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How to mitigate payment related risks in contracts? [PHOTO]

17 March 2022 16:03 (UTC+04:00)
How to mitigate payment related risks in contracts? [PHOTO]

In many cases, payment-related risks under contracts are not taken into consideration by companies seriously. For instance, in sale and purchase agreements, or in the contracts on the provision of services, some companies demand advance payment. In such situations, assessment of risks, especially in the case of foreign money transfers is of importance.

Moreover, some companies do not analyze contracts submitted by the counterparty at all and ignore the issues that may pose risks.

Failure to address those risks may lead to adverse consequences, such as time-consuming and resource-intensive litigation or foreign arbitration. To avoid such risks, specifically, those are payment related, the following contractual mechanisms are suggested for your kind consideration:

Bank guarantee is one of the significant method of securing obligations. In case of an advance payment, it is strongly recommended to demand from the counterparty an advance payment guarantee in the amount equal to the sum of the advance payment. Even it is suggested to agree on the wording of the bank guarantee beforehand and attach the same as an appendix to the contract itself to avoid any further misunderstanding.

Letter of credit (LC) is a widespread financial mechanism to mitigate payment-related risks.

In return for delivery of goods, the performance of services, fulfillment of other contractual terms and submission of documents on fulfillment of obligations, the bank undertakes to pay to the recipient the amount set out in the letter of credit. It is advisable to agree on the text of the LC in advance and enclose the same to the contract.

Mortgage – depending on the nature of financial obligation the parties may choose this option to use the immovable property to secure the obligation under the contract. This mechanism is widely used to secure the payment obligations as set out in loan agreements.

Payment in installments – if none of the above are applicable to your specific case, then it could be an option to make payments in installments rather than make full payment in advance. For example, 20 % of the contract price is paid as an advance, 20 % when the equipment is delivered to the carrier, 40% when the equipment is delivered to the consignee and 20 % is paid when the installation of equipment is completed.

Other mechanisms may also be used depending on the characteristics of the contractual relations. On the other hand, each of the mechanisms described above has its own features which require a specific approach and professional consulting, especially in high-value transactions. In any case, it is better to engage professional consultants to review the contracts to make amendments where necessary to avoid financial risks.

About the author: Emin Musayev is a lawyer who specializes in intellectual property, contracts, and corporate law and currently works at Legalize Law Firm. For more information about the author please see the following link:https://legalize.az/team/emin-musayev

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