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Navigating Non-Compliant Demands: A Guide to Corrections Under Demand Guarantees

Demand guarantees are crucial instruments in international trade, providing security and assurance to beneficiaries. However, the intricacies of these instruments can sometimes lead to discrepancies and non-compliant demands, causing delays and potential disputes. Fortunately, the International Standard Demand Guarantee Practice (ISDGP) provides clear guidelines on how to rectify such situations. Understanding Non-Compliance A demand is deemed non-compliant when it fails to adhere to the specific terms and conditions outlined in the guarantee. This could range from simple errors in documentation to more substantial deviations from the agreed requirements. When a guarantor identifies a non-compliant demand, they must reject it, triggering a process for potential correction. The Beneficiary's Right to Correct Crucially, the ISDGP acknowledges the beneficiary's right to rectify non-compliance. Even if the guarantee explicitly excludes Article 17(b), the beneficiary is still permit...
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A Guide to Letter of Credit Amounts and Tolerance

The amount specified in a Letter of Credit (LC) is a critical element, representing the maximum financial commitment of the issuing bank. However, discrepancies can arise in international trade, making the concept of "tolerance" essential. This article delves into the intricacies of LC amounts and tolerances, drawing insights from the provided document and the Uniform Customs and Practice for Documentary Credits (UCP) 600.   

Introducing Tolerance

Recognizing that absolute precision isn't always achievable, LCs often incorporate tolerances. Tolerance allows for minor variations in the quantity of goods shipped or the unit price, without rendering the LC invalid. This is particularly relevant when dealing with commodities or goods where precise measurement is challenging.

Types of Tolerance and Their Application

The document outlines different types of tolerances:

  • Percentage Tolerance: This allows for a specified percentage deviation (plus or minus) from the stated LC amount. For instance, a 5% tolerance on a USD 100,000 LC would allow drawings between USD 95,000 and USD 105,000.
  • Quantity Tolerance: Similar to percentage tolerance, this applies specifically to the quantity of goods. UCP 600, Article 30(b) allows for a 5% tolerance in quantity, provided the LC doesn't specify the quantity in packing units or individual items, and the total drawing amount doesn't exceed the credit amount.
  • Unit Price Tolerance: Although not explicitly detailed in the document, tolerances can also apply to unit prices. It's crucial to explicitly state any unit price tolerance in the LC.

UCP 600's Role in Interpreting Tolerance

UCP 600 provides a framework for interpreting tolerance in LCs. Key provisions include:

  • "About" or "Approximately": Article 30(a) stipulates that using these terms in relation to the LC amount, quantity, or unit price implies a tolerance of 10% more or 10% less.
  • General Quantity Tolerance: As mentioned earlier, Article 30(b) allows for a 5% quantity tolerance under specific conditions.
  • Tolerance and Partial Shipments: Article 30(c) addresses tolerance when partial shipments are not allowed, permitting a 5% reduction in the LC amount under certain circumstances.

Important Considerations

  • Specificity is Key: It is crucial to clearly state the desired tolerance in the LC. Don't assume a tolerance applies to quantity or unit price just because it's stated for the overall amount.
  • Interplay between Tolerances: The document emphasizes that specifying a tolerance for the LC amount doesn't automatically apply to the quantity or unit price, and vice versa. Each needs to be explicitly addressed. 
  • UCP 600 as the Governing Standard: Understanding the relevant articles of UCP 600 is fundamental to navigating the complexities of LC amounts and tolerances.

Conclusion

LC amounts and tolerances are intrinsically linked, and designed to facilitate international trade by accommodating real-world variations. Both buyers and sellers must thoroughly understand the different types of tolerances, their applications, and the relevant UCP 600 rules to ensure smooth and compliant transactions. By paying close attention to detail and clearly articulating tolerance provisions in the LC, parties can mitigate potential discrepancies and foster successful trading relationships.



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