IB Law Session 6 - Payment

Payment

The voluntary performance of an obligation owed, which discharges the debtor and extinguishes the debt.

Debtor

The person or business that owes payment or another obligation.

Creditor

The person or business to whom payment or another obligation is owed.

Buyer’s obligation to pay

Under Article 53 of the Vienna Convention (CISG), the buyer must pay the price for the goods and take delivery.

Time of payment

Unless otherwise agreed, the buyer must pay when the seller places the goods or documents controlling them at the buyer’s disposal.

Place of payment

Unless otherwise agreed, payment is made at the seller’s place of business, or at the place where goods or documents are handed over if payment is made against their delivery.

Means of payment

The instrument used to transfer money, such as cash, a cheque, a bank transfer, a bill of exchange, or a promissory note.

Payment technique

The arrangement determining when and under what conditions payment occurs, such as advance payment, open account, documentary collection, or documentary credit.

Cheque

An unconditional order from an account holder to their bank to pay a specified amount to a named recipient.

Drawer

The party issuing an order to pay; for a cheque, the account holder, and for a bill of exchange, usually the seller.

Drawee

The party instructed to pay; for a cheque, the bank, and for a bill of exchange, usually the buyer.

Payee

The person or business entitled to receive payment.

Bank transfer

An electronic transfer of money from one bank account to another through debit and credit entries.

SWIFT

Society for Worldwide Interbank Financial Telecommunication; a secure messaging network banks use to communicate international payment instructions.

Bill of exchange

A written order, usually issued by the seller, directing the buyer to pay a fixed amount to a specified recipient on demand or at a future date.

Sight draft

A bill of exchange payable when presented for payment.

Time draft

A bill of exchange payable at a specified future date.

Acceptance of a bill of exchange

The drawee’s agreement to pay the bill according to its terms.

Acceptor

The drawee who has accepted a bill of exchange and undertaken to pay it.

Required details of a bill of exchange

Its title, order to pay a defined amount, drawee’s name, payment date and place, payee’s name, date and place of issue, and drawer’s signature.

Promissory note

A signed promise by one party to pay another a specified amount on demand or at a specified future date.

Promisor

The party making the promise to pay under a promissory note, usually the buyer.

Promisee

The party to whom the promise to pay is made, usually the seller.

Required details of a promissory note

Its title, promise to pay a specified amount, payment date and place, payee’s name, date and place of issue, and promisor’s signature.

Bill of exchange versus promissory note

A bill of exchange is an order to another party to pay; a promissory note is a promise by its maker to pay.

Payment delay

Extra time the seller allows the buyer to pay; bills of exchange and promissory notes can provide this without automatically guaranteeing payment.

Bank guarantee of payment

A bank’s undertaking to pay under specified conditions, providing additional protection against nonpayment.

Open account

A payment arrangement in which the seller delivers the goods before receiving payment, exposing the seller to the risk of buyer nonpayment.

Advance payment

A payment arrangement in which the buyer pays in full before the seller delivers the goods; it provides the seller with the greatest protection against nonpayment.

Documentary collection

A payment technique in which banks pass the seller’s documents to the buyer in exchange for payment or acceptance of a bill of exchange.

Remitting bank

The seller’s bank, which sends the documents and collection instructions to another bank.

Collecting bank

The bank handling collection from the buyer and releasing documents according to the collection instructions.

Documents against payment (D/P)

A form of documentary collection in which the buyer receives the documents only after paying.

Documents against acceptance (D/A)

A form of documentary collection in which the buyer receives the documents after accepting a bill of exchange payable later.

URC 522

The ICC Uniform Rules for Collections governing documentary collections when incorporated into the arrangement.

Seller’s risk in documentary collection

The buyer may refuse or be unable to pay or accept the bill after the goods have been shipped; the banks do not guarantee payment.

Buyer’s risk in documentary collection

The documents do not guarantee that the goods inside the shipment match the contract.

Documentary credit (letter of credit)

A bank’s undertaking to pay the seller if the seller presents documents complying with the credit’s terms.

ICC

International Chamber of Commerce; the organization that publishes rules for documentary collections and documentary credits.

UCP 600

The ICC Uniform Customs and Practice for Documentary Credits, effective from 1 July 2007, governing documentary credits when incorporated into their terms.

Applicant

The buyer who asks their bank to issue a documentary credit in favour of the seller.

Beneficiary

The seller entitled to payment under the documentary credit after presenting complying documents.

Issuing bank

The bank that opens the documentary credit at the buyer’s request and undertakes to pay against complying documents.

Advising bank

The bank that notifies the seller of the documentary credit; advising alone does not create an obligation to pay.

Nominated bank

The bank with which the credit is available, authorized to handle payment or negotiation according to the credit’s terms.

Irrevocability

The issuing bank cannot unilaterally cancel its payment undertaking once it has issued the documentary credit.

Autonomy of documentary credit

The documentary credit is independent of the underlying sales contract.

Strict compliance

The seller’s documents must comply with the documentary credit’s requirements; discrepancies can lead to refusal of payment.

Documents required under a documentary credit

Documents specified in the credit, commonly including an invoice, transport documents, insurance documents, and certificates.

Commercial invoice

A document issued by the seller stating the goods supplied and the amount charged.

Bill of lading

A transport document acknowledging receipt or loading of goods for sea carriage that can also control entitlement to claim the goods.

Insurance document

A document providing evidence of insurance coverage for the shipment.

Certificate of origin

A document identifying the country of origin of the goods.

Sanitary certificate

A document certifying that goods meet specified health or sanitary requirements.

Confirmed documentary credit

A documentary credit in which a second bank adds its own irrevocable undertaking to pay against complying documents.

Confirming bank

The bank that adds its own payment undertaking alongside that of the issuing bank.

Documentary collection versus documentary credit

In collection, banks handle documents without guaranteeing payment; in documentary credit, the issuing bank undertakes to pay against complying documents.

Competent jurisdiction

The court legally entitled to hear a dispute.

Jurisdiction clause

A contractual provision identifying the court chosen by the parties to hear disputes.

Applicable law

The legal system governing a contract or legal relationship.

Habitual residence

For the Rome I rules discussed in the slides, generally a company’s central administration or a businessperson’s principal place of business.

Fraud exception

The principle that fraud can justify refusing payment despite the documentary credit’s independence from the sales contract.

Amendment of documentary credit

A change requiring agreement from the issuing bank, the confirming bank if any, and the beneficiary.