URC 522 Explained

URC 522 Article 21: Charges and Expenses in Collections – Explanation

by

URC 522 ARTICLE 21 : CHARGES AND EXPENSES

Clause (a): “If the collection instruction specifies that collection charges and/or expenses are to be for account of the drawee and the drawee refuses to pay them, 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 charges and/or expenses, unless sub-Article 21(b) applies. Whenever collection charges and/or expenses are so waived they will be for the account of the party from whom the collection was received and may be deducted from the proceeds.”

Explanation: This clause provides that if a collection instruction mandates that the drawee (the party expected to pay) is responsible for charges and expenses, and the drawee refuses to pay, the presenting bank (the bank handling the documents) may still deliver the documents against payment, acceptance, or under other terms, without collecting these charges from the drawee. However, the charges or expenses waived will then be charged to the party from whom the collection instruction was received, and these may be deducted from the collection proceeds.

Example: Suppose a seller in India sends a bill of exchange to a buyer in Germany through an Indian bank, with instructions that the German buyer is responsible for any collection charges. If the German buyer refuses to pay these charges but agrees to pay the bill, the German bank (presenting bank) may still deliver the documents to the buyer. The Indian bank would then be responsible for the charges, and it could deduct these from the funds received from the buyer’s payment.

Clause (b): “Where the collection instruction expressly states that charges and/or expenses may not be waived and the drawee refuses to pay such charges and/or expenses, the presenting bank will not deliver documents and will not be responsible for any consequences arising out of any delay in the delivery of the document(s). When payment of collection charges and/or expenses 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 emphasizes that if the collection instructions clearly state that the charges cannot be waived and the drawee refuses to pay these charges, the presenting bank must not release the documents. The bank is also not liable for any delays caused by this refusal. Moreover, the presenting bank must immediately notify the bank that sent the collection instruction (remitting bank) using the quickest possible means of communication.

Example: Continuing with the previous scenario, if the Indian seller had explicitly instructed that the collection charges must not be waived, and the German buyer refused to pay these charges, the German bank would hold onto the documents and immediately inform the Indian bank. The German bank is not responsible for any delays in delivering the documents, even if this delay causes issues with the buyer or seller.

Clause (c): “In all cases where in the express terms of a collection instruction or under these Rules, disbursements and/or expenses and/or collection charges are to be borne by the principal, the collecting bank(s) shall be entitled to recover promptly outlays in respect of disbursements, expenses and charges from the bank from which the collection instruction was received, and the remitting bank shall be entitled to recover promptly from the principal any amount so paid out by it, together with its own disbursements, expenses and charges, regardless of the fate of the collection.”

Explanation: This clause provides that if collection instructions or the URC 522 rules state that the principal (the party initiating the collection) is responsible for charges, the collecting bank can promptly recover these costs from the bank that sent the collection instruction. The remitting bank, in turn, can promptly recover these costs from the principal, irrespective of whether the collection was successful or not.

Example: If the Indian seller’s collection instruction specifies that they are responsible for all charges, and the German bank incurs expenses in the collection process, the German bank can demand reimbursement from the Indian bank. The Indian bank, in turn, can demand these costs from the seller, whether or not the buyer in Germany ultimately pays the bill.

Clause (d): “Banks reserve the right to demand payment of charges and/or expenses in advance from the party from whom the collection instruction was received, to cover costs in attempting to carry out any instructions, and pending receipt of such payment also reserve the right not to carry out such instructions.”

Explanation: This clause allows banks to demand advance payment of charges and expenses from the party issuing the collection instruction (typically the principal). If the advance payment is not made, the bank reserves the right to refuse to execute the collection instructions.

Example: If the Indian seller sends a collection instruction to their bank but the bank anticipates that the collection might involve significant expenses, the bank can ask the seller to pay these charges in advance. If the seller does not pay, the bank has the right to refuse to process the collection.

URC 522 Article 15: “Force Majeure” in Documentary Collections – Explanation

by

URC 522 Article 15: Force Majeure

“ARTICLE 15 FORCE MAJEURE Banks assume no liability or responsibility for consequences arising out of the interruption of their business by Acts of God, riots, civil commotions, insurrections, wars, or any other causes beyond their control or by strikes or lockouts.”

Explanation:

Article 15 of the Uniform Rules for Collections (URC) 522 deals with the concept of “force majeure,” a legal principle that relieves parties from their contractual obligations when certain unforeseen events occur. These events are beyond the control of the parties involved and make it impossible or impractical to fulfill their contractual duties.

