banking regulations

URC 522: Articles 24 and 25 : “Protest”, “Case-Of-Need” – Explanation

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Article 24: Protest

“The collection instruction should give specific instructions regarding protest (or other legal process in lieu thereof), in the event of non-payment or non-acceptance.”

Explanation:
This clause mandates that the collection instruction must include clear guidelines on what should be done if the payment is not made or the document is not accepted. If there are specific instructions for handling such situations, they must be detailed in the collection instruction to ensure proper legal recourse.

Example:
Imagine a company, ABC Ltd., issues a collection instruction for a trade document, instructing the bank to collect payment from XYZ Ltd. If XYZ Ltd. fails to pay or accept the document, ABC Ltd.’s instruction should specify whether the bank should protest the non-payment legally. If ABC Ltd. states, “In case of non-payment, protest the document at the chamber of commerce,” the bank follows this instruction. Without such specific instructions, the bank isn’t obligated to take any legal action.

“In the absence of such specific instructions, the banks concerned with the collection have no obligation to have the document(s) protested (or subjected to other legal process in lieu thereof) for non-payment or non-acceptance.”

Explanation:
If the collection instruction does not provide specific instructions for protest or legal action, the banks involved are not required to take any action in the event of non-payment or non-acceptance.

Example:
If ABC Ltd. does not specify any instructions regarding protest or legal processes, and XYZ Ltd. fails to make payment or accept the document, the bank is not obligated to initiate any legal proceedings or protest. The bank simply handles the collection as instructed without additional actions.

“Any charges and/or expenses incurred by banks in connection with such protest, or other legal process, will be for the account of the party from whom the collection instruction was received.”

Explanation:
Any costs or expenses related to protesting the document or undertaking other legal processes are the responsibility of the party who issued the collection instruction. This ensures that the bank’s costs are covered by the instructing party.

Example:
If ABC Ltd. instructs the bank to protest a document due to non-payment and incurs a fee for this legal action, ABC Ltd. will be responsible for covering this expense, not the bank. The bank will charge ABC Ltd. for the cost of the protest process.

Article 25: Case-of-Need

“If the principal nominates a representative to act as case-of-need in the event of non-payment and/or non-acceptance the collection instruction should clearly and fully indicate the powers of such case-of-need.”

Explanation:
This clause requires that if a principal designates a representative to handle matters in case of non-payment or non-acceptance, the collection instruction must specify the powers granted to this representative. The instructions should be comprehensive to avoid ambiguity.

Example:
If ABC Ltd. designates Mr. John Doe as the case-of-need representative, the collection instruction should detail Mr. Doe’s authority, such as whether he can negotiate or extend the payment deadline. For instance, the instruction might state, “Mr. John Doe is authorized to negotiate an extension of payment up to 30 days if necessary.” This clarity ensures that the bank knows exactly how Mr. Doe can act on behalf of ABC Ltd.

“In the absence of such indication banks will not accept any instructions from the case-of-need.”

Explanation:
Without clear instructions specifying the powers of the case-of-need representative, banks will not entertain or follow any instructions given by the representative. This clause ensures that the representative’s role and authority are clearly defined.

Example:
If ABC Ltd. appoints Mr. John Doe as the case-of-need representative but fails to specify his powers in the collection instruction, the bank will not follow any directives from Mr. Doe. The bank will only act according to the original collection instructions and will not engage with the representative.

URC 522 Article 19: “Partial Payments” – Explanation

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ARTICLE 19: PARTIAL PAYMENTS

Clause a:

“In respect of clean collections, partial payments may be accepted if and to the extent to which and on the conditions on which partial payments are authorised by the law in force in the place of payment. The financial document(s) will be released to the drawee only when full payment thereof has been received.”

Explanation: This clause allows for partial payments in clean collections, provided that the law in the place where payment is to be made permits such partial payments. Clean collections involve the collection of financial documents without accompanying commercial documents (like invoices or bills of lading). The key point here is that even if a partial payment is made, the financial documents (such as drafts or promissory notes) will only be handed over to the drawee (the party expected to pay) once the full payment is received.

Example: A bank in India is handling a clean collection for a draft of $10,000 drawn on a drawee in the USA. The drawee offers to make a partial payment of $6,000, but under US law, partial payments on such drafts are not permissible. As a result, the bank must refuse the partial payment. If US law did allow partial payments, the bank would still need to hold the financial document until the full $10,000 is paid.

Clause b:

“In respect of documentary collections, partial payments will only be accepted if specifically authorised in the collection instruction. However, unless otherwise instructed, the presenting bank will release the documents to the drawee only after full payment has been received, and the presenting bank will not be responsible for any consequences arising out of any delay in the delivery of documents.”

