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Part VIII Obligations of the Buyer, 36 Payment

From: Global Sales and Contract Law

Ingeborg Schwenzer, Pascal Hachem, Christopher Kee

Content type:
Book content
Product:
International Commercial Law [ICML]
Published in print:
26 January 2012
ISBN:
9780199572984

From: Oxford Legal Research Library (http://olrl.ouplaw.com). (c) Oxford University Press, 2023. All Rights Reserved. Subscriber: null; date: 06 June 2023

Subject(s):
Payment obligations of the buyer — Contractual stipulation and time for payment — Default rules and time for payment — Partial payment — Modes of payment

(p. 453) 36  Payment

  1. A.  General 36.01

  2. B.  Partial Payment 36.03

  3. C.  Place for Payment 36.06

    1. I.  Contract 36.07

    2. II.  Default Rules 36.09

    3. III.  Implications for Jurisdiction 36.14

  4. D.  Time for Payment 36.16

    1. I.  Contract 36.16

    2. II.  Default Rules 36.19

  5. E.  Currency 36.23

    1. I.  Contract 36.23

    2. II.  Default Rules 36.29

  6. F.  Modes of Payment 36.30

    1. I.  Default Rules 36.32

    2. II.  Contract 36.34

    3. III.  Set-Off 36.48

  7. G.  Means of Securing the Unpaid Seller 36.49

    1. I.  Retention of Title 36.50

    2. II.  Other Means of Securing the Unpaid Seller 36.58

      1. 1.  Purchase Money Security Interest 36.58

      2. 2.  Seller’s Lien and Right to Retain Possession 36.59

      3. 3.  Seller’s Right to Reclaim the Goods 36.61

      4. 4.  Right of Stoppage in Transitu 36.62

A.  General

36.01  The payment of the purchase price in all legal systems is the reciprocal counterpart of the seller’s obligation to deliver the goods and transfer title.1 In many legal systems this obligation typically involves the exchanging of goods for money.2 However, taken in the abstract the (p. 454) obligation to make payment itself should not be so limited. The concept of barter has been explained elsewhere in this text.3

36.02  It is primarily up to the parties to determine the purchase price or to make provision for the determination of that price.4 As has been indicated earlier in the context of the formation of contract, this is also of great significance to the question of whether a contract has been formed at all.5 However, the amount to be paid under the contract might be subject to scrutiny in the context of the requirement of iustum pretium found in some legal systems6 as well as in the context of validity with particular reference to notions of unconscionability and gross disparity.7 Furthermore, adjudicators may be permitted to interfere with the purchase price agreed by the parties in hardship situations—that is, where the economic circumstances of the contract have changed dramatically.8

B.  Partial Payment

36.03  In the same way as the seller is obliged to make full delivery of the goods, the buyer is obliged to make full payment of the purchase price as set out in the contract.9 In civil law jurisdictions this is expressed by provisions prohibiting the debtor of an obligation to perform only in part.10 Many contracts explicity provide for partial payments of the purchase price, for example 10 per cent on contract conclusion, 70 per cent upon delivery, and 20 per cent upon satisfactory testing. Whether the seller, by accepting a partial payment that is not provided for in the contract, releases the buyer from the outstanding amounts is a completely different question.

36.04  Where the buyer tenders only partial payment this in general does not satisfy the obligation to pay the purchase price and the seller may reject the partial payment. However, the conduct of the seller in these situations may lead to a different result or at least deprive the seller of the possibility to rely on the buyer’s failure to pay. In civil law jurisdictions, if the seller agrees to accept partial payment, the question of whether or not the payment obligation has been satisfied will depend on the interpretation of the seller’s conduct. Where the seller accepts partial payment in the belief that the balance will be paid subsequently by the buyer, partial payment does not satisfy the payment obligation.11 This is even the case if the contract had originally provided for a single payment.12 It is only where the seller’s conduct leads the buyer to reasonably believe that the partial payment has discharged the obligation to pay the purchase price (p. 455) that the seller might be prevented from claiming the balance under the principle of good faith.13