The article specifically states that banks are not liable for any consequences that arise due to interruptions in their business operations caused by events such as natural disasters (referred to as “Acts of God”), riots, civil unrest, insurrections, wars, strikes, lockouts, or any other events beyond their control. This means that if a bank is unable to process a collection or perform any related tasks due to such events, they cannot be held responsible for any resulting losses or delays.

Examples:

  1. Natural Disaster (Act of God):
    • Scenario: A bank in a coastal city is responsible for processing documentary collections for an international trade transaction. However, a major hurricane hits the city, causing widespread flooding and power outages. As a result, the bank’s operations are severely disrupted, and they cannot process the collection documents on time.
    • Application of Article 15: In this case, the bank would not be held liable for any delays or financial losses incurred by the parties involved in the transaction because the interruption was caused by a natural disaster, an event beyond the bank’s control.
  2. Civil Unrest:
    • Scenario: A bank is located in a country experiencing significant civil unrest, including riots and violent protests. The bank is forced to close its branches temporarily for the safety of its employees and customers, resulting in a delay in the processing of documentary collections.
    • Application of Article 15: Here, the bank would not be responsible for any consequences of the delay, as the interruption was caused by civil commotions, which are beyond the bank’s control.
  3. Strikes or Lockouts:
    • Scenario: A bank’s employees go on strike, leading to a complete halt in the bank’s operations. During this period, the bank is unable to process any documentary collections, causing delays for several trade transactions.
    • Application of Article 15: According to Article 15, the bank would not be liable for any delays or financial losses suffered by the parties in these transactions, as the interruption was due to a strike, which is explicitly mentioned as a force majeure event in the article.

Conclusion:

Article 15 of URC 522 provides banks with protection from liability in situations where their ability to perform their duties is compromised due to uncontrollable events. By understanding this provision, businesses involved in international trade can better manage their expectations and prepare for potential disruptions caused by force majeure events.

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

by

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.

URC 522 Article 4 : Collection Instruction – Explanation

by

ARTICLE 4 COLLECTION INSTRUCTION

a 1 “All documents sent for collection must be accompanied by a collection instruction indicating that the collection is subject to URC 522 and giving complete and precise instructions. Banks are only permitted to act upon the instructions given in such collection instruction, and in accordance with these Rules.”

Explanation:
This clause mandates that any documents sent for collection must be accompanied by a clear collection instruction, explicitly stating that the collection is subject to URC 522. Banks are required to follow only the instructions provided in this collection instruction and must adhere strictly to the rules outlined in URC 522.

Example:
Imagine a company in India sends documents to a bank in the UK for collection. The collection instruction must clearly mention that the transaction is governed by URC 522. If the instruction specifies that payment should be made only upon acceptance, the bank in the UK must follow this instruction and cannot act otherwise.

a 2 “Banks will not examine documents in order to obtain instructions.”

Explanation:
Banks are not responsible for examining the documents to derive instructions. Their role is to execute the instructions provided in the collection instruction and not to infer any instructions from the accompanying documents.

Example:
If a bank in Germany receives a set of documents and the collection instruction is unclear, the bank is not obligated to look through the documents to understand what needs to be done. The bank will only follow the explicit instructions given in the collection instruction.

a 3 “Unless otherwise authorised in the collection instruction, banks will disregard any instructions from any party/bank other than the party/bank from whom they received the collection.”

Explanation:
Banks are instructed to follow only the collection instructions received from the party or bank that originally sent the collection. They will ignore any additional instructions from other parties unless the collection instruction explicitly authorizes them to do so.

Example:
If a bank in China receives a collection instruction from a bank in Japan, and later receives additional instructions from a different bank in Singapore, the Chinese bank will disregard the new instructions unless the original collection instruction from the Japanese bank authorized them to accept instructions from the Singaporean bank.

b “A collection instruction should contain the following items of information, as appropriate.”

Explanation:
This section outlines the specific details that must be included in a collection instruction to ensure clarity and precision in processing.

b 1 “Details of the bank from which the collection was received including full name, postal and SWIFT addresses, telex, telephone, facsimile numbers, and reference.”

Explanation:
The collection instruction must clearly identify the bank that sent the collection, including all relevant contact information. This ensures proper communication and processing of the collection.

Example:
A bank in Brazil sending a collection to a bank in Canada must include its full name, postal address, SWIFT address, and contact numbers in the collection instruction.

b 2 “Details of the principal including full name, postal address, and if applicable telex, telephone and facsimile numbers.”

Explanation:
The collection instruction must also include details of the principal (the party on whose behalf the collection is being made), ensuring that the bank handling the collection knows exactly who the principal is.

Example:
If an exporter in South Africa is the principal, the collection instruction should include their full name, postal address, and any applicable contact numbers.

b 3 “Details of the drawee including full name, postal address, or the domicile at which presentation is to be made and if applicable telex, telephone and facsimile numbers.”

