AVALIZATION UNDER DOCUMENTARY COLLECTIONS

SVISHU – Kuwait Posted 29 May 10 |

Though URC 522 does not have any article covering Avalisation, at times, we get documents from the collecting banks instructing us to avalise ( guarantee the payment on due date ) .
Shouldn't there be an article under URC 522 to handle such situations ?

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Daniel D – Switzerland Posted 31 May 10 |

Maybe because it is dealt with by the applicable law. Anyway it is the case in Switzerland
Regards
Daniel
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Jim Barnes – United States Posted 02 Jun 10 |

If the URC were to deal with collection instructions that included an instruction to avalize (guarantee payment of) the drawee's obligation to pay at maturity, it might signal that such instructions were considered to be within standard practice.

I think that in the US avalization instructions are considered to be traps for unwary collecting banks. Banks here probably could, but to date have only rarely, avalized trade acceptances. Our Uniform Commercial Code codifies documentary collection law and, like the URC, does not deal in that context with instructions to avalize.

In any case, avalization would raise a lot of questions about what to do if the collecting bank refuses to avalize, who should pay charges, hold the avalized drafts, etc. I doubt the URC ever did or will want to go into all that. The forfaiting folks might, however.

Regards, Jim Barnes
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SVISHU – Kuwait Posted 03 Jun 10 |

You used the right words- it is trap for unwary banks. If the presenting bank does not notice the avalisation instruction and hands over the usance documents to the drawee against a simple acceptance and the drawee do not have funds on due date. That was the reason I had raised this issue. Thanks for inputs from both.
Regards
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Daniel D- Switzerland Posted 04 Jun 10 |

I will add that we handle such collections regularly without any problem. We specify in our instructions that the BoE is to be accepted by the drawee and "your aval on the draft for payment at maturity". So far, our correspondents have never fail to notice our "aval" instructions. We surely do not intend to trap them.
Daniel
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Rajan Sharma – Canada Posted 04 Jun 10 |

I agree with Daniel that this is a common practice for Swiss banks and banks in many other regions to make such a request. It certainly is not a trap. If the person handling the transaction is not familiar with the term then it does have that element of risk which Jim mentioned. I guess, person handling cross border trade documents are generally familiar with such terms

Rgds
Rajan
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N.H.Duc – Viet Nam Posted 05 Jun 10 |

Hi all,

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.

Regards,
N.H.Duc
(Mr. Old Man)
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(Newly added)
JSMITH – United Kingdom Posted 07 Jun 10 |

I can see that an article in URC regarding avalisation would be useful. However, I cannot see that it could:
1. exonerate a presenting bank that had missed an avalisation instruction (I have recently been involved in such a case which resulted in around a GBP30k loss to the bank concerned).
2. define the legal affect of avalisation as this will be a product of the applicable law.

Incidentally, in the UK I believe it is a relatively routine matter for a presenting banks to avalise bills even though there is not any English statute or, I believe, case law on the matter.

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(Newly added)

GlennRansier – United States
Posted 08 Jun 10 |

Its been my experience that Aval goes well above and beyond what a collection transaction was originally intended to cover. Requests for a collecting/presenting bank (bank) to add its Aval attempts to transform a collection item against which a bank has minimal mandates and no real financial obligation and morph it into a transaction where the bank is expected to commit itself to payment upon maturity. ICC rules are meant to reflect current practices and as mentioned in this correspondence chain, it is a current practice for some to request an Aval commitment by a bank in addition to the drawee’s payment obligation. In this regard, I would support the URC’s inclusion to either accept or bar the practice. Additionally, since Aval appears to have different or no legal definition throughout the globe, perhaps URC could be used to create a standard definition for collection transactions in the same manner UCP does for Deferred Payment, etc. As Jermey, Jim and others are aware, banks have been trapped by this type of requirement because URC does not speak of it and many banks just never expected such a request to be included in a collection transaction. ICC opinions have thus far supported remitting banks and required that if requested to add an Aval the collecting/presenting bank must do so or refuse to so and have the requirement removed before proceeding with the collection transaction. However, ICC opinion does not have the same effect of law and a new set of rules could harmonize practices. …