Documentary Collection in International Trade: Legal Framework, Procedures, and Risks

 

August 19, 2024

BRACE Law Firm ©

 

Currently, various forms of international settlements are used in foreign trade, including documentary letters of credit, collections, bank transfers, settlements using checks and bills of exchange, and others. The most common form of settlement in foreign trade is the bank transfer. International collection is used significantly less frequently in international trade.

Economic ties constantly arise between the economic systems of states as a result of international trade. At the same time, both foreign and Russian foreign trade participants often find it disadvantageous to make advance payments for goods. To resolve this situation, international trade practice developed a form of settlement known as international collection.

This article examines the procedure for conducting international settlements using collection.

Collection as a Form of Settlement in Foreign Trade

The essence of collection as a form of settlement is that a supplier provides its bank with an instruction to obtain a specific amount or confirmation (acceptance) from an importer that this amount will be paid within the timeframes established by the contract. In response to such an instruction, the bank may perform these actions independently or through another bank. As justification, the supplier presents financial documents (bills of exchange, etc.) or commercial documents (commercial invoices, etc.), which the supplier's bank forwards to the Russian importer's bank along with its instruction.

Due to this document flow structure, this form of settlement outwardly resembles a letter of credit, since in both cases, before payment is made to the foreign supplier, the nominated bank must receive documents confirming that the shipment of goods has occurred. However, the role of the importer’s bank differs between a collection and a letter of credit. In settlements by letter of credit, the bank assumes an obligation to pay for the goods (at the importer's expense) upon the supplier's presentation of documents complying with the terms of the letter of credit. In settlements by collection, the bank has no such obligation because it acts as an intermediary; therefore, it can only debit funds from the client’s account with the client's consent.

Collection is generally used when the seller and buyer have long-term commercial relationships and have no reason to doubt the reliability of deliveries or the receipt of payment.

Collection has several features compared to a letter of credit:

• Less formality and a lower level of bank commissions and other overhead expenses;
• A lower degree of liability on the part of the participating banks.

Some authors believe that from the buyer's perspective, collection is more preferable than a letter of credit. In the Soviet era, it was actively recommended by the Bank for Foreign Trade of the USSR to foreign trade organizations importing consumer goods as a settlement condition with foreign contractors. Regarding operational risks, they certainly exist in collection operations, but their level is significantly lower compared to letters of credit.[1]

At the same time, collection involves several serious risks, which will also be considered in this article.

Regulatory Framework for Collection in Russia

Pursuant to Article 874 of the Civil Code of the Russian Federation (the "Civil Code"), in settlements by collection, a bank (the issuing bank) undertakes, upon a client's instruction, to perform actions at the client's expense to obtain payment and/or acceptance of payment from the payer. The issuing bank that received the client's instruction has the right to involve another bank (the nominated bank) to execute it.

The issuing bank is liable to the client for failure to perform or improper performance of the client's instruction. If the failure to perform or improper performance occurred due to a violation of settlement transaction rules by the nominated bank, liability to the client may be imposed on that bank.

Article 875 of the Civil Code establishes that if any document is missing or if the documents do not outwardly conform to the collection instruction, the nominated bank must immediately notify the person from whom the collection instruction was received. If these deficiencies are not rectified, the bank has the right to return the documents without execution.

Documents are presented to the payer in the form in which they were received, except for bank stamps and inscriptions necessary for processing the collection operation.

If documents are payable upon presentation, the nominated bank must make the presentation for payment immediately upon receipt of the collection instruction. If documents are payable at a different time, the nominated bank must present the documents for acceptance immediately upon receipt of the collection instruction to obtain the payer's acceptance, and the demand for payment must be made no later than the payment deadline specified in the document.

Partial payments may be accepted if established by banking rules or if special permission is provided in the collection instruction. The collected amounts must be transferred by the nominated bank to the issuing bank, which must credit these amounts to the client's bank account. The nominated bank has the right to withhold its due remuneration and reimbursement of expenses from the collected amounts.

According to Article 876 of the Civil Code, if payment and/or acceptance were not obtained, the nominated bank must immediately notify the issuing bank of the reasons for non-payment or refusal to accept. The issuing bank must immediately inform the client, requesting instructions regarding further actions.

