Risk Management in Bulk Commodity Trade with China – Payment Risks and Their Mitigation

In international trade, the payment of goods plays a crucial role, often becoming a source of disputes between parties, leading to demands for legal responsibilities. While some payment-related issues in bulk commodity trade are well-known, this article will explore lesser-discussed yet important concerns from the perspective of foreign buyers. The focus will be on the legal application of installment payments, risk management strategies for delayed payments, the significance of reserving ownership rights, and the impact of market factors on commodity prices.

1.   Legal Application of Installment Payments

In bulk commodity trade, installment payments are common. However, both buyers and sellers may not be clear about the legal definition of installment payments and tend to rely on conventional understanding. It is necessary to clarify the legal application of such payments.

Taking the following payment clause as an example

“If the buyer fails to pay one-fifth of the total price when it becomes due and, despite the seller’s notice, fails to make the payment within a reasonable period, the seller may request the payment of the entire price or the rescission of the contract.”

Buyers must be mindful of the critical and sensitive proportion of owed payments, which is one-fifth of the total price. Crossing this threshold empowers the seller to demand full payment or even contract termination. As such, this aspect deserves careful attention.

For sellers, understanding the buyer’s sensitivity to this proportion is crucial. If sellers suspect that the buyer has lost the financial capacity to pay, the one-fifth threshold becomes a key factor to exert pressure and pre-emptively mitigate risks. However, the parties cannot privately agree to breach this proportion; otherwise, such an arrangement would be invalid. It is permissible to agree on a higher proportion for contract termination but not lower than one-fifth.

2.   Significance of Reserving Ownership Rights for Payment Security

In bulk commodity trade, payment security is of paramount concern for sellers. Besides relying on the buyer’s compliance, sellers often resort to various means such as urging, coordinating, sending letters, or even resorting to litigation. However, when a buyer faces economic crises and is unable to pay other sellers or creditors, the payment for bulk commodities becomes insecure. In such cases, ownership reservation provides a solution.

Ownership reservation refers to an arrangement where the seller retains ownership of the goods sold until the buyer fully pays the purchase price. Thus, if the buyer encounters an economic crisis, the sold goods won’t be subject to seizure by other creditors. Instead, the seller can exercise their right to reclaim the goods.

3.   Liability for Late Payment and Breach of Contract

In cases where the buy-sell contract stipulates a penalty for late payment, the buyer remains liable for paying the late payment penalty even after the seller has received the payment. The buyer cannot use the fact that the seller has accepted the payment as a reason for refusing to pay the late payment penalty.

However, if the late payment penalty is not mentioned in the account statement or repayment agreement, the seller cannot claim the penalty separately if the account statement or agreement already explicitly states the principal amount and late payment interest, or if the original buy-sell contract has already modified the clauses regarding the principal and interest.

If the contract does not specify the late payment penalty or its calculation method, and the seller demands compensation for the late payment loss due to the buyer’s breach, the calculation of the penalty will be based on the benchmark interest rate for Renminbi loans of the same period and the same type published by the People’s Bank of China.

In conclusion, managing payment risks is crucial in international bulk commodity trade. Clear and well-defined contract terms, along with mutual understanding of rights and responsibilities, are essential for both buyers and sellers. Additionally, the flexible handling of market risks and unforeseen circumstances can lead to mutually beneficial outcomes and prevent unnecessary disputes. By implementing sound risk management strategies, stable and prosperous international trade can be fostered.

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