36.05  In common law jurisdictions, the seller’s willingness to accept a lesser sum in lieu of the original contract price amounts to a modification of the contract and thus requires consideration.14 Thus even where the seller has actually agreed to accept a lesser sum, if consideration cannot be found, the obligation to pay the full price will still exist.15 This consideration, however, may be as simple as paying the lesser sum at an earlier time, different place, or by a different method.16 Where no consideration is provided it remains possible that the seller may be estopped by its own conduct from pursuing the outstanding money from the buyer.17 This is not however simply a matter of the buyer reasonably believing the obligation has been discharged. The buyer must satisfy the elements of estoppel, and as such the buyer may need to demonstrate that it both acted in reliance on the seller’s statements and that in the general circumstances it would be inequitable to permit the seller to go back on its promise.18

C.  Place for Payment

36.06  In sale of goods transactions the determination of the place for payment of the purchase price is very important. This is especially true in international transactions. The buyer and the seller have competing interests in this regard. For the buyer a requirement to pay in its own country may be easier and less expensive. In contrast, the seller has an interest in being paid in its country, so that it may freely and promptly utilize the money it receives. These competing interests are also reflected in issues regarding the type of currency and the exchange controls in force in some countries.19

I.  Contract

36.07  The place of payment is to be primarily determined by the parties’ contract. The process of contract interpretation will sometimes be simple—that is, the parties will have expressly identified the place. In the absence of an express statement, further interpretation may be required. In this context, other aspects of the payment obligation and the delivery obligation will often reveal an intention on the part of the parties as to the place of payment.20

36.08  Particular aspects of the method of payment may be interpreted to establish the place of payment. For example, where the purchase price is to be paid by direct debit, the place of the buyer’s bank is also the place of payment.21 Payment by electronic transfer of money, (p. 456) by contrast, leads to the place of the seller being the place of payment.22 Similarly, in cases involving international trade, the nomination of a currency, especially where that currency is used in only one country, may but will not always suggest the parties had implicitly agreed payment was to take place there.23

II.  Default Rules

36.09  In the absence of either an agreement reached by the parties, practices between the parties, or applicable trade usages, the default rules must be consulted. In this regard legal systems demonstrate a considerable variety of approaches without a clear majority supporting any particular one. The variety is not only produced by the fact that different legal systems determine different default places of payment but also because the place may change within individual legal systems depending on the circumstances of the particular case.

36.10  Many legal systems take the view that the buyer (as debtor) must make payment at the place of the seller (as creditor). At the domestic level this is the position of the common law jurisdictions,24 the general law on obligations in many civil law systems,25 as well as the Nordic legal systems.26 At the international level this is also the place of payment addressed first by uniform laws27 and projects.28 Some domestic systems apply this rule where payment at the place of delivery is not possible.29

36.11  A second approach is that the buyer shall pay the price at the place of delivery of the goods.30 Consequently, if a fixed place for delivery has already been agreed to by the parties, as the law allows them to do, the same agreement would be extended to the place of payment without need of a special clause on this issue.31 This approach is especially to be found in specific sales law provisions32 in the civil law jurisdictions of the Asian,33 Ibero-American,34 Arabic, and (p. 457) Middle Eastern35 regions and, in some instances, Europe.36 At the international level, uniform laws also contemplate that the place of delivery is also the place of payment where the payment is to be made against delivery.37

36.12  A specific aspect of this approach concerns the delivery of documents. Based on the approaches taken to symbolic delivery38, it appears that payment of the price should be performed in the place where the documents are delivered, unless the goods themselves have already been delivered.39

36.13  The approach that payment is to be made at the buyer’s place of business appears to be a rather exceptional approach, at least in practice.40 Its notable proponents are France,41 Austria,42 and Germany.43 In the latter two systems, however, the consequences of this rule are mitigated by having the buyer bear the risks and costs associated with the transfer of the payment.44 Unlike other systems which have established deviating specific sales provisions for the place of payment, the named systems maintain the general obligations rule that an obligation must be performed at the place of the debtor. Some legal systems fall back on this approach where payment at the place of delivery is not possible.45

III.  Implications for Jurisdiction

36.14  The place of payment of the purchase price is primarily a matter of substantive law. However, it also has an important procedural aspect. This has primarily been discussed in the context of a seller claiming payment of the purchase price. A rule establishing the jurisdiction of courts at the place of performance of an obligation can be found in numerous procedural laws both at the domestic46 as well as at the international level47.48 When determining the relevant place of performance, these rules may either rely on the obligation that is characteristic for the contract or rely on the obligation that has been breached. Where the latter approach is taken, this means that it is the place of payment that is decisive for the jurisdiction of the courts. If the applicable procedural law furthermore provides that the place of performance must be determined by the lex causae, courts must turn to the applicable contract law. Should the applicable contract law by default determine the place of business of the seller as the place of payment, this leads to the result that courts at the seller’s place of business always have jurisdiction where the seller claims payment of the purchase price.

