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WHERE DOCUMENTS UNDER D/P ARE NOT PAID

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QUESTION

Dear Mr. Old Man,

I have the following case that needs your advice:

A seller signed a contract to sell sea products to a buyer in Italy. After the shipment was made, the seller presented the documents under D/P terms to his bank (remitting bank) and asked for discounting. The remitting bank discounted the documents on a with recourse basis and forwarded the documents to the collecting bank for collection under D/P terms.

After sometime without receiving payment from the collecting bank, the remitting bank inquired the status of the documents and was informed by the collecting bank that it had delivered the documents to the buyer (drawee), however, the drawee did not pay. Therefore, it had to suspend the payment pending the court’s decision with regards to the dispute with the drawee.

Not long after that the remitting bank debited the seller’s account to collect the amount that it had advanced to the seller plus the accrued interest. The seller did not agree with the remitting bank’s action and requested the bank to re-credit the amount to his account. However, the remitting bank refused to do so and suggested the seller to file a lawsuit against the collecting bank.

My questions are:

1. Was the remitting bank correct in debiting the seller’s account to collect the advanced amount?
2. In case of a lawsuit against the collecting bank, who is appropriate, the remitting bank or the seller, to file the lawsuit?
3. Can the seller file a lawsuit against the buyer for non-payment?

Your advice is appreciated.

Yours sincerely,
GTN
——————-

ANSWER

Hi,

In collection transactions, the seller may bear the risk of being unpaid while the goods have been shipped. This is true to the case in question.

If the discounting is with recourse, the discounting bank is entitled to have recourse to the seller in case it does not receive the payment under the documents when due.

The fact that the remitting bank/discounting bank debited the seller’s account to collect the amount that it had advanced to the seller was in accordance with its right to recourse provided in the discounting agreement.

The seller can, for his sake and benefit, file a lawsuit to the court of Italy against the collecting bank for having released the documents to the drawee not in accordance with the instructions (i.e., release of the documents against payment). However, please note that a lawsuit costs time and money. So, taking a lawsuit is the last resort after all other solutions fail. It is recommended that a letter of complaint threatening legal action be sent to the collecting bank’s CEO who, for the sake of the bank’s reputation and creditworthiness, may investigate the issue and urge his bank to pay.

I do not think it is appropriate for the seller to file a lawsuit against the buyer in this case. It is the collecting bank that would do so as the buyer failed to pay as promised when taking up the documents from the collecting bank.

Best regards,
Mr. Old Man

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4 Comments

  1. anonymous

    June 26, 2013 at 9:06 am

    Anonymous writes:I think that the seller files a lawsuit against the buyer is appropriate in case DA collection. The collecting bank released the docs to the buyer under the payment undertaking of the buyer. When due, the buyer fails to fulfil his payment undertaking so the collecting can not take any action.

    Reply

  2. mroldmanvcb

    June 26, 2013 at 10:06 pm

    Please note the case in question is D/P collection and not D/A.I agree with you that the seller can file a lawsuit against the buyer if the buyer accepted the document but fails to pay at maturity.

    Reply

  3. dini

    June 26, 2016 at 10:12 pm

    Dear Mr.Old Man,

    I need your Opinion regarding outward collection D/P.
    Drawer instructs our bank to send docs under D/P to Bank X branch 001, long street Country Y.
    Unfortunately, there is no such address for Bank X branch 001. It seems that drawee gave the incorrect address of collection bank for their purpose. Our courier service informed us that docs has been delivered to the correct address of Bank X branch 001 since their courier didn’t find address as per drawer’s instruction.
    But, Bank X said that they never received the docs and someone that signed and received docs is not their staff. Drawer found that drawee has taken up the docs and released the goods.
    When drawer instructs us to send docs under outward collection, we as remitting bank just follow drawer’s instruction. we don’t know if the address doesn’t exist. Should remitting bank responsible for the payment ?
    Who’s the party should responsible for this matter or payment ?
    What’s the best action should be taken by remitting bank ?

    Thank you.

    Reply

    • mroldman

      June 28, 2016 at 2:52 pm

      Hi,

      According to the information provided the drawee received the documents and took delivery of the goods whereas the collecting bank confirmed that it did not receive the documents for collection.

      I guess this could be a fraud where the drawee on purpose provided the drawer with his office’s address instead of the collecting bank’s address so that the courier delivered the documents to the drawee instead of the collecting bank.

      The drawer should contact the carrier to determine if the goods were delivered to the drawee against the bill of lading. If so, the drawer should urge the drawee to pay otherwise the drawer would sue the drawee for fraud.

      The remitting bank that properly acted in accordance with the principal’s instructions is free from any responsibility in this case.

      Kind regards,
      Mr. Old Man

      Reply

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