simply stated that they “do not endorse” the ICC Opinions or that “the LC is not issued subject to the ISBP.”
In other words: you may be right, but if the counterpart is not on the same playing field as you – one million ICC Opinions in your favour will not help you!
However – your relations may actually help you. If you know the right person – preferably having actually met – then things may be smoother. In some countries the LC handling is very decentralised, and if the dispute is with a branch, it may be fruitful to “move” it (if at all possible) to the head office. The LC Head in the head office may well be more “receptive” to UCP 600/ISBP/ICC Opinions arguments than is the case in a branch. Further – by using relations the case becomes “broader,” and may include the full co-operation between you and your counterpart. Assuming that both want to preserve it – a solution to a “single case” may be easier.
By the commercial agreement
More often than not the real subject of the dispute is not the problem in the LC. For example the presentation may be refused citing the discrepancy “Bill of lading not signed correctly.” This may or may not be correct, but the subject for the dispute is most likely based on the commercial agreement – e.g. one party (for example the buyer) is of the opinion that the other party (for example the seller) have not fulfilled the commercial agreement. This may (again as an example) be in respect of the quality of the goods. Only rarely the signing of a B/L causes real problems.
In these cases good customers – i.e. customers that have the desire to be “helpful” – are indeed valuable. More often than not – the best solution to any dispute is between the commercial parties. If they agree – then most likely the case can be solved in a good way. If they have a real disagreement, a solution may be difficult indeed.
By court action
When all attempts are exhausted court action may be the last resort. A customer of mine told me recently that he always have a sum of money ready to be used to solve disputes, as he would be prepared to go to great lengths to avoid going to court. Going to court is “one long line of bad” … It is expensive – even if you win; and it takes long time – and perhaps worst of all: It takes away focus from what should be the primary focus: running your business. So for sure: court action should really be the last resort…
So what else is there? There are of course other measures. One of the first that falls into mind is arbitration; i.e. an alternative dispute resolution – outside the courts. This may of course work well, but the challenge is that this is normally built into the agreement between the commercial parties. The LC banks are not part of the commercial agreement; so a dispute under the LC that involves one or more of the LC banks is not well suited for arbitration…
So what to do? I think that one idea to consider carefully is DOCDEX. DOCDEX is ICC’s Documentary Instruments Dispute Resolution Expertise. DOCDEX offers international bankers and traders means to settle trade finance disputes. The cases are usually solved in two to three months. The standard fee is US$5000. In other words: Really fast and really cheap compared to court action!
The DOCDEX cases are decided by a panel of three impartial experts, whose decision is further scrutinized by the technical advisor of the ICC Banking Commission to ensure that it conforms to applicable ICC Rules and their interpretation by the ICC Banking Commission.
BUT – and there is a but; the decisions are binding only if both parties have so agreed. There are many examples where one part submits a case to DOCDEX – and the counterpart has not added their view – and most likely is not prepared to.
So at best the DOCDEX decision can be used as evidence in the court case to follow. It would however be preferable if going to court can be avoided.
And in fact – in many cases – it can. The issuing bank can build a “DOCDEX Clause” into the LC – or for that matter guarantee (as demand guarantees subject to URDG 758 can also be handled by the DOCDEX system). This would be a clause stating that any dispute under the LC (Subject to article 1 of the DOCDEX Rules) must be decided by the DOCDEX system. This would have many advantages. Basically the issuing bank signals in a strong way that they respect the instrument and international practice – and are willing to solve disputes based on this. This means that other banks will be more willing to accept the risk on such bank. And if there is a dispute – it has been agreed how to go about it! An LC or guarantee with a DOCDEX Clause should make the banks and beneficiary a bit more secure and calm in respect of the issuing bank.
Chang-Soon Thomas Song who is First Expert, Attorney at Law, Trade and Services Division at Korea Exchange Bank writes a bi-weekly column in a Korean trade journal. In this he has elaborated over the benefit of inserting a DOCDEX clause in the LC. It is available here in Korean language:
If Korean is not your strongest (!!) Mr. Song has generously accepted that the English translation is published in www.lcviews.com - so the article titled “Dispute Resolution with Documentary Dispute Expertise Decision” is available in the article section:
It is great – and hereby highly recommended! Happy reading.
I conclude this blog post by informing you that I have recently been notified that a large international bank has issued their first bank guarantee (subject to URDG 758), which included a DOCDEX Clause. Hurrah for that bank!!
And by the way. The DOCDEX rules are available here:
Take care of each other – and the LC!
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