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Navigating Non-Compliant Demands: A Guide to Corrections Under Demand Guarantees

Demand guarantees are crucial instruments in international trade, providing security and assurance to beneficiaries. However, the intricacies of these instruments can sometimes lead to discrepancies and non-compliant demands, causing delays and potential disputes. Fortunately, the International Standard Demand Guarantee Practice (ISDGP) provides clear guidelines on how to rectify such situations. Understanding Non-Compliance A demand is deemed non-compliant when it fails to adhere to the specific terms and conditions outlined in the guarantee. This could range from simple errors in documentation to more substantial deviations from the agreed requirements. When a guarantor identifies a non-compliant demand, they must reject it, triggering a process for potential correction. The Beneficiary's Right to Correct Crucially, the ISDGP acknowledges the beneficiary's right to rectify non-compliance. Even if the guarantee explicitly excludes Article 17(b), the beneficiary is still permit...
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Aval Bill of Exchange under Documentary Collection Transaction.

Documentary Collection refers to the process where banks handle documents (such as bills of exchange, invoices, and shipping documents) as per instructions received. The primary objectives of this process are:

  1. Obtain payment and/or acceptance: Secure payment or acceptance of the bill of exchange from the buyer.
  2. Deliver documents against payment and/or against acceptance: Release the documents to the buyer only after receiving payment or acceptance of the bill.
  3. Deliver documents on other terms and conditions: Release documents based on specific conditions agreed upon by the buyer and seller.

Bill of Exchange:

A bill of exchange is a written order instructing one party (the drawee, typically the buyer) to pay a specified sum of money to another party (the payee, typically the seller) on demand or at a future date.

Acceptance:

  • Definition: When the drawee (buyer) formally agrees to pay the bill of exchange on the due date.
  • Bank's Role:
    • Banks are not responsible for the genuineness or validity of any documents presented under a collection. (URC 522 article 13, ICC, 1995)
    • Once a bill is accepted, the collecting bank informs the remitting bank.
    • Upon receiving payment on the due date, the collecting bank sends the funds to the remitting bank, less any applicable charges, typically via SWIFT.
  • Important Note: Acceptance of a bill by the buyer does not guarantee the payment will be made by the buyer at maturity.

Aval:

  • Definition: An aval is a guarantee provided by the buyer's bank that it will pay the bill of exchange if the buyer fails to do so.
  • Essentially: An aval acts as a bank guarantee, enhancing the creditworthiness of the bill.

Aval Process:

  • Obtaining Permission: Prior permission is crucial. Both the buyer and their bank must agree to the aval before the collecting bank submits the collection instructions.
  • Avalisation: The buyer's bank signs the bill with the words "Bon pour aval," signifying their acceptance of the aval, and informs the seller bank of the agreement to aval the bill. 
  • Benefits: Increases the bill's marketability: It allows the seller to potentially raise financing on the bill before the due date.
  • Costs: Avalisation incurs additional bank charges. The buyer and seller must agree on who will bear these costs.
  • Collecting Bank/Buyer Bank's Responsibility: The collecting bank must ensure the buyer's financial capacity to pay the bill at maturity before agreeing to provide avalisation.

Key Takeaways:

  • Documentary collections offer a mechanism for international trade transactions, allowing sellers to manage risks associated with payment.
  • Avalisation provides an added layer of security for the seller by involving the buyer's bank in the payment guarantee.
  • Careful communication and agreement between all parties involved (seller, buyer, remitting bank, collecting bank) are crucial for a successful documentary collection transaction.


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