Bills of Exchange

URC 522 Article 8: “Creation of Documents” – Detailed Explanation

by

“ARTICLE 8 CREATION OF DOCUMENTS”

Clause: “Where the remitting bank instructs that either the collecting bank or the drawee is to create documents (bills of exchange, promissory notes, trust receipts, letters of undertaking or other documents) that were not included in the collection, the form and wording of such documents shall be provided by the remitting bank, otherwise the collecting bank shall not be liable or responsible for the form and wording of any such document provided by the collecting bank and/or the drawee.”

Explanation: This clause in URC 522 Article 8 addresses the situation where the remitting bank asks the collecting bank or the drawee to create specific documents that were not originally included in the collection package. The clause emphasizes that if the remitting bank requires the creation of these documents, it must provide clear instructions regarding the form and wording of such documents.

The documents mentioned could be various types of financial instruments, such as bills of exchange, promissory notes, trust receipts, or letters of undertaking. The primary responsibility for ensuring that these documents are correctly formatted and worded lies with the remitting bank. If the remitting bank fails to provide the necessary instructions, the collecting bank is not liable for any issues that arise from the documents created by either the collecting bank itself or the drawee.

Example: Imagine a scenario where an exporter sends goods to an importer under a documentary collection arrangement. The remitting bank, acting on behalf of the exporter, forwards the documents related to the transaction to the collecting bank in the importer’s country. However, the remitting bank realizes that a trust receipt is needed but was not initially included in the documents. The remitting bank then instructs the collecting bank to create the trust receipt.

In this case, if the remitting bank provides specific instructions on how the trust receipt should be worded and formatted, the collecting bank must follow these instructions. If the instructions are not provided, and the collecting bank creates the trust receipt based on its discretion, the remitting bank cannot hold the collecting bank responsible for any errors or issues with the document.

URC 522 Article 7: “Release of Commercial Documents” – Explanation

by

Explanation of URC 522 Article 7: “Release of Commercial Documents”

“a. Collections should not contain bills of exchange payable at a future date with instructions that commercial documents are to be delivered against payment.”

Explanation:
Clause (a) under Article 7 of URC 522 specifies that if a collection includes a bill of exchange payable at a future date, it should not instruct that the commercial documents be delivered only upon payment. The reasoning behind this is straightforward—if the bill is due at a later date, the payment would also be made later. Therefore, demanding that documents be released only after payment would create a conflict, as the documents would have to be held until the payment is made, which contradicts the principle of releasing documents for the recipient to act upon before payment.

Example:
An exporter in India ships goods to an importer in Brazil under a collection arrangement. The bill of exchange is payable 60 days after sight. If the collection instruction states that the commercial documents are to be delivered against payment, this instruction is problematic because the payment is due after 60 days. As a result, the importer would not be able to take possession of the goods (or sell them) until payment is made, which isn’t expected for another 60 days.

“b. If a collection contains a bill of exchange payable at a future date, the collection instruction should state whether the commercial documents are to be released to the drawee against acceptance (D/A) or against payment (D/P). In the absence of such statement commercial documents will be released only against payment and the collecting bank will not be responsible for any consequences arising out of any delay in the delivery of documents.”

Explanation:
Clause (b) advises that when a bill of exchange payable at a future date is included in a collection, the instructions must clearly specify whether the commercial documents should be released against the acceptance of the bill (D/A) or only after payment is made (D/P). If the instructions are ambiguous or missing, the default action for the collecting bank is to release the documents only after payment. The clause also clarifies that the collecting bank will not be liable for any delays in document delivery due to this.

Example:
Imagine a scenario where an exporter in China sends goods to a buyer in Germany, with a bill of exchange due 90 days after acceptance. If the collection instruction fails to specify whether documents should be released against acceptance (D/A) or payment (D/P), the collecting bank in Germany will automatically wait for payment before releasing the documents. If the importer needed the documents to clear the goods at customs and the lack of clarity in the instruction causes a delay, the collecting bank would not be responsible for any resulting issues, such as storage fees or penalties.

“c. If a collection contains a bill of exchange payable at a future date and the collection instruction indicates that commercial documents are to be released against payment, documents will be released only against such payment and the collecting bank will not be responsible for any consequences arising out of any delay in the delivery of documents.”

Explanation:
Clause (c) reiterates the importance of clear instructions when dealing with bills of exchange payable at a future date. It emphasizes that if the instruction explicitly states that the documents are to be released only against payment, the collecting bank must adhere to this and release the documents only when the payment is made. Any delay in document delivery due to this will not be the bank’s responsibility.

Example:
Consider a situation where an exporter in Italy sends a shipment to a buyer in Japan under a collection arrangement. The bill of exchange is payable 120 days after acceptance, and the collection instruction specifies that documents are to be released against payment. The Japanese buyer cannot access the goods without the documents, but the payment is not due for another 120 days. The collecting bank in Japan will hold the documents until payment is made, and if the delay causes the goods to be stuck at customs or leads to penalties, the bank will not be liable.