If instructions regarding further actions are not received within the timeframe established by banking rules, or in the absence thereof, within a reasonable timeframe, the nominated bank has the right to return the documents to the issuing bank.

It should be noted that Russian legislation does not categorize types of collection. Overall, only three articles in the Civil Code are dedicated to settlements by collection. The Civil Code provides that the procedure for conducting settlements by collection is regulated by law, banking rules established in accordance with it, and business customs applied in banking practice. However, no separate law dedicated to settlements by collection has been adopted in Russia. The Regulations of the Bank of Russia dated June 29, 2021, No. 762-P, On the Rules for Transferring Funds (Chapter 7, Settlements by Collection Instructions), regulates settlements by collection in slightly more detail than the Civil Code.

International Regulation of Settlements via Collection

Intergovernmental agreements between states on trade and economic cooperation serve as the legal basis for organizing settlement and credit relations in foreign trade transactions.

The Uniform Customs and Practice for Documentary Credits and the Uniform Rules for Collections developed by the International Chamber of Commerce (ICC) play an important role in regulating international settlements. [2] These rules are advisory and become binding for the parties to a foreign trade contract if the parties explicitly state that the relationship arising between them will be governed by these rules.

The influence of the Uniform Rules for Collections on the Civil Code should be noted. Although there are no serious discrepancies between Russian legislation and the uniform rules, certain differences exist, as with letters of credit. For example, the terminology used differs: instead of the terms "issuing bank" and "nominated bank", the rules use "remitting bank" and "collecting bank". [3]

ICC Uniform Rules for Collections

For a long time, these uniform rules issued by the International Chamber of Commerce were the primary source of legal regulation for international settlement relations. This was due to the absence of mandatory international acts and the often weak regulation of such issues in the domestic legislation of individual countries.

The Uniform Rules for Collections (URC), 1995 Revision, Publication No. 522 (the "Rules"), define collection as operations conducted by banks based on instructions received with financial and/or commercial documents for the following purposes:

• Obtaining payment and/or acceptance;
• Delivering commercial documents against payment and/or against acceptance;
• Delivering documents on other terms.

Pursuant to the Rules, financial documents mean bills of exchange, promissory notes, checks, or other similar documents used for obtaining monetary payment, while commercial documents mean invoices, transport documents, documents of title, or any other documents that are not financial documents.

The definition of collection (with various variations) is provided in all revisions of the Rules. These Rules were first published by the International Chamber of Commerce as early as 1936. Subsequently, they were revised three times—in 1967, 1978, and 1995. In the Soviet Union, the Rules (ICC Publication 1978, No. 322) were specifically published for official use as an Appendix to the internal Instruction of the Bank for Foreign Trade of the USSR, On the Procedure for Conducting International Settlement Operations.[4]

The Rules divide collection into clean collection, which is the collection of financial documents not accompanied by commercial documents, and documentary collection, which means the collection of financial documents accompanied by commercial documents or commercial documents not accompanied by financial documents.

The Rules apply to the parties to a contract if they include a condition on the application of the Rules in the contract. The Rules apply to all collections if they are included in the text of the collection instruction and are binding on all participating parties unless otherwise specifically agreed or unless this contradicts provisions of federal, republican, or local legislation and/or mandatory rules.

Banks are not obligated to perform a collection or process any collection instructions or subsequent related instructions. If a bank decides for any reason not to perform a collection or any instructions received relating to a collection, it must notify the party from whom it received the collection or instructions without delay by telecommunication or, if the latter is not possible, by other expedited methods.

The parties to a collection are:

• The principal – the party entrusting the processing of a collection to a bank;
• The remitting bank – the bank to which the principal has entrusted the processing of a collection;
• The collecting bank – any bank, other than the remitting bank, involved in the process of processing the collection instruction;
• The presenting bank – the collecting bank making the presentation to the payer;
• The payer – the person to whom presentation is to be made in accordance with the collection instruction.

All documents sent for collection must be accompanied by a collection instruction stating that the collection is subject to the Rules and containing full and precise instructions. Banks are permitted to act only in accordance with the instructions contained in such a collection instruction and in accordance with the Rules.