(p. 458) 36.15  This result has long received severe criticism.49 It undermines the well-established rule of actor sequitur forum rei—that is, the creditor has to follow to the debtor’s jurisdiction. Furthermore, it is feared that where the seller moves its place of business, the buyer would face an unexpected court system. The same effect is feared in scenarios where the seller assigns its claim to a third party whose place of business would then be the place of performance of the payment obligation. It has therefore been argued that in procedural laws the term ‘place of performance’ should be interpreted autonomously in order to avoid these results. In Europe the 2000 Brussels Regulation has taken notice of that criticism and now provides for such an autonomous interpretation in its Article 5(1)(b).50 Pursuant to this Article, the place of performance of the payment obligation is where the goods were delivered or should have been delivered.

D.  Time for Payment

I.  Contract

36.16  The time for payment is usually established in the parties’ contract or by previous dealings or trade usages. In this regard, the general remarks made on the time for delivery apply correspondingly.51

36.17  In many instances, especially in instalment contracts, the time for payment will depend on specified events such as the delivery of an individual instalment or the otherwise completion of a part of the performance by the seller. For example, the contract may provide that part of the price is to be paid immediately after conclusion of the contract, another part after notice of shipment, a further part upon arrival, and the remainder after installation or approval of the goods.

36.18  On the question as to whether untimely payment justifies avoidance of the contract see below.52

II.  Default Rules

36.19  Failing any agreement between the parties and absent any practices or usages, the default rules apply. In this regard, the legal systems and international instruments again display a variety of approaches. The earliest point established as the time for payment is the conclusion of the contract. In a number of civil law jurisdictions this is the position taken in context of the general law of obligations.53 Other legal systems arrive at the same result by requiring performance to be carried out immediately54 or without undue delay.55 Another approach is to rely on the time of delivery as the relevant time for payment.56 This approach is sometimes found in the (p. 459) specific sales part of those civil law jurisdictions that would otherwise rely on the time of the conclusion of the contract. Finally, some legal systems require payment to be made upon demand by the seller if another time cannot be inferred.57 Some systems following this approach do not allow such demand to be made before the goods are handed over or placed at the buyer’s disposal.58 At the international level, uniform law and projects also display differences in approaches. The CISG by default requires payment to be made upon the delivery of the goods.59 On the other hand, the uniform projects require payment to be made within a reasonable time after the conclusion of the contract.60

36.20  Whether these approaches play out differently in practice is doubtful. Independent of whether the time for performance is linked to the conclusion of the contract or to the delivery, in the absence of contractual agreements, delivery of the goods and payment of the purchase price are always concurrent performances and thus each party is entitled to hold back performance until the other party has performed. In other words, seeing that both parties can always resort to requiring performance step by step, in practice, payment will by default at the earliest be due upon delivery of the goods.61

36.21  Legal systems may permit the buyer to postpone payment of the purchase price until it has had a chance to inspect the goods. For example, the phrase ‘at the earliest’, as used by some legal systems62 as well as the CISG,63 does not oblige the buyer to pay before it has had a chance to inspect the goods.64 Such inspection opportunity is typically different from the general requirement to examine the goods and notify the seller of defects as discussed in Chapter 34. Rather, such provisions are designed to permit a short and brief examination of the goods mostly relating to the quantity of the goods. Where the buyer makes use of the right to inspect the goods before payment and does not discover any non-conformities, this does not necessarily mean that the buyer is deprived from later relying on these non-conformities.

36.22  In the event the goods are lost or destroyed before delivery but during a time at which they are at the buyer’s risk, payment must be made within a reasonable period after the loss or destruction.65

(p. 460) E.  Currency

I.  Contract

36.23  All legal systems—at least implicitly—generally acknowledge that the parties themselves may agree on the currency in which the purchase price is expressed.66 Some ambiguity may nevertheless need to be resolved, as numerous jurisdictions describe their currency in the same fashion. For example, ‘Dollar’ is the name of the official currency in at least 36 countries. Where such ambiguity arises, the construction of the contract will depend on factors such as the place of payment and the places of business of the parties and possibly the governing law of the contract.67