Explanation: This clause deals with documentary collections, where both financial and commercial documents are presented for payment. Partial payments can only be accepted if the collection instruction (instructions from the seller or remitting bank to the presenting bank) explicitly allows it. Even then, unless the collection instruction states otherwise, the presenting bank should not release the documents to the drawee until full payment has been made. The bank is also not liable for any delays in document delivery that result from this process.

Example: A seller in Germany exports goods to a buyer in Brazil under a documentary collection of $50,000. The collection instruction specifies that partial payments are acceptable. The buyer makes an initial payment of $30,000. However, the presenting bank in Brazil cannot release the shipping documents (e.g., bill of lading, invoice) to the buyer until the remaining $20,000 is paid, unless the collection instruction specifically allows for the documents to be released against partial payment.

Clause c:

“In all cases partial payments will be accepted only subject to compliance with the provisions of either Article 17 or Article 18 as appropriate. Partial payment, if accepted, will be dealt with in accordance with the provisions of Article 16.”

Explanation: This clause emphasizes that any partial payment, whether in clean or documentary collections, must comply with the relevant provisions of Article 17 (which deals with clean collections) or Article 18 (which deals with documentary collections). Moreover, any accepted partial payment must be processed according to the rules outlined in Article 16, which addresses issues related to the presentation of documents and payment.

Example: If a partial payment is accepted for a documentary collection under Article 18, it must follow the procedures for handling documents as per Article 16. For instance, if Article 16 requires that the documents be delivered to the drawee against payment, and a partial payment is accepted, the presenting bank must ensure that this requirement is still met. The documents should not be handed over unless the full payment conditions outlined in Article 16 are satisfied.

URC 522 Article 13: “Disclaimers on the Effectiveness of Documents” – Explanation

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“ARTICLE 13 DISCLAIMER ON EFFECTIVENESS OF DOCUMENTS”

This article of URC 522 (Uniform Rules for Collections) outlines the extent of a bank’s responsibility regarding the documents presented under a documentary credit. Here’s a detailed breakdown of each clause within Article 13, including explanations and examples:

Clause: “Banks assume no liability or responsibility for the form, sufficiency, accuracy, genuineness, falsification or legal effect of any document(s)”

Explanation: Banks are not responsible for verifying whether the documents presented are properly formatted, complete, or legally effective. This means that the bank does not check if the documents comply with the required standards or if they have been correctly executed.

Example: Suppose a bank receives a bill of lading for a shipment. The bank is not liable if the bill of lading contains errors or if it was falsified, as long as the documents comply with the terms set out in the credit. If the bill of lading inaccurately describes the shipment or is forged, the bank will not be held accountable.

Clause: “nor do they assume any liability or responsibility for the general and/or particular conditions stipulated in the document(s) or superimposed thereon”

Explanation: Banks do not take responsibility for the specific terms or conditions mentioned in the documents or any additional conditions that might be added. They are only concerned with whether the documents comply with the credit terms, not with the details within those documents.

Example: If a sales contract stipulates certain conditions regarding the quality of goods, the bank will not be held liable if those conditions are not met. For instance, if the contract requires the goods to be of a specific quality and the actual goods do not meet this requirement, the bank is not responsible for any issues arising from this discrepancy.

Clause: “nor do they assume any liability or responsibility for the description, quantity, weight, quality, condition, packing, delivery, value or existence of the goods represented by any document(s)”

Explanation: Banks are not liable for verifying the physical characteristics of the goods described in the documents. This includes aspects such as quantity, weight, quality, and condition of the goods, as well as how they are packed and delivered.

Example: If the documents presented show a shipment of 1000 units of goods, but the actual shipment contains only 900 units, the bank will not be responsible for this discrepancy. The bank’s role is limited to processing the documents according to the credit terms, not inspecting or verifying the actual goods.

Clause: “nor for the good faith or acts and/or omissions, solvency, performance or standing of the consignors, the carriers, the forwarders, the consignees or the insurers of the goods, or any other person whomsoever”

Explanation: Banks do not assume responsibility for the reliability or performance of the parties involved in the transaction, including the consignors, carriers, forwarders, consignees, insurers, or any other parties. They are not liable for any actions or failures on the part of these parties.

Example: If a carrier fails to deliver the goods on time or if the consignee is unable to pay for the goods, the bank is not liable for these issues. The bank’s responsibility is solely to process and check the documents as per the credit terms, not to oversee the actions of other parties involved in the transaction.