As a foreign trade transaction, a deal using collection is structured as follows:

1. The seller of the goods (the exporter) enters into a contract with the buyer (the importer), providing for a collection form of settlement as part of the payment terms. For example, by stating that "payment for the goods by the buyer is made by the seller issuing a collection instruction through the remitting bank to the collecting bank."
2. Simultaneously with the shipment of goods to the buyer, the seller, acting as the principal, sends a collection instruction to the remitting bank with all commercial documents relating to the contract.
3. The remitting bank, in turn, sends these documents with the necessary instructions to the collecting bank. This bank, acting simultaneously as the presenting bank, informs the buyer of the receipt of the documents and notifies them of the terms for their delivery.
4. The payer makes the payment or accepts the bill of exchange (if those are the terms) and receives the documents in return. After this, the presenting bank transfers the collected amount to the remitting bank, which credits the exporter's account with the received proceeds.

Banks will not examine documents for the purpose of obtaining instructions. Unless the collection instruction states otherwise, banks will not consider any instructions from any party or bank other than the party or bank from whom they received the collection.

The collection instruction must contain the following information:

• Details of the bank from which the collection was received, including the full name, postal address, and S.W.I.F.T. address, telex, telephone, and fax numbers, and the reference;
• Details of the principal, including the full name, postal address, or domicile where presentation is to be made, and, if necessary, telex, telephone, and fax numbers;
• Details of the payer, including the full name, postal address, or domicile where presentation is to be made, and, if necessary, telex, telephone, and fax numbers;
• Details of the presenting bank, if any, including the full name, postal address, and, if necessary, telex, telephone, and fax numbers;
• The amount and currency to be collected;
• A list of attached documents and the sequential number of each document;
• The terms on which payment and/or acceptance is to be obtained;
• The terms for delivery of documents against payment and/or acceptance, or other terms. Responsibility for clearly and unambiguously stating the terms for delivery of documents lies with the party preparing the collection instruction; otherwise, banks are not liable for any consequences that may arise;
• The commission to be collected, indicating whether the right to waive the commission is permitted;
• The interest to be collected, if applicable, indicating whether the right to waive interest is permitted, including the interest rate, interest period, and the basis for calculating interest (e.g., 360 or 365 days per year);
• The method of payment and the form of payment notice;
• Instructions in case of non-payment, non-acceptance, and/or non-compliance with other instructions.

Collection instructions must contain the full address of the payer or the place of permanent residence where presentation is to be made. If the address is incomplete or imprecise, the collecting bank may attempt to establish the correct address without any obligation or liability on its part. The collecting bank bears no liability or obligation for any delay resulting from an incomplete or imprecise address provided.

Presentation is the procedure by which the presenting bank makes documents available to the payer in accordance with instructions.

The collection instruction must clearly state the exact period of time within which the payer must take any action.

Expressions such as "first and foremost", "urgently", "immediately", and the like should not be used in connection with presentation or regarding any period of time within which documents must be accepted by the payer or other actions must be taken by them. If such expressions are used, banks will ignore them.

Documents must be presented to the payer in the form in which they were received.

To execute the principal's instructions, the remitting bank will use the bank designated by the principal as the collecting bank. In the absence of such a designation, the remitting bank will use any bank of its own choice or the choice of another bank in the country of payment or acceptance or in the country where other terms must be fulfilled. Documents and the collection instruction may be sent directly by the remitting bank to the collecting bank or through another bank. If the remitting bank has not designated a specific presenting bank, the collecting bank may use a presenting bank of its own choice.

If documents are payable upon presentation, the presenting bank must make the presentation for payment without delay.

If documents are payable at a time other than upon presentation, the presenting bank must, when acceptance is requested, make the presentation for acceptance without delay, and when payment is requested, make the presentation for payment no later than the corresponding payment deadline.