36.24  Where the contract specifies a purchase price in a particular currency, this may strongly suggest, but will not necessarily mean, that payment must be made in that currency. A number of legal systems expressly permit that the purchase price may be paid by the debtor in the legal currency of the place of payment if it is expressed in a currency other than that of the place of payment.68 However, also in those legal systems, the right of the debtor to choose the currency in which it effects payment is sometimes limited where the parties have agreed that the debtor is to make payment only in the currency agreed upon.69 Other legal systems, and amongst them the CISG, however, are more restrictive and strictly bind the buyer to the currency in which the purchase price is expressed and consequently do not recognize a right to choose.70

36.25  While the right of the debtor to choose the currency in which it effects payment is expressly dealt with in a number of jurisdictions, provisions on a possibly existent right of the seller to request payment to be effected in a different currency than agreed are to be found only in some select domestic legal systems and at the international level in the PICC.71 According to the rules established there, the seller is entitled to request the buyer to make payment in the currency of the place of payment, where it is impossible for the buyer to effect payment in the contractually agreed currency. The CISG generally does not grant the seller a right to require payment in the currency of the place of payment, if the purchase price is expressed in a different currency.72 However, it is acknowledged under the CISG that this right also exists where it is impossible for the buyer to pay the purchase price in the agreed-upon currency.73

(p. 461) 36.26  Where the contract specifies a purchase price in a particular currency but a right to pay in a different currency or to require payment in a different currency exists, the contractually specified currency becomes the ‘money of measurement’—that is, it establishes an objective measure to ascertain whether the amount paid in the other currency satisfies the obligation.74 In this context, but also more generally, many legal systems recognize a principle of nominalism. This principle simply states that the value of the payment is to be assessed at the time payment is due—be it because of the contract or because of a judgment. Consequently, a buyer bears the risk of a currency appreciating while the seller bears the risk of a currency depreciating between the time of contract conclusion and payment.75

36.27  As in sales contracts both seller and buyer face certain risks regarding the development of a currency, parties at times attempt to avoid these risks by choosing an index as a reference point for the purchase price. An example of this is where the parties express the purchase price in gold. The purposes of such ‘gold clauses’ is generally not to require payment in gold itself but rather to use gold as the measure by which the value of the obligation is to be assessed. In other words, the buyer must pay the seller whatever it would cost in the chosen currency to buy the stipulated value of gold on the market at the time payment is due.76 In recent decades, the gold clause has lost most of its practical importance. Nowadays, the risk of currency fluctuation is more commonly dealt with by allowing the seller to choose between several different currencies for payment (so-called multiple currency clauses) or by reference to a consumer price index.

36.28  In some legal systems, especially common law jurisdictions, the interplay of a choice of currency and the enforcement of a monetary obligation gave rise to problems.77 In common law jurisdictions it is only relatively recently that courts have considered themselves capable of awarding judgments in foreign currencies.78 This evolution has seen a change in the applicable date for any necessary conversion. It is now no longer necessary for sums to be converted at the time of the breach; rather instead the date for conversion (if one is necessary) is the date the judgment or award is payable. This is ultimately simply an expression of the principle of nominalism.

II.  Default Rules

36.29  The situations in which it is necessary to turn to a default rule to determine the currency in which the purchase price must be paid will be rare as parties will typically—expressly or impliedly—nominate a currency.79 Where this has not occurred, legal systems typically state that it is the currency of the place of payment that is relevant;80 a natural consequence of the fact that legal systems almost always define their own currency as legal tender. The place of (p. 462) payment is to be determined as described above.81 Where several places of payment exist, regard should be had to the financial environment of the transaction.82

F.  Modes of Payment

36.30  The evolution of trade has increasingly separated buyers and seller, especially in a territorial sense. Accordingly, modes of payment which accommodate this separation have been developed. The intricacies of these modes have themselves frequently necessitated regulation whether by national legislators or industry bodies. It seems reasonable to assume that at the forefront of the purposes of these new modes of payment has been the protection of the respective parties. For example, the buyer will only want to pay when it feels certain that it will receive the goods, and the seller will only want to part with the goods when it feels certain that it will receive payment.

