bill of exchange

URC 522 Article 20 : “Interest” – Explanation

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URC 522 Article 20: Interest

Clause 20(a):

“If the collection instruction specifies that interest is to be collected and the drawee refuses to pay such interest, the presenting bank may deliver the document(s) against payment or acceptance or on other terms and conditions as the case may be, without collecting such interest, unless sub-Article 20(c) applies.”

Explanation:
This clause deals with situations where the collection instruction from the remitting bank specifies that interest should be collected from the drawee. If the drawee refuses to pay this interest, the presenting bank has the authority to release the documents upon payment or acceptance of the bill without collecting the specified interest. The presenting bank may choose to deliver the documents on terms other than those initially outlined in the collection instruction, as long as clause 20(c) does not apply. This flexibility is provided to facilitate the collection process and ensure that the main payment or acceptance is not delayed due to a dispute over interest.

Example:
Suppose a bank in Germany sends documents to a bank in India with instructions to collect $10,000 along with 5% interest. If the Indian buyer (drawee) refuses to pay the interest, the Indian bank may still release the documents to the buyer upon payment of $10,000, unless clause 20(c) is applicable.

Clause 20(b):

“Where such interest is to be collected, the collection instruction must specify the rate of interest, interest period, and basis of calculation.”

Explanation:
This clause requires that if the collection instruction includes a directive to collect interest, the details of the interest must be clearly specified. The remitting bank must provide the exact interest rate, the period for which the interest is to be calculated, and the method for calculating the interest. This ensures clarity and prevents disputes between the parties involved.

Example:
For instance, if a bank in Japan instructs a bank in Brazil to collect an invoice amount along with 6% interest, the instruction must specify whether the interest is simple or compound, the time frame (e.g., from the date of shipment to the date of payment), and the principal amount on which the interest is to be calculated.

Clause 20(c):

“Where the collection instruction expressly states that interest may not be waived and the drawee refuses to pay such interest, the presenting bank will not deliver documents and will not be responsible for any consequences arising out of any delay in the delivery of document(s). When payment of interest has been refused, the presenting bank must inform by telecommunication or, if that is not possible, by other expeditious means without delay the bank from which the collection instruction was received.”

Explanation:
This clause outlines the situation where the remitting bank’s collection instruction explicitly states that the interest is non-negotiable and cannot be waived. If the drawee refuses to pay this mandatory interest, the presenting bank is instructed not to release the documents. The presenting bank is also absolved of any liability related to delays in the delivery of documents resulting from this refusal. Additionally, the presenting bank is required to immediately notify the remitting bank about the refusal of interest payment through the quickest communication method available.

Example:
Imagine a situation where a bank in the United States instructs a bank in France that a certain interest amount must be collected and cannot be waived. If the French buyer refuses to pay the interest, the French bank is obligated to withhold the documents and promptly inform the U.S. bank of the refusal. The French bank is not responsible for any delays caused by this situation.

URC 522 Article 2: Definition of Collection – Explanation

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ARTICLE 2: DEFINITION OF COLLECTION

“For the purposes of these Articles: a “Collection” means the handling by banks of documents as defined in sub-Article 2(b), in accordance with instructions received, in order to: 1 obtain payment and/or acceptance, or 2 deliver documents against payment and/or against acceptance, or 3 deliver documents on other terms and conditions.”

Explanation:

This clause defines “Collection” as the process by which banks manage specific documents, either financial or commercial, on behalf of their customers. The purpose of this handling is to either secure payment or acceptance of a payment obligation, such as a bill of exchange, or to deliver documents to another party based on certain agreed conditions.

Example:

Imagine a seller in India who exports goods to a buyer in the UK. The seller instructs their bank to collect payment by presenting the shipping documents to the buyer’s bank. The buyer’s bank will then handle these documents in exchange for payment or acceptance of a draft, ensuring that the seller receives their due payment according to the terms specified by the seller.

“b “Documents” means financial documents and/or commercial documents: 1 “Financial documents” means bills of exchange, promissory notes, cheques, or other similar instruments used for obtaining the payment of money; 2 “Commercial documents” means invoices, transport documents, documents of title or other similar documents, or any other documents whatsoever, not being financial documents.”

Explanation:

This clause categorizes the documents involved in a collection process into two types:

  • Financial Documents: These are documents that represent a payment obligation, such as bills of exchange, promissory notes, or cheques. These are primarily used to collect money from the buyer.
  • Commercial Documents: These are documents related to the actual transaction of goods or services, such as invoices, bills of lading, or certificates of origin. These documents do not directly represent a payment obligation but are essential for completing the trade transaction.

Example:

Continuing with the earlier example, if the seller in India presents a bill of exchange (a financial document) and an invoice along with a bill of lading (commercial documents), the buyer’s bank must handle both sets of documents according to the seller’s instructions to obtain payment or acceptance from the buyer.

“c “Clean collection” means collection of financial documents not accompanied by commercial documents.”

Explanation:

A “Clean Collection” refers to a situation where only financial documents, such as a bill of exchange or a promissory note, are presented to the bank for collection, without any accompanying commercial documents like invoices or shipping documents.

Example:

If the seller in India only sends a bill of exchange to the buyer’s bank without any other documents, it would be considered a clean collection. The buyer’s bank would then handle the collection process solely based on this financial document.

“d “Documentary collection” means collection of: 1 Financial documents accompanied by commercial documents; 2 Commercial documents not accompanied by financial documents.”

Explanation:

A “Documentary Collection” involves either:

  1. Financial documents accompanied by commercial documents: This is the typical scenario where documents like a bill of exchange are presented along with invoices and transport documents to facilitate payment.
  2. Commercial documents not accompanied by financial documents: In this case, the collection involves only the commercial documents, such as shipping documents or invoices, without any accompanying financial documents.

Example:

If the seller in India sends both a bill of exchange (financial document) and a bill of lading (commercial document) to the buyer’s bank, it is a documentary collection under the first type. If the seller sends only the bill of lading without a bill of exchange, it would still be a documentary collection but under the second type.