Under the condition "documents against payment" (D/P), the presenting bank delivers documents to the payer only upon their immediate payment. The concept of "immediacy" should be interpreted to mean that payment must be made immediately after the goods arrive at the destination. If the exporter seeks to receive payment before the goods arrive, a condition for immediate delivery of documents to the payer upon their receipt by the presenting bank is included in both the contract and the invoice, and a condition for payment upon "first presentation of documents" is included in the collection instruction.[5]

Under the condition "documents against acceptance" (D/A), the presenting bank delivers documents to the importer against their acceptance of a bill of exchange (draft) providing for payment 30–180 days after the date of presentation or on a specific future date. A promissory note is not used in such an operation. Thus, this effectively involves the seller providing the buyer with installment payments or a commercial credit, as the buyer can obtain the goods before paying for them (by selling the goods on the local market, the importer obtains the necessary funds for payment to the exporter). When the remitting bank issues instructions that either the collecting bank or the payer must process documents (bills of exchange, promissory notes, trust receipts, letters of guarantee, or other documents) that were not included in the collection, the form and wording of such documents must be provided by the remitting bank. Otherwise, the collecting bank will not be liable for the form and wording of any such document provided by the collecting bank and/or the payer.[6]

The Rules specifically state that if a collection contains a bill of exchange payable at a future date, the collection instruction must indicate whether documents are to be delivered to the payer against acceptance or against payment. In the absence of such an indication, documents will be delivered only against payment, and the collecting bank will not be liable for any consequences caused by any delay in the delivery of documents.

In the Rules, a separate section is dedicated to the liability of the parties involved in a collection operation, containing definitions of conditions for exempting parties from liability. It should be noted that in previous revisions of the Rules, significantly less attention was paid to these issues, indicating the need to summarize extensive practical experience. Given the importance of these issues in interbank relations and the consequences of underestimating them, these provisions should be considered. [7]

The Rules briefly formulate the core idea that banks participating in a collection operation will act in good faith and exercise reasonable care.

Goods should not be sent directly to the bank's address or on consignment[8] to the bank or to the bank's order without its prior consent. Nevertheless, if goods are sent directly to the bank's address or on consignment to the bank or to the bank's order for delivery to the payer against payment or acceptance or on other terms without the bank's prior consent, such bank is not obligated to accept delivery of the goods, the risk and liability for which continue to be borne by the party sending the goods.

Banks are not obligated to take any action regarding goods to which a documentary collection relates, including storage and insurance of goods, even if specific instructions have been issued to that effect. Banks will take such actions only in those cases, only then, and only to the extent to which they have consented in each case. This rule applies even in the absence of any special notice to that effect from the collecting bank.

If banks take action to protect the goods, regardless of whether they received instructions to that effect, they bear no liability or obligation for the fate and/or condition of the goods and/or for any acts and/or omissions of any third parties entrusted with the storage and/or protection of the goods. However, the collecting bank must notify the bank from which the collection instruction was received of any such action taken without delay.

Any commission and/or expenses incurred by banks in connection with any actions taken to protect the goods will be charged to the account of the party from whom they received the collection.

When goods are sent on consignment to the collecting bank or to the order of the collecting bank, and the payer has paid the collection via payment or acceptance or on other terms, and the collecting bank arranges for the delivery of the goods, the collecting bank is deemed to have received authority to do so from the remitting bank.

When the collecting bank, based on instructions from the remitting bank, arranges for the delivery of the goods, the remitting bank must provide such collecting bank with reimbursement for all losses and expenses incurred by the latter.

Banks using the services of another bank or other banks for the purpose of executing the principal's instructions do so at the expense and risk of such principal. Banks bear no liability or obligation if the instructions they transmit are not executed, even if they took the initiative in selecting such other bank. The party instructing another party to provide services is obligated to provide the instructed party with reimbursement for all obligations and types of liability imposed by foreign laws and customs.

Banks must determine that the documents received are the same as those listed in the collection instruction and must notify the party from whom the collection instruction was received of any missing documents or documents other than those listed in the instruction. Banks have no other obligations in this regard. If the documents do not conform to those listed, the remitting bank must refrain from discussing the type and quantity of documents received by the collecting bank. Banks will present documents in the form in which they were received without further verification.

Importantly, banks bear no obligation or liability for the form, completeness, accuracy, authenticity, falsification, or legal validity of any document or for general or specific conditions specified in or applied to the document(s); they bear no obligation or liability for the description, quantity, weight, quality, condition, packaging, delivery, value, or existence of the goods represented by any document(s), or for the good faith, acts and/or omissions, solvency, performance of obligations, or financial condition of shippers, carriers, forwarders, consignees, or insurers of the goods or any other persons whatsoever.

