Foreign trade activities means activities of international goods purchase and sale which are carried out in the form of export and import; temporary import for re-export; temporary export for re-import; border-gate transfer; and transit and other activities related to international goods purchase and sale in accordance with law and treaties to which the Socialist Republic of Vietnam is a contracting party.RISKS IN PAYING FOREIGN TRADE CONTRACT CONTRACT

Accordingly, a foreign trade contract is understood as an agreement between the seller and the buyer from two different countries, which stipulates that the seller must deliver the goods, hand over any documents relating to them as well as ownership (title) of goods for buyer and the buyer must pay the price for the goods.

In practical application, because of the differences in language, culture, legal institutions… this has caused the parties to have disputes, one of the typical disputes is about payment terms in the contract.

With the experience of accompanying many import-export enterprises in both internal and abroad, we have a team of good lawyers with many years of experience in the field of consulting, and understanding the concerns of your business, we would like to provide some related analysis for your business to have a basis for reference and application to minimize risks.


1.  Risks due to payment methodsRISKS IN PAYING FOREIGN TRADE CONTRACT

In Foreign trade contract, with the specificity of the contracting parties coming from many different countries, the choice of payment method is an important issue that needs to be considered by the parties to know which method will be most suitable.for the signed contract, to ensure the rights and interests of the parties. Although Bank is used as a third party to secure the payment but these methods may still have some risks that should be noted such as:

1.1 Remittance method (Mail transfer or telegraphic transfer)

a. Definition:

  • Remittance method is a method in which the payers request their Bank to transfer a certain amount for the beneficiary, at a specific location by means of money transfer requested by the payer.

  • Mail transfer or M/T: The bank in the importer’s country sends a letter to the correspondent bank in the exporter country to pay. In this form, the cost of money transfer is low but the speed is slow and it is easily affected if there are many fluctuations in the exchange rate.

  • Telegraphic transfer or T/T: The remittance bank sends commands by telegraphic to the correspondent bank for payment to an exporter. According to this form, the cost of money transfer is higher but the speed is fast and the exchange rate is limited.RISKS IN PAYING FOREIGN TRADE CONTRACT

b. The pros and cons of the remittance

  • Pros: The procedure is simple, fast and convenient. Banks only act as payment intermediaries
  • Cons: The payments are fast or slow depending on the goodwill of the payer/importer,.so this method does not guarantee the interests of the beneficiary/exporter. The level of security in payment is low, so remittance is only suitable between partners who trust each other or the small payment.

I.2 Collection method (Clean Collection and Documentary Collection)

a. Definition:

  • The collection method is a payment method in which sellers delegate to their bank collects the amount of.goods and services delivered to the buyer based on the seller’s bill of exchange.
  • The clean collection is a method in which the seller delegate to the bank to collect.the amount of the buyer base on the bill of exchange which they set up; the documentary will send to the buyer not through the bank.
  • Documentary Collection is a method in which the seller.delegate to their bank collects the amount of the buyer not only based on the bill of exchange,.but also on the set of shipping documents for the buyer to receive the goods.

b. The pros and cons

Depending on the payment method, the parties in the contract will be more profitable than the opposite party, for example:

  • Clean Collection method, the seller: the buyer receives the goods,.this is completely separate from the payment, the buyer can receive the goods without.payment or delay but the buyer: if the bill of exchange arrives earlier than the document,.the buyer must pay within when not know whether the seller’s delivery is in accordance with the contract or not.
  • Documentary collection method,.the interests of the seller are more guaranteed because the seller asks the.Bank to control the shipping documents for the buyer. However, the seller cannot receive the documentary to delay payment. The banks are just payment intermediaries, not responsible for paying the buyer.

