5.4 Payment conditions (documentary collection, L/Cs, bank guarantees)

Main idea: If goods or services are to be delivered, the parties agree on a price to be paid, the moment of payment, and the modus operandi regarding delivery. Normally, a sales transaction is effected by handing over the goods and payment (either in cash or upon receipt of an invoice). The customer can see what it is buying, and the supplier is relatively certain about obtaining payment. In an international context, this implied level of trust is often absent. In those circumstances, the parties need a payment arrangement that corresponds to their interest and their power of negotiation.

Common arrangements. Commonly used payment arrangements are: payment in advance, payment by documentary collection, and payment by documentary credit. Certainty of payment can be improved by a bank guarantee or a standby letter of credit. The effectiveness of these arrangements varies and depends on the risk assumed by the bank involved. Furthermore, the higher the risk carried by the bank, the higher the cost of the arrangement will be.

This section will discuss the common payment arrangements mentioned above, together with the legal framework typically chosen. The International Chamber of Commerce (ICC) has adopted authoritative rules to answer the questions that arise in each of the arrangements.