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The Mitigation Rule and Impacts of Overdue Payments

in International Business

 

STUDENT PAPER

By Xiyuan Wu

SKEMA Business School

Paris, France

 



ABSTRACT

Globalization has entered a new phase, in which the entire world is inextricably linked. Countless transnational trade is carried out every day, while numerous contracts are signed every day. However, trade frictions and trade disputes may cause various problems because buyers and sellers are in different countries, and may eventually damage the interests of one or both parties. An essential factor which prevents the capabilities of contractors is irregular and delays in payment.

Usually, if the buyer does not pay on time, it may also affect the seller’s capital chain and even change the contractual relationship. Moreover, there may be additional fines and interest charges. Therefore, the objective of this paper is to explore the impacts of overdue payment and analyze how to protect the rights and avoid this kind of situations happen through the contract. And the article will explain the issue and use Dominance method to compare different standards, including The United Nations Convention on Contracts for the International Sale of Goods(CISG), Engineers Joint Contract Documents Committee(EJCDC), Consensus Docs and American Institute of Architects(AIA). At the meantime suggest, and the ideal solution will be given at the end of the article.

Key words: Late Payment, Compensation, Remedies, Financial Costs, Risks, Automatic Avoidance, Milestone Payment

INTRODUCTION

From hundreds or thousands of years ago till today, contractual relations are ubiquitous. The contract is an agreement concluded after the parties reached the deal by regular consultation, stipulating the obligations that must be fulfilled and the rights they should enjoy. Especially in the cross-border trade, CISG-compliant contracts are the basis for formal cooperation and the guarantee of rights. However, even under contractual constraints, there will still be various kinds of default or yet breach of contract, which may be caused by the buyer or the seller or even both parties. In fact, one of the most critical factors is overdue payment. According to the United Nations Convention on Contracts for the International Sale of Goods (CISG) Article 71, “Damages for breach of contract by one party consist of a sum equal to the loss, including loss of profit, suffered by the other party as a consequence of the breach.”

Generally speaking, that overdue payment will lead a catastrophic effect on businesses for both buyer and contractor, especially for the buyer that the subsequent impact like has limited or even no cash reserves to rely on. While, for companies that are paid based on invoicing for given products or services, late payments are strapped to happen.

Casually regarding the receivables as “better late than never” could mean life or death to the trade. Because the two sides regularly negotiate deferred payment will affect the entire project process, for example, if the buyer does not pay or payment delay, the seller to ensure normal business activities and loans will bring additional costs. There are several reasons may cause the late payments. It could be as simple as someone forgets the payment date or the manager/accountant is not here when their approval is required to sign off on the invoice. More complicated reasons can be a puzzle, which includes any uncontrollable element or even a shift in direction for the overall system of what you are apart.

Therefore, the purpose of the research and analysis in this paper is to develop and answer the following questions in FIDIC, AIA, EJCDC, Consensus Docs and CISG:

  • The impact of overdue payment on both parties
  • How to handle or avoid the possible risks
  • Primarily how to prevent the late payment in international trade
  • And to analyze some of the provisions of the contract is how to regulate or constrain such behavior.

More…

To read entire paper, click here

 

Editor’s note: Student papers are authored by graduate or undergraduate students based on coursework at accredited universities or training programs.  This paper was prepared as a deliverable for the course “International Contract Management” facilitated by Dr Paul D. Giammalvo of PT Mitratata Citragraha, Jakarta, Indonesia as an Adjunct Professor under contract to SKEMA Business School for the program Master of Science in Project and Programme Management and Business Development.  http://www.skema.edu/programmes/masters-of-science. For more information on this global program (Lille and Paris in France; Belo Horizonte in Brazil), contact Dr Paul Gardiner, Global Programme Director [email protected]



About the Author


Xiyuan Wu

SKEMA Business School

Lille, France

 


Xiyuan Wu
, MSC student in SKEMA Business School, major in Project and Programme Management & Business Development (PPMBD). He graduated from SKEMA Business School and holds a Bachelor’s degree in Business Administration. As a business student, he worked in an American company Cannes Concierge, in an international project team and implemented multiple international congresses, which including Cannes Film Festival, Cannes Lions International Festival of Creativity, MIPCOM, etc. His current research interests include the Project Management in China, the Banking system in China and he is currently completing a research paper about payments in international business.

He lives in Lille, France now and can be contacted at [email protected]