1.3 Documentary credit method

a. Definition:

Documentary credit is an agreement by the bank that issues the Letter of Credit (L/C).will commit to pay for the amount or accept the bill of exchange drawn by the beneficiary if he/she presents a valid set of payment.documents with the contents specified in the Credit. In there “Bank issues the letter of credit is the bank that issues the.L/C at the request of the L/C applicant or on its own behalf”. And “The beneficiary is the party to whom the Credit is issued”.

b. The pros and cons

  • Pros: the bank is the party to bail it out, so it ensures the safety of the transaction process,.it is the person who guarantees payment for the goods to the importer. This will help limit risks for exporters.
  • Cons:
    • L/C has no payment method absolutely safe because the payment is based on documents,.not on the quality of the goods. Therefore, the buyer can be at a disadvantage when receiving goods that do not match the quality. – Takes a lot of time in preparing and checking documents.

    • Transaction fees with banks are many.RISKS IN PAYING FOREIGN TRADE CONTRACT

    • The cost of storing and preserving goods at the port is large if the documents are wrong and the buyer does not receive the goods.

1.4 Bookkeeping method

a. Definition:

  • The exporter will open an account debating the.number of goods and services provided to the importer, up to monthly,.quarterly or yearly the importer must pay the exporter by the method of bank transfer money. In fact, in this method, the exporter lends the importer a deferred payment and charges interest on this deferred payment.

b. Pros and Cons

  • Pros: the importers can buy goods without having to pay immediately,.which can solve the problem of immediate lack of capital.
  • Cons: this method is still high risk for exporter. It only applies in cases where there is a regular trade relationship and mutual trust between.the two parties or a trading relationship between the parent company and its subsidiary.

2. Price risks

  • When enter into a foreign trade contract, the parties in the contract have fixed.a fixed price and the parties must make payment based on that price. However, in fact, the price of goods will be adjusted by objective factors such as market demand for that commodity,.political factors that make the commodity scarce, and prices adjusted… This has significantly affected the buyer’s ability to pay and the time to receive the goods.
  • Therefore, in order to limit price risks, the parties should have contingency provisions.for price increase/decrease to ensure that the rights and interests of the parties.are guaranteed and the contract can be enforced.

3. Risk of payment currency

  • In an international commercial contract, the currency specified in the payment terms.may be subject to the agreement of the parties.(it can be the currency of the exporting country or of the.importing country or of a third country that both parties agree)
  • However, the payment currently as well as its exchange.rate affects the payment terms and the value of the contract. This makes the parties in the contract passive in payment if the exchange rate of the currency is changed.

4. Risk of payment term 

  • In case the parties do not have an agreementor the content of the agreement is invalid, the time of payment will be the time of delivery in accordance with the law. In many cases, the payment time will be determined based on the seller’s delivery time. However, the delivery of goods is not in accordance with the Contract.or.is affected by force majeure conditions that affect the Seller’s ability to deliver goods at the wrong time as specified in the contract,.which will affect the payment term of the buyer.


There are many causes of risk in the payment process for foreign trade contracts when the distance between the contracting parties is often transnational, the foreign exchange laws of each country are different.

Understanding the causes of the above risks will help contracting parties enter into.the contract avoiding unfortunate consequences that cause financial or relationship damage.

The causes of this risk can be divided into the following categories:

1. Subjective causes

Subjective causes come from the content of payment terms in the contract. While agreeing on payment terms the parties did not clearly understand each country’s.regulations on restrictions on foreign exchange activities (exchange rates).or regulations on customs clearance procedures at border gates in the form of shipping…. These arising issues will affect the contract performance process of the parties,.if there is no specific regulation, it will arise unnecessary disputes.

It can be seen that the subjective cause is that one or both parties have not fully studied and prepared.the terms to protect their own legitimate rights and interests.