36.31  Closely related to the mode of payment is the question of what can constitute payment. This issue has been discussed elsewhere in the context of barter.83 However, where there is a requirement that payment be provided in monetary form, attention must be given to what amounts to legal tender. It is common that coins or paper bills are used as money and thus are the standard case of legal tender. However, there are still certain items which, for historic reasons to this very day, fall under legal tender. The probably most famous example is postage stamps, which may in some legal systems still be used as legal tender. Sometimes this depends on whether the post is a state enterprise or privatized company.84

I.  Default Rules

36.32  In the absence of any agreement, some legal systems examined still maintain the traditional rule that the price is to be paid in cash.85 The CISG also primarily envisages that the purchase price will be paid in cash.86 Naturally, this approach was originally designed for situations where seller and buyer are in one and the same place. However, even where buyer and seller are face to face, nowadays payment is made increasingly by credit cards or debit cards. In the context of distance selling it may be doubted whether payment in cash still actually occurs.

36.33  To this day a number of very specific rules on the payment of the purchase price can still be found. For example, in the United Kingdom 20 pence pieces and 50 pence pieces are only legal tender in amounts up to ten pounds.87 Similarly one penny and two pence pieces are legal tender in amounts up to 20 pence.88 In Switzerland the creditor is not obliged to accept more than 100 coins.89 In the European Community the Council Regulation (EC) No 974/98 (3 May 1998) states that, within Member States, no one is obliged to accept more than 50 coins in any single payment.90

(p. 463) II.  Contract

36.34  Modern trade has revealed the significant limitations of cash as a mode of payment. Trade has therefore developed a variety of different modes of payment of which only an overview can be provided here.91 As discussed below these different means frequently involve third parties and other processes. Where that is the case it is important to note that the buyer is not generally relieved of its ultimate obligation to pay the seller. Thus the seller usually retains its right to seek the purchase price from the buyer even where, through no fault of the buyer, a bank has refused to honour a letter of credit.92 The same is true of negotiable instruments.93

36.35  Payment by open account is a common mode of payment especially in international trade although parties will typically only apply that mode where a certain level of trust has been reached.94 That trust is necessary as the goods are sent to the buyer before payment, and payment is only made upon receipt of the goods and the invoice or an agreed time thereafter.95

36.36  Far greater security is offered to the seller by the use of documentary collection. Nevertheless, some trust by the seller is still needed as again payment only occurs after delivery. The seller after shipping the goods provides the transport documentation, any other commercial documents and the bill of exchange to its bank. This bank then forwards the documents to the buyer’s bank. The buyer inspects the documents and pays or agrees to pay the price in return for possession of the documents. Once the buyer has obtained possession of the documents it is then able to collect and deal with the goods.96 There are variations to this sequence. For example, in a ‘clean collection’ only financial documents are sent and collected, meaning payment may occur before the goods have been shipped.97 Additionally, in a ‘direct collection’ scenario, the seller may send instructions directly to the buyer’s bank with the permission of the seller’s bank.98

36.37  One of the advantages of payment by documentary collection is that there is an internationally well-established set of rules dealing with this mode of payment. Since 1 January 1996 the ICC Uniform Rules for Collections 522 have been in force and gained wide acceptance.

36.38  Another popular mode of payment is the use of a negotiable instrument. The most important examples are promissory notes and drafts such as bills of exchange or cheques. In many legal systems specific legislation has been enacted for all or at least some of them.99 At the international level, efforts date back to 1930 when the League of Nations produced the Convention Providing a Uniform Law for Bills of Exchange and Promissory Notes. It had limited success although appearing to inspire some subsequent domestic legislation. In 1988 the United Nations Convention on International Bills of Exchange and International Promissory (p. 464) Notes was adopted by the UN General Assembly but it is yet to enter into force.100 Bills of exchange and cheques contain directions to a bank for payment to be made against presentation of the document, whereas a promissory note contains a promise to pay.101 Bills of exchange are often used as part of the documentary collection process outlined above.

36.39  Arguably the most popular mode of payment for larger international trade transactions and the most secure for both parties is payment by way of documentary credit. Documentary credits are a type of letter of credit, and the terms are often used interchangeably, although letter of credit is slightly broader. The importance of documentary credits to international trade has been repeatedly recognized by courts102 and commentators103 alike. Its importance is further recognized by the 1995 United Nations Convention on Independent Guarantees and Stand-by Letters of Credit.104 This mode of payment often appears in contracts by way of the shorthand reference ‘L/C’.105

36.40  At its most simple this procedure involves the buyer requesting its bank to enter into an agreement with the seller to pay the seller a sum of money upon presentation of certain documents. Typically the required documents are ones which give the buyer some comfort that the goods have been delivered, such as a bill of lading, insurance certificate, etc. Often, however, the procedure is more complicated. It may be necessary to involve another bank at the seller’s place of business. Furthermore parties generally tailor the arrangement to suit their particular needs. As a result there are a variety of species of letters of credit.106 However for present purposes the two most important distinctions are between revocable and irrevocable credits, and confirmed and unconfirmed credits.