Banks bear no obligation or liability for consequences arising from delays and/or loss in transit of any messages, letters, or documents, or for delays, distortions, or other errors occurring during the transmission of any telecommunication message, or for errors in translation and/or interpretation of technical terms.

Banks will bear no obligation or liability for any delays caused by the need to obtain clarifications regarding any instructions received.

Banks bear no obligation or liability for consequences arising from the suspension of their activities due to natural disasters, riots, civil disturbances, insurrections, wars, or any other causes beyond their control, or due to strikes or lockouts.

Collected amounts (less commission and/or costs and/or expenses respectively) must be made available to the party from whom the collection instruction was received without delay in accordance with the terms of the collection instruction. Unless otherwise agreed, the collecting bank will make payment of the collected amount only to the remitting bank.

In the case of documents payable in the currency of the country of payment (local currency), the presenting bank must, unless the collection instruction contains a contrary instruction, deliver documents to the payer against payment in local currency only if such currency is immediately available in the manner specified in the collection instruction.

In the case of documents payable in a currency other than the currency of the country of payment (foreign currency), the presenting bank must, unless the collection instruction contains a contrary instruction, deliver documents to the payer against payment in the prescribed foreign currency only if such foreign currency can be immediately transferred in accordance with the instructions given in the collection instruction.

For clean collections, partial payments may be accepted only if permitted by the legislation in force at the place of payment and only to the extent and on the terms established by that legislation for partial payments. Financial documents will be delivered to the payer only after full payment has been received.

For documentary collections, partial payments may be accepted only if specifically authorized in the collection instruction. However, unless otherwise instructed, the presenting bank will deliver documents to the payer only after receiving full payment, and the presenting bank will not be liable for any consequences caused by the delay in delivering documents.

If the collection instruction contains an instruction to collect interest and the payer refuses to pay such interest, the presenting bank may deliver documents against payment, acceptance, or on other terms, as the case may be, without collecting such interest. If the collection instruction explicitly states that waiving the right to collect interest is not permitted and the payer refuses to pay such interest, the presenting bank will not deliver the documents and will not be liable for any consequences caused by the delay in delivering documents. When payment of interest is refused, the presenting bank must inform the bank from which it received the collection instruction without delay via telecommunication or, if the latter is not possible, by other expedited methods.

When such interest is to be collected, the collection instruction must specify the interest rate, the interest period, and the basis for calculating interest.

If the collection instruction specifies that the collection commission and/or expenses are for the payer's account and the payer refuses to pay them, the presenting bank may deliver the document(s) against payment or acceptance or on other terms, as the case may be, without collecting the commission and/or expenses. Whenever such a waiver of the right to collect commission and/or expenses occurs, they will be charged to the account of the party from whom the collection was received and may be withheld from the proceeds.

Where the collection instruction explicitly states that waiving the right to collect commission and/or expenses is not permitted and the payer refuses to pay such commission and/or expenses, the presenting bank will not deliver the documents and will not be liable for any consequences caused by the delay in delivering documents. If payment of the collection commission and/or expenses is refused, the presenting bank must inform the bank from which it received the collection instruction without delay via telecommunication or, if the latter is not possible, by other expedited methods.

In all cases where, in accordance with the explicitly stated terms of the collection instruction, costs and/or expenses and/or collection commissions are to be borne by the principal, the collecting bank is entitled to prompt reimbursement of costs related to costs, expenses, and commissions from the bank from which the collection instruction was received, and the remitting bank is entitled to prompt reimbursement from the principal of any amount paid by it in this manner, along with its own costs, expenses, and commissions, regardless of the results of the collection.

Banks reserve the right to demand from the party from whom the collection instruction was received advance payment of commissions and/or expenses to cover costs associated with efforts to execute any instructions and also reserve the right not to execute such instructions pending receipt of such payment.

The collection instruction must contain special instructions regarding protest (or other legal action in lieu thereof) in case of non-payment or non-acceptance. In the absence of such special instructions, banks performing the collection are not obligated to protest the documents (or take other legal action in lieu thereof) in case of non-payment or non-acceptance. Any commission and/or expenses incurred by banks in connection with such protest or other legal action will be charged to the account of the party from whom the collection instruction was received.

