16 December 2007

Collections: Documents Against Payment

“Please advise what is the difference between L/C and D/P payment ? Thanks in advance”.

A question received from Helen Jolee, China.

LC, as we all know, is a written undertaking by the issuing bank to guarantee that the payment will be honoured upon presentation of documents and in compliance with the terms and conditions of the LC.

DP or Documents Against Payment or Collections does not constitute an undertaking to make payment by presenting bank or accepting bank. The movement of the documents from the seller to the buyer under DP is quite similar to those documents drawn under the LC. The seller will prepare all the necessary documents and present them to his bank for onward redirection to the buyer’s bank. The seller’s bank or the collecting bank, upon receipt of the documents, is not obligated to examine the said documents to establish compliance.
Unlike LC, Collections is governed by separate standard international rules called Uniform Rules for Collections (URC 522). Under these rules, collecting bank is merely acting as an ‘agent’ for the seller where its’ responsibility is only restricted to ‘handling’ the documents and ‘collecting’ proceeds. In doing so, collecting bank must take necessary steps to provide full information pertaining to the documents it receives to the paying bank. This includes, type of documents, number of pieces of each document, how payment should be transmitted, amount, currency and so on. The documents than are couriered the paying bank for presentation to the buyer.

The paying bank will notify the buyer and make presentation by obtaining payment for the documents value, that is switching documents for payment. The paying bank is also merely acting as and ‘agent’ to collect payment from the buyer and deliver the documents. If the buyer fails to pay on first presentation, the paying bank has no authority to demand neither can it enforce any legal mechanism to obtain payment from the buyer.

The ‘ownership’ of the documents under Collections is held by the seller. The seller is the party in this operations who makes a call. The paying bank only acts according to the instruction of the seller via instructions provided for by his bank (Collecting bank).

This method of trade settlement is much riskier as compare to LC. However, it is also widely used in international trade especially involving parties of the same group of companies. First time traders are not advised to resort to this method as the probability of non payment is very high.

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