CO_ACCEPTANCE OF BILLS

CO_ACCEPTANCE OF BILLS

QUESTION

Dear Mr. Old Man,

We need your expert opinion in the following case:

We received one documents for collection from Bank A with the condition “90 days D/A co-accepted by bank”.

Our bank sent MT499 to Bank A indicated “the documents have been co-accepted by us and we will make payment on due date”. We released a/m document to drawee. However, on due date, the drawee didn’t have enough money to make payment. Bank A sent MT499 to ask us effect the payment because we co-accepted the document.

In this case, is our bank under an obligation to make payment?

Looking forward to hearing from you soon.

Thanks and best regards,

NTTN
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ANSWER

Hi,

Interesting question!

My answer is YES.

Why YES? Your bank has accepted the bill of exchange and/or documents accepted by the importer/drawee and it has also communicated the same to Bank A, hence, it must make payment upon maturity irrespective of whether the drawee has enough money or not.

This is like the case where the remitting bank instructs the collecting/presenting bank to release the documents to the drawee against the latter’s acceptance, coupled with the collecting/presenting bank’s AVALIZATION of the bill of exchange.

Regarding avalization under documentary credit, I ever made my comment in DCPro Discussion Forum in May, 2010 as follows:

QUOTE

It is recognized that avalization is existing but not popular under documentary collection transactions.

From my experience in dealing with documentary collection transactions I see that less than one out of every 100 documentary collection transactions has the instruction that documents are to be released to the importer against acceptance and the collecting bank’s avalization added to the bill of exchange.

The reasons may be that:
– Avalization is not regulated under the URC;
– Collecting banks are normally not ready to add its avalization to the bill of exchange under a documentary collection, especially when there is no financing agreement in advance between the collecting bank and the importer.

The instruction that documents are to be released to the importer only against the importer’s acceptance and the collecting bank’s avalization added to the bill of exchange may lead to delayed delivery of the documents to the importer once the collecting bank refuses to aval the bill of exchange.

To avoid any delay in delivery of the documents to the importer, the exporter that instructs the remitting bank to incorporate such an instruction should ensure that the importer’s bank is willing to add its avalization to the bill of exchange.

The idea that avalization should be included in the coming URC to handle such situations is good enough. Why not? Express stipulations with regard to avalization could help smoothen the transaction process.

UNQUOTE

Kind regards,

Mr. Old Man