Documentary collection: a process for collecting payment. A bank in the country of the buyer plays a key role in the arrangement, acting as a collecting agent for the seller. The bank (the “presenting bank”) delivers the agreed documents to the buyer in accordance with the collection instruction provided by the seller, against payment or acceptance.
Why choose documentary collection? Documentary collection is useful if the parties fail to agree on payment in the country of the seller, but the buyer needs the documents to clear customs or prove ownership of the goods in its own country (or vis-à-vis its own customers). In most cross-border transactions, the goods must be transported, transport should often be insured, and frequently the goods have to be exported and imported (i.e. cleared for customs). The related actions are reflected or evidenced in various documents. Possessing those documents (e.g. a negotiable bill of lading) implies a great level of control over the corresponding goods.
Risks involved. The seller usually ships the goods before receiving payment and therefore bears the risk that the buyer will not accept the goods, will not take delivery, or will refuse to pay. Moreover, if the goods are defined as delivered at the premises of the buyer, as is often the case in air, truck and rail shipment, the buyer simply obtains possession of the goods. Finally, the seller also bears the risk of the buyer’s insolvency. In an opposite scenario with a ‘strong seller’, the buyer must pay a demand draft or accept a draft before the goods are delivered (or are even available for inspection). The buyer may examine the documents before the payment, but nevertheless bears the risk of delivery of damaged or non-conforming goods. This risk can be diminished if the seller also provides inspection and insurance certificates. Involving banks to interchange documents against payment facilitates the transaction. Especially if the seller is generally reliable (e.g. the seller has a good reputation and standing) and if the seller is not particularly concerned about the buyer’s failure to take delivery (e.g. the goods may alternatively be sold to a third party), documentary collection is an appropriate payment arrangement.
Types of collection. The most common types of documentary collection are:
- documents against payment (D/P), also called cash against documents (C/D)) – a type of documentary collection whereby the presenting bank will deliver the documents only upon receipt of the agreed price; and
- documents against acceptance (D/A) – a type of documentary collection whereby the presenting bank will deliver the documents only upon acceptance of the bill of exchange by the buyer.
Terminology. If the parties have stipulated documents against acceptance, the presenting bank demands payment by presenting a “bill of exchange” (also called a “draft”). The bill of exchange, often a cheque, is a written demand for payment of a specified amount addressed to the “drawee”. Payment may be demanded upon presentation (i.e. “at sight”) or on a certain specified maturity date such as a number of days after sight (e.g. “30 days after sight”), or a number of days after another date (e.g. “30 days after the bill of lading date”). Such deferred payment is in fact a credit from the seller to the buyer. Typically, a bill of exchange specifies a party to be paid (the “payee”). Nevertheless, most bills of exchange are also “negotiable”. This means that the payee’s right to payment may be transferred to another party.
Regulatory framework: URC 522. The most authoritative legal framework for documentary collection is the Uniform Rules for Collections published by the International Chamber of Commerce (URC 522). URC 522 applies only if this is stated in the collection instruction. Also, the parties must stipulate in the sales agreement that “the payment by documentary collection is subject to the Uniform Rules for Collections”.
Collection Instruction. In connection with the documents sent for collection, the seller must provide a “collection instruction”. The collection instruction must indicate that the collection is subject to URC 522 and give complete and precise instructions. Collecting banks will only act according to the collection instruction. A bank will not look elsewhere for instructions and is not obliged to examine documents for instructions. Therefore, a seller (or a remitting bank, i.e. the seller’s own bank responsible for communications with the presenting bank) must ensure that all necessary information and instructions are provided in the collection instruction. Usually, a bank would ask its customer to use a specific form.
The collection instruction should:
- state the amount and currency to be collected;
- enclose the list of accompanying documents;
- state the terms and conditions upon which the payment or acceptance is to be obtained;
- specify the terms of the delivery of the documents (D/P, D/A or other terms or conditions);
- stipulate the method of payment and instructions in case of non-payment, non-acceptance or non-compliance with other instructions.
The collection instruction may specify aspects of protest (or objection rights) in the event of non-payment or non-acceptance. If it does not, the bank will have no obligation to allow the buyer to refuse payment or acceptance. Finally, the parties may consider including instructions in the collection instruction in the event that the documents are not taken by the buyer. Do the goods then need to be transported to a warehouse and insured?
 See the ITC Model Contract for the international commercial sale of goods (standard version) Article 4.3, requiring a specification of the documents-to-be-presented in Article 5 (Documents). See also the ITC Model Contract for the international commercial sale of goods (short version) Articles 4 and 5, the ITC Model Contract for the international long-term supply of goods Article 4.3 (option 2), and the ITC Model Contract for international distribution of goods Article 5.3 (option 2).
 ICC Publication No. 522.
 URC 522 Article 4(a)(i).
 URC 522 Article 4(b).
 URC 522 Article 24.