Can the Collecting Bank Release the Documents to the Buyer after Sending Advice of Non-Payment?

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In documentary collections, things don’t always go as planned. Sometimes the buyer initially refuses to pay under a Documents against Payment (D/P) collection, only to come back the next day ready to settle and collect the goods. But what if, by then, the collecting bank has already reported the buyer’s refusal and is waiting for the remitting bank’s instructions? Can it still go ahead and release the documents upon payment?

Let’s look at a real case shared by reader P., and see how URC 522 Article 26 applies.

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QUESTION

Hi Mr. Old Man,

Please advise on the following case:

Bank B received a collection instruction from Bank A under D/P terms (Documents against Payment).

• On 18 September 20xx, Bank B presented the documents and demanded payment from the buyer, but the buyer refused to pay.
• On 19 September 20xx, Bank B retained the documents and informed Bank A of the buyer’s refusal, requesting the seller’s instructions on how to handle the documents.
• On 20 September 20xx, the buyer made payment to Bank B and requested delivery of the documents. Bank B, therefore, received the payment and released the documents to the buyer to enable cargo clearance.
• On 21 September 20xx, when Bank B was about to remit the proceeds to the remitting bank, it received an instruction from Bank A to return the documents. Bank B explained the entire situation to Bank A, but Bank A rejected the explanation and threatened legal action against Bank B.

Given the above situation, Mr. Old Man, what is your assessment of the handling by Bank A and Bank B?

Thank you very much!

P.

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ANSWER

Hi P.,

Thank you for your interesting question.

From your description, I understand that the collecting bank, after notifying the remitting bank (Bank A) of the buyer’s refusal and requesting disposal instructions, subsequently released the documents to the buyer (drawee) upon receipt of payment — without waiting for further instructions from the remitting bank. Your question is whether the collecting bank acted correctly under URC 522.

I would like to share my view as follows:

For your convenient reference, I quote URC 522 sub-article 26(c)(2) in full:

“The presenting bank should endeavour to ascertain the reasons for non-payment and/or non-acceptance and advise accordingly, without delay, the bank from which it received the collection instruction.

The presenting bank must send without delay advice of non-payment and/or advice of non-acceptance to the bank from which it received the collection instruction.

On receipt of such advice the remitting bank must give appropriate instructions as to the further handling of the documents. If such instructions are not received by the presenting bank within 60 days after its advice of non-payment and/or non-acceptance, the documents may be returned to the bank from which the collection instruction was received without any further responsibility on the part of the presenting bank.”

It should be understood from the above that once the presenting (collecting) bank has advised the remitting bank of the buyer’s refusal, it is not entitled to subsequently release the documents to the buyer without first receiving the remitting bank’s further instructions — even if payment is later received from the buyer.

The best course of action would have been for the collecting bank to seek confirmation from the remitting bank before releasing the documents when the buyer later offered payment.

Some banks try to pre-empt such situations by wording their advice of non-payment as follows:

“We are holding the documents pending your bank’s instructions. However, if the importer changes his mind and agrees to pay before we receive your new instructions, we will release the documents and remit proceeds as per your previous instructions.”

While this approach may appear practical, if the remitting bank later objects, the collecting bank will find no provision in URC 522 to justify its action.

I hope my answer is helpful.

Best regards,

Mr. Old Man