URC 522 Article 12: “Disclaimer on Documents Received” – Explanation

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“ARTICLE 12 DISCLAIMER ON DOCUMENTS RECEIVED”

a Banks must determine that the documents received appear to be as listed in the collection instruction and must advise by telecommunication or, if that is not possible, by other expeditious means, without delay, the party from whom the collection instruction was received of any documents missing, or found to be other than listed. Banks have no further obligation in this respect.

Explanation: This clause mandates that banks must check whether the documents they receive match the list provided in the collection instruction. If there are any discrepancies, such as missing documents or documents that do not match the list, the bank must inform the party who issued the collection instruction immediately. This communication should be made as quickly as possible, using telecommunication methods if available, or otherwise through other prompt means. Once this notification is done, the bank has no further responsibility concerning these discrepancies.

Example: Suppose a bank receives a collection instruction stating that the documents should include an invoice, a bill of lading, and a certificate of origin. If the bank only receives an invoice and a bill of lading, it must promptly notify the party who issued the instruction about the missing certificate of origin. After this notification, the bank is not obligated to investigate or resolve the discrepancy further.

b If the documents do not appear to be listed, the remitting bank shall be precluded from disputing the type and number of documents received by the collecting bank.

Explanation: This clause means that if the documents provided to the collecting bank do not match the listed documents, the remitting bank (the bank that sent the documents) cannot later dispute or argue about the types or numbers of documents received by the collecting bank. Essentially, the remitting bank has to accept that the documents were received as listed and cannot challenge discrepancies after the fact.

Example: If the remitting bank sent a shipment of documents that were supposed to include an insurance certificate and a packing list, but the collecting bank received only a packing list, the remitting bank cannot later claim that the insurance certificate was included or that the collecting bank made an error in the number of documents received.

c Subject to sub-Article 5(c) and sub-Articles 12(a) and 12(b) above, banks will present documents as received without further examination.

Explanation: According to this clause, banks are required to present the documents they receive without additional scrutiny, following the stipulations outlined in sub-Article 5(c) and the provisions in sub-Articles 12(a) and 12(b). This means that after the initial check and notification of any discrepancies, banks are not responsible for further examination of the documents.

Example: If a bank receives documents and has notified the issuing party of any missing items as required by Article 12(a), and there are no disputes as per Article 12(b), the bank will present the documents exactly as received to the relevant parties, without performing any additional checks or modifications.

URC 522 Article 11 : “Disclaimer for Acts of an Instructed Party” – Explanation

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Article 11: Disclaimer for Acts of an Instructed Party

a. “Banks utilising the services of another bank or other banks for the purpose of giving effect to the instructions of the principal, do so for the account and at the risk of such principal.”

Explanation: This clause emphasizes that when a bank uses another bank’s services to execute instructions from its client (the principal), the primary responsibility and risk associated with these instructions remain with the client. The bank that initiates the use of another bank’s services is merely facilitating the process, and it is the client who bears any financial or operational risk involved.

Example: Imagine a company (the principal) instructs its bank (Bank A) to transfer funds to an overseas supplier through a correspondent bank (Bank B). According to this clause, if there are any issues or losses arising from the transaction while Bank B is handling it, the company (the principal) is responsible for these issues, not Bank A. Bank A is acting on behalf of the company but does not assume liability for the actions of Bank B.

b. “Banks assume no liability or responsibility should the instructions they transmit not be carried out, even if they have themselves taken the initiative in the choice of such other bank(s).”

Explanation: This clause makes it clear that banks are not liable for failures in executing instructions if they have chosen another bank to carry out the instructions. Even if the initiating bank (Bank A) was involved in selecting the other bank (Bank B) for the transaction, it does not assume responsibility if the other bank fails to execute the instructions properly.

Example: Consider a scenario where Bank A chooses Bank B to process a letter of credit for a transaction. If Bank B fails to fulfill the terms of the letter of credit and there are losses or complications, Bank A is not held responsible for Bank B’s failure. The liability lies with the party (the principal) who instructed the bank.

c. “A party instructing another party to perform services shall be bound by and liable to indemnify the instructed party against all obligations and responsibilities imposed by foreign laws and usages.”

Explanation: This clause highlights that if one party instructs another party to perform certain services, the instructing party is responsible for any obligations or legal responsibilities that arise under foreign laws or customs related to the service. The instructing party must also indemnify (compensate) the instructed party for any such obligations or responsibilities.

Example: Suppose a company (the instructing party) asks a bank (the instructed party) to facilitate an international transaction. If foreign laws or regulations impose certain duties or liabilities on the bank due to this transaction, the company must cover these responsibilities. For instance, if the transaction involves compliance with foreign anti-money laundering regulations and the bank faces fines or penalties due to the company’s failure to comply, the company must compensate the bank for these costs.