36.41  As the name suggests an irrevocable letter of credit cannot be revoked. For this reason it offers far greater security to sellers, and indeed in international transactions there is a presumption that letters of credit are intended to be irrevocable.107 The confirmed versus unconfirmed letter of credit arises in situations where two or more banks are involved. The second bank, typically located at the seller’s place of business, can either simply advise a letter of credit has been issued by the buyer’s bank, or can confirm the letter of credit. If the second bank confirms the letter of credit then it is assumes joint liability with the buyer’s bank. An irrevocable confirmed letter of credit is therefore the most secure mode of payment for an exporting seller.

36.42  In a documentary credit transaction the bank largely ignores the underlying sales transaction. It is not interested in issues such as actual conformity or delivery. Rather the bank must simply (p. 465) make payment on the basis of the terms of the documentary credit. There is however an exception for situations involving fraud.108

36.43  Given the popularity of this mode of payment it is unsurprising that standardized procedures such as the Uniform Customs and Practice 600 (UCP 600 and eUCP supplement) have been developed. These standards establish specific requirements that particular documents must meet109 and examination duties on the side of the bank.110 The acceptance of the UCP published by the International Chamber of Commerce is such that they are understood to reflect an international trade usage for the purposes of the CISG.111

36.44  The closest mode to cash payment is payment by credit transfer. This sometimes simply involves the transfer of money from the buyer’s bank account to the seller’s bank account. Unsurprisingly this is frequently referred to as a bank or telegraphic transfer. This mode of payment is usually completely disconnected from the sales transaction. The buyer simply instructs its bank to transfer money without an explanation as to why that transfer is to be made. This mode of payment does not envisage the bank assuming any risk for the solvency of the buyer.

36.45  In day-to-day consumer transactions, consumers will often pay using a card. Closely connected to payment by bank transfer is payment by debit card. In these instances the buyer electronically accesses its own bank account and has the money transferred to the seller. Who bears the risk of insolvency in these situations depends on a variety of factors. For example, where the buyer merely allows the seller, at a later point in time, to debit the buyer’s account, the seller bears the risk of insufficient funds. Where the buyer conducts its purchase using a store debit card it is the buyer who bears the risk of the seller’s insolvency. Finally, in most modern electronic systems it is possible to ascertain immediately whether or not there are sufficient funds in the buyer’s bank account. Consequently, the seller is not generally exposed to risk. Thereby this technical development can be seen as reinforcing the principle of concurrent performances.

36.46  Another popular form of payment by card is the use of a credit card. Unlike letters of credit and negotiable instruments, providing credit card details is in the ordinary course likely to be considered complete fulfilment of the payment obligation. In these circumstances the seller would not be able to pursue the buyer if the credit card company subsequently fails to give the seller the purchase price.112 The liability of the credit card company typically arises because of the contractual agreement that exists between it and the seller. This position can naturally be altered by the agreement of the parties.

36.47  Particularly in the context of consumer transactions new platforms and modes of payment are continuing to emerge that are increasingly independent from banks or other institutions traditionally associated with handling money such as post offices. In many parts of the world these platforms are a commercial response to the proliferation of e-commerce transactions, in particular online auction sites. In other parts of the world modes of payment have developed due to a particular lack of banking infrastructure. A notable example of such is the system of mobile money utilized throughout Africa. Purchasers are able to load money onto their mobile phone account and, through the use of text messages, instruct the phone company to transfer the mobile phone user’s money to the seller, who also may only have a mobile phone account. Media reports suggest that such transactions together amount to several billions of dollars a year.

(p. 466) III.  Set-Off

36.48  In most instances the payment obligation may be satisfied by setting off monies or obligations owed to the buyer. Whether this is permitted will be a matter to be determined by the parties’ contract and the applicable law.113

G.  Means of Securing the Unpaid Seller

36.49  If the seller has not received the purchase price before or upon the delivery of the goods the crucial question arises how it can be protected against other creditors of the buyer especially in case of the buyer’s insolvency. The solutions to this problem vary significantly among the legal systems. Here, only a small selection can be offered.