2. Objective causes

Objective causes often come from external agent, which can be due to the influence of weather,.climate, natural disasters, legal policies such as prices, politics, or government cooperation… for example:

  • Changes in exchange rates by the state:RISKS IN PAYING FOREIGN TRADE CONTRACT

    • In foreign trade, delivery time is usually after a certain time from the date of signing the contract and payment time is usually after a certain time from the date of delivery.
    • At the time of signing the contract, the parties know clearly about the payment value, currency, current exchange rate and time of payment.
    • However, the process of contract performance is long or for reasons that.affect the delivery and payment time of the customer, the contract is affected by the changing exchange rate.at the time of payment (difference with time specified in the contract)
  • Legal issues:

    • With the characteristic of transnational activities, the parties signing to the.contract often come from two or many different countries, so the applicable law.to regulate the relationship will be much more complicated compared to domestic trading activities. At the time of signing the contract, the parties have jointly chosen the applicable.law when a dispute occurs, however, when a dispute occurs, each party wants to protect their legitimate rights and interests best. So, they often do not have a common voice and a common agreement. Moreover, regulations will change to best regulate social relations but will somewhat affect the terms of foreign trade contracts.
  • National issues:

    • Either country where the subject of the contract has some instability such as war, turmoil, etc. will cause the payment of the parties to go out of control and dispute occurs.

Objective causes often come unexpectedly and affect the performance.of the contract of both the buyer and the seller. Therefore, risk identification is essential. The parties when signing and performing a contract need to have a comprehensive.view of the risks that may be encountered for each contract,.the commercial contract with a comprehensive view to bring the appropriate and detailed content into the contract, protecting interests.


The parties to the contract shall take the following measures to limit risks:

  • Research about the laws of the country in which the partner in the contract exists in order to understand the regulations related to foreign exchange or the rules on clearance conditions about the necessary documents to ensure the performance of the delivery obligation (if the seller) or the payment obligation (if the buyer).
  • Agreement each another about relevant terms to limit disputes,.such as the applicable law when performing the contract, the conciliation agency, the dispute-handling agency, the language,…;
  • Clearly regulating about all relevant issues related to payment terms to avoid ambiguity or difficulty in application when implementing the contract or when there is a dispute between the parties
  • Terms in the contract should be noted about fluctuations in market prices so that both parties can have sharing terms with the other party when there is a fluctuation; or the terms of force majeure,.fire for breach, compensation for damage, insurance, … should also be clearly stated in the terms of the contract.


Pursuant to the Commercial Law 2005, there are three important conditions that must be satisfied in order to be able to apply the remedy of fines for breach of contract:

  • Firstly, the parties have to agree about remedy for breach. If they do not make an agreement, even if a breach of contract occurs in reality, the aggrieved party is not entitled to apply this remedy.

  • Secondly, it must have a violation that the parties have agreed. Accordingly, only the violations mentioned in the fine for breaches can lead to the application of remedy of fine.

  • Thirdly, the violation must not be in the cases of liability exemption as prescribed by law.

Thus, in the case that the contract do not recognize the remedy of fine agreement between the.parties on delayed payment when a breach occurs, the aggrieved party will not be able to apply remedy of fine. The Commercial Law 2005 regulates the fine level for a breach of a contractual obligation or the aggregate fine level for more than one.breach shall be agreed upon in the contract by the parties, but must not exceed 8% of the value of the breached contractual obligation portion.

The value of damages covers the value of the material and direct loss suffered by the aggrieved party due to the breach of the breaching party and the direct profit which the aggrieved party would have earned if such breach had not been committed.


  • Where the parties agree upon fines for breaches, the aggrieved party shall be entitled to apply both remedies of fines and damages

  • Where the parties do not agree upon fines for breaches, the aggrieved party shall only be entitled to claim damages;

Payment terms are an important term and indispensable in foreign trade contracts because it directly affects to the parties’ rights and obligations. Due to the specific nature of the parties in the contract, they are in different countries,.in order to minimize the risks that occur during the contract performance, Clients should be cautious and attentive when providing conditions of these payment terms. In addition, the parties need to create credibility for each other, research the solvency issues of the other party before signing the contract. To better understand the provisions about “Risks in agreeing on the payment terms in foreign trade contract” as well as the solution when disputes arise, please contact LawPlus with the hotline +84 2862 779 399, +84 3939 30 522 or email info@lawplus.vn.

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