AVALIZATION AND DRAWEE IN BILL OF EXCHANGE

QUESTION

Dear Mr. Old Man

I have been visiting your blog frequently ever since I came to know about the blog and am very thankful to you for sharing your knowledge with others.

Am herewith a question today with respect to bill of exchange incase of avalization.

– Client presented document with covering letter stating “documents to be released against acceptance of draft and to be avalized by Collecting Bank “

My question is the bill of exchange to be drawn on Drawee or Collection bank incase of avalization.

Best Regards,

SAR

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ANSWER

Dear SAR,

Avalization is defined as the endorsement by the bank on the bill of exchange which has been accepted by the drawee (i.e. the importer) to guarantee the payment in case the importer fails to pay the accepted bill at maturity/

So, my short answer is that the bill of exchange under documentary collection transaction is drawn on the importer (drawee) and not on the bank that is instructed to add its avalization to the bill of exchange.

Some years ago I ever answered a question on DCPro Discussion Forum regarding avalization under document collections transactions.

I quote hereunder for your reference:

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 smooth the transaction process.

Unquote

Hope it is helpful.

Kind regards,

Mr. Old Man