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  • QA 216
    Question:
    Is delayed payment sufficient cause to cancel a contract?
    Background:
    What to do when a client delays payment? Is there a 'reasonable time limit' for payment after presentation of documents? Can delayed payment justify cancellation of a contract? Our transaction is based on the European Contract for Coffee - ECC.
    Asked by:
    Trader - Belgium
    Answer:

    Where one of the parties to a contract does not execute its part the injured party can formally declare the offending party to be in default and can claim discharge of the contract with or without damages.

    The payment clause "cash against documents on first presentation" is a longstanding clause that means what it says: payment on first presentation - so not after one week or even two days. Time is of the essence in commodity contracts.

    In past times, when traders in the same city were doing business with each other, this was relatively simple to operate. The documents would be delivered to the buyer's office and payment would be made that very day.

    However, for international trade where documents are presented through the banking system, it is of course not always possible for a seller to know on which precise day a set of documents is presented to the buyer. What the seller should therefore do is to act reasonably in seeking information as to presentation and payment, based on past experience.

    Although international payment for same day value is possible these days, in practice, buyers pay for documents for value one or two days ahead and this works well.

    However, once a seller decides that payment is not forthcoming then this brings the matter of default to the fore. Refusal to pay on time is a clear breach of contract that entitles the seller to declare the buyer in default and to claim repudiation of the contract, with or without damages. Of course such a declaration must be made in writing. *

    How long should a seller wait to act before he is satisfied that the documents have been presented and there is no valid reason for non-payment? Strictly speaking, he does not have to wait at all. He may decide to allow the buyer two or so days to pay but that is a commercial judgement for each seller to make.

    The other party may contest such a declaration and if the matter cannot be settled amicably then it will have to be decided through arbitration. Under ECC all disputes are to be settled through arbitration. Similarly any claim for damages, if disputed, will have to be settled through arbitration as well.

    * To note that ECC considers default differently from claims since the notion of a claim presupposes an incorrectly executed contract. Default on the other hand deals with the damage caused by total and possibly wilful non-execution of a contract. It is up to an injured party to decide whether or not to make a formal default declaration.

    Posted 16 April 2009.

    Related chapter(s):
    Related Q & A:
    Q&A 018, 035, 143, 179, 180, 182