Explanation:
The collection instruction must contain the complete details of the drawee (the party required to make the payment), including their address or the place where the documents will be presented.

Example:
If the drawee is a company in the United States, the collection instruction should provide the full name, postal address, and contact details of that company.

b 4 “Details of the presenting bank, if any, including full name, postal address, and if applicable telex, telephone and facsimile numbers.”

Explanation:
If there is a presenting bank involved (the bank making the presentation to the drawee), its details should be included in the collection instruction.

Example:
If a bank in Italy is responsible for presenting the documents to the drawee, its full name, postal address, and contact details should be listed.

b 5 “Amount(s) and currency(ies) to be collected.”

Explanation:
The collection instruction must specify the exact amounts and the currencies in which the collection is to be made.

Example:
If a payment of USD 50,000 is expected, the collection instruction should clearly state “USD 50,000” as the amount to be collected.

b 6 “List of documents enclosed and the numerical count of each document.”

Explanation:
A detailed list of all the documents enclosed, along with the quantity of each document, must be included in the collection instruction. This ensures transparency and accuracy in the handling of documents.

Example:
If the collection involves 3 invoices and 2 bills of lading, the collection instruction should list these documents and indicate the count as “3 invoices” and “2 bills of lading.”

b 7 a “Terms and conditions upon which payment and/or acceptance is to be obtained.”

Explanation:
The collection instruction should clearly state the terms and conditions under which the payment or acceptance is to be obtained from the drawee. This includes specifying whether documents should be released against payment, acceptance, or any other terms.

Example:
If the terms specify that documents should be released only against full payment, this must be clearly mentioned in the collection instruction.

b 7 b “Terms of delivery of documents against: 1) payment and/or acceptance 2) other terms and conditions”

Explanation:
The collection instruction should also specify the terms of delivery of documents, whether against payment, acceptance, or other conditions. The party preparing the collection instruction is responsible for clearly and unambiguously stating these terms.

Example:
If documents should be delivered against partial payment and acceptance, this should be explicitly stated in the collection instruction to avoid any confusion.

b 8 “Charges to be collected, indicating whether they may be waived or not.”

Explanation:
Any charges to be collected should be clearly mentioned in the collection instruction, along with an indication of whether these charges can be waived.

Example:
If there is a handling charge of USD 100, the collection instruction should specify this charge and whether it can be waived in case of non-payment.

b 9 “Interest to be collected, if applicable, indicating whether it may be waived or not, including: a. rate of interest b. interest period c. basis of calculation (for example 360 or 365 days in a year) as applicable.”

Explanation:
If interest is to be collected, the collection instruction should detail the rate of interest, the period over which it is calculated, and the method of calculation (e.g., 360 or 365 days in a year). It should also state whether the interest can be waived.

Example:
If 5% interest is to be charged on the amount from January 1, 2024, for a period of 30 days on a 360-day basis, these details should be explicitly mentioned.

b 10 “Method of payment and form of payment advice.”

Explanation:
The collection instruction must indicate the preferred method of payment (e.g., wire transfer, cheque) and the form in which payment advice should be provided (e.g., SWIFT message, email).

Example:
If payment is to be made via wire transfer and advice provided via SWIFT, the collection instruction should clearly state this.

b 11 “Instructions in case of non-payment, non-acceptance and/or non-compliance with other instructions.”

Explanation:
The collection instruction should provide clear instructions on what the bank should do if the drawee fails to pay, accept, or comply with other instructions.

Example:
If the drawee does not make payment within 10 days, the collection instruction might instruct the bank to return the documents to the sender.

c 1 “Collection instructions should bear the complete address of the drawee or of the domicile at which the presentation is to be made. If the address is incomplete or incorrect, the collecting bank may, without any liability and responsibility on its part, endeavour to ascertain the proper address.”

Explanation:
The collection instruction must include the complete address of the drawee or the location where the documents are to be presented. If the address is incomplete or incorrect, the collecting bank may attempt to find the correct address but will not be held responsible for any delays caused by the incorrect information.

Example:
If the drawee’s address is listed as “123 Main St., New York,” but the full address should include a suite number, the collecting bank may try to find the correct suite number but will not be liable for any delays this may cause.

c 2 “The collecting bank will not be liable or responsible for any ensuing delay as a result of an incomplete/incorrect address being provided.”

Explanation:
If the drawee’s address provided in the collection instruction is incomplete or incorrect, and this leads to a delay, the collecting bank will not be held responsible for the delay.

Example:
If the documents are delayed because the address provided was “456 Elm St.” instead of “456 Elm St., Apt 7B,” the collecting bank is not liable for this delay.