Documents Against Payment

Documents against payment, abbreviated D/P, is a method of settling an international sale in which an exporter ships goods and sends the shipping documents through banks, with the instruction that the importer may have them only on paying the invoice amount. Because the importer normally needs the documents to collect the goods from the carrier, the seller keeps control of the cargo until it is paid. The arrangement is one of the two standard release terms in a documentary collection.

The other term is documents against acceptance (D/A), under which documents are released when the buyer accepts a bill of exchange payable at a later date. D/P is safer for the seller than D/A or open account trading, but less secure than a letter of credit, because no bank promises to pay. Collections are governed by the International Chamber of Commerce's Uniform Rules for Collections, URC 522.

• Principal. The exporter, who entrusts the collection to its bank.
• Remitting bank. The exporter's bank, which forwards the documents with a collection instruction.
• Collecting bank. A bank in the importer's country that receives the documents, often a correspondent of the remitting bank.
• Presenting bank. The bank that presents the documents to the buyer; it is often the collecting bank itself.
• Drawee. The importer, to whom presentation is made.

1. Seller and buyer agree in the sales contract that payment will be by D/P collection.
2. The seller ships the goods and obtains the transport document, usually a bill of lading.
3. The seller hands its bank the documents, typically the commercial invoice, transport document, packing list, insurance and origin certificates, often with a sight draft, together with a collection instruction.
4. The remitting bank sends the documents to the collecting bank.
5. The presenting bank notifies the buyer that the documents have arrived and are available against payment.
6. The buyer pays, and the bank releases the documents.
7. The buyer uses the documents to take delivery and clear customs.
8. The collecting bank remits the funds, less charges, to the remitting bank, which credits the seller.

From the importer's side the same transaction is an import bill collection.

Under URC 522 the banks act as agents handling documents. They must follow the collection instruction and act with reasonable care, but they do not guarantee payment and have no duty to examine the documents beyond checking that those received appear to be the ones listed. They are not responsible for the goods and need not store or insure them unless they agree to. If the buyer refuses to pay, the presenting bank must advise the remitting bank without delay and await further instructions.

The collection instruction should say who pays each bank's charges, whether charges or interest may be waived, whether an unpaid draft should be formally protested, and whom to contact locally, a representative called a case-of-need, if problems arise.

The seller's control depends on the transport document. A negotiable order bill of lading is a document of title, so the carrier will release goods only to its holder. An air waybill, road consignment note or a straight bill of lading is not, and the named consignee may obtain the goods without the documents; sellers in those cases sometimes consign the goods to the collecting bank, which requires that bank's prior consent.

Even with control of the goods, the seller bears the risk that the buyer will not pay. By then the cargo is in a foreign port, accruing storage and demurrage charges, and the seller must find another buyer, often at a discount, or pay to ship it home. The buyer may use that position to demand a lower price. The seller is also exposed to exchange controls or political events that delay the transfer of funds. These risks can be covered by export credit insurance.

The buyer benefits from lower bank charges than under a letter of credit, uses none of its credit lines and pays only when the goods have been shipped. It cannot usually inspect the goods before paying, however, and relies on the documents and, if agreed, an inspection certificate. In some countries buyers by custom delay payment until the vessel arrives, even though the term calls for payment at first presentation.

D/P suits trade between parties with some established relationship, in stable markets, for goods that could be resold if the buyer defaults. It is cheaper and simpler than documentary credits and gives more protection than open account. Variants exist: a collection may call for payment a set number of days after sight while documents are held until payment, although the ICC discourages this because it confuses the two release terms. Exporters needing cash before the buyer pays may obtain an advance from their bank against the collection, a form of trade finance similar to export bill discounting. The allocation of shipping costs and risk between the parties is set separately by the Incoterms rule chosen in the contract.

• International Chamber of Commerce