If the principal appoints a representative to act as a representative in case of need upon non-payment and/or non-acceptance, the collection instruction must clearly and fully state the powers of such representative in case of need. In the absence of such an indication, banks will not accept any instructions from the representative in case of need.

Collecting banks must notify of the execution of the collection instruction. All notices or information from the collecting bank to the bank from which the collection instruction was received must contain all necessary details, including in all cases the reference assigned by the latter bank as specified in the collection instruction.

The responsibility for instructing the collecting bank regarding the methods by which notices are to be issued lies with the remitting bank. In the absence of such instructions, the collecting bank will send the corresponding notices by the method it chooses itself, at the expense of the bank from whom the collection instruction was received.

The collecting bank must send a notice of payment to the bank from which the collection instruction was received without delay, specifying in detail the collected amount or amounts, the withheld commission and/or costs and/or expenses respectively, and the method of disposing of the funds, as well as send a notice of acceptance to the bank from which the collection instruction was received without delay.

In the case of non-payment and/or non-acceptance, the presenting bank must attempt to ascertain the reasons for such non-payment and/or non-acceptance and notify the bank from which the collection instruction was received accordingly without delay.

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

Upon receipt of such notice, the remitting bank must provide corresponding instructions regarding further processing of the documents. If such instructions are not received by the presenting bank within 60 days of its notice 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 liability on the part of the presenting bank.

Legal Risks of International Collection

Settlements in the form of collection allow banks to monitor the timeliness of receiving payment; however, banks generally lack levers of real influence over the importer to expedite the payment of documents. Furthermore, legal risks of the collection form of settlement include, among others, the following circumstances:

• The buyer may refuse to pay for the presented documents. In the contract, the parties must specify the cases where the buyer is entitled to refuse payment in full or in part;
• During the transportation of goods, it may be discovered that the buyer is unable to pay for them. In this case, the exporter will incur expenses related to storing the cargo, selling it to a third party, or transporting it back to its own country;
• The risk of loss or damage to the goods if the goods arrive before the documents for those goods.

For example, a dispute over the recovery of debt from a buyer for delivered goods was caused by the "impossibility of performing contractual obligations due to the revocation of the servicing bank's license and the crisis affecting the entire Russian business." [9] The courts established that "the fact of delivery of goods, as well as the amount of debt, is confirmed by the evidence presented in the case materials, including collection instructions with documents attached to them. All necessary shipping documents, information about which is specified in the collection instructions themselves, including the bill of lading, were attached to the collection instructions sent to the defendant's nominated bank."[10] Thus, the courts concluded that the plaintiff's claims were justified and subject to full satisfaction.

Consequently, from the examined article, it can be concluded that the advantages of the collection form of settlement for the payer (buyer) consist of making payment for goods against documents after ensuring that the goods have been shipped to their address by the supplier. In turn, for the recipient of the payment (seller), the collection form of settlement guarantees that the goods will not pass into the buyer's disposal until they make the payment, as the documents remain at the disposal of the collecting bank until payment is received.

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References

[1] Putilin, V.I., Operational Risks in Conducting Documentary Operations, International Banking Operations Journal, 2010, No. 3.

[2] Uniform Rules for Collections, International Chamber of Commerce Publication No. 522, 1995 Revision (entered into force on January 1, 1996).

[3] International and Foreign Financial Regulation: Institutions, Transactions, Infrastructure: Monograph: in 2 Parts, edited by A.V. Shamraev.

[4] Putilin, V.I., International Settlements in the Form of Collection: Types, Participants, Transaction Features, International Banking Operations Journal, 2010, No. 4.

[5] Ibid.

[6] Ibid.

[7] Ibid.

[8] Eng. “consignment” — a document, written evidence — a form of commission sale of goods where its owner (consignor) transfers the goods to the consignee's warehouse. The goods remain the property of the consignor until the moment of their sale. Generally, if the goods are not sold for a long period (e.g., more than a year), they are returned to the consignor at their expense.

[9] Decree of the Thirteenth Arbitration Appellate Court dated June 20, 2017, in Case No. A56-59364/2016.

[10] Ibid.