I.  Retention of Title

36.50  The first possibility for a seller is to retain title to the goods. In most legal systems the parties are free to make the transfer of title in the goods conditional on an event—typically payment of the price by the buyer.114 The seller thus remains the owner of the goods even after their delivery. In civil law systems typically reference is made to ‘retention of title’ or ‘pactum reservati dominii’. In common law jurisdictions these clauses have also become known as ‘Romalpa clauses’, although that name is better reserved for only those clauses which create a fiduciary relationship.115 In the European Union the Late Payment Directive116 expressly obliges the Member States to provide that the seller retains title to goods until they are fully paid for if a retention of title clause has been expressly agreed between the buyer and the seller before the delivery of the goods.

36.51  It is generally considered that these clauses are of great practical importance. There are, however, exceptions. While Switzerland and Turkey generally acknowledge the use of retention of title clauses in contracts,117 the practical importance thereof is virtually insignificant as retentions of title must be registered and can thus not simply be used in non-negotiated terms or (p. 467) otherwise simply be included by the parties.118 A registration requirement is also found at the international level in the OHADA AUDCG.119 No noticeable restriction to the practical importance results from the form requirement that some legal systems impose on retention of title clauses.120

36.52  In other legal systems, retention of title clauses are not acknowledged as such. However, in these legal systems, assistance for the unpaid seller may be found in the insolvency laws.121 Interestingly, the Nordic systems refer to these methods in their actual sale of goods Acts.122

36.53  At the international level, the CISG recognizes the right of the seller to retain title. While the Convention does not decide on the validity of a clause providing for the retention of title on account of Article 4 sentence 2(b) CISG,123 such clause does not constitute a breach of the seller’s obligation to transfer title under Article 30 CISG.124 However, where under the applicable domestic law it is sufficient for the seller to unilaterally declare retention of title in order to effect it, the goods suffer from a legal defect under Article 41 CISG if the seller does so subsequently to the conclusion of the contract in violation of the agreement.125

36.54  Whether a clause in a contract actually amounts to a retention of title is a matter of interpretation. The mere indication that payment is to be made at a set period after delivery does not of itself prevent the passing of property.126 The retention of title clause must clearly indicate that the passing of property is conditional on the fulfilment of particular contractual obligations of the buyer, usually but not necessarily limited to, the payment obligation.

36.55  The mere fact that the seller retains title to the goods does naturally not stop the buyer from dealing with the goods in a manner contrary to the seller’s title.127 First, before payment has been made, the buyer may have resold the goods to a third party. The seller is of course still in need of protection. In a number of legal systems so-called prolonged retention of title clauses have been developed. These clauses can be drafted in different ways. In civil law jurisdictions familiar with such clauses, the buyer—although not becoming the owner—is entitled to resell the goods and transfer title to a third party. In turn, the buyer in advance assigns to the seller its future claim for the purchase price against the third party but is entitled to collect the purchase price from the third party.128

(p. 468) 36.56  In common law jurisdictions ‘Romalpa clauses’ may not only reserve title in the seller, but impose further obligations on the buyer in the event it deals with the goods.129 It is not simply an assignment of the buyer’s claim for the future purchase price. For example, in a true Romalpa clause the buyer will be found to hold the goods on trust for the seller. The buyer effectively becomes a trustee and the seller a beneficiary under a trust. As a result of this fiduciary relationship the seller may be able to avail itself of remedies such as tracing.130 The tracing allows the seller to follow the goods or those assets into which the goods have been converted into the hands of a third party.

36.57  Difficult questions arise where, notwithstanding a retention of title clause, a buyer in some way destroys or otherwise transforms the original goods in the process of creating a new product. The central issue is that typically the buyer in this process acquires ownership of the new good. Sellers often try to escape this result by including specific provisions in their retention of title clause. The effects of such clauses differ greatly among legal systems both in content as well as in acknowledgement. In common law jurisdictions, the clause may depending on its wording effectively grant an equitable interest or security interest over the newly manufactured goods.131 However, the effectiveness of such clauses will depend on the laws governing security interests in general; for example, registration may be required.132 In other systems parties either try to abrogate provisions leading to the acquisition of ownership by transformation. In other instances they stipulate that the seller shall be regarded the transforming person. Whether such clauses will be upheld is often unpredictable and subject to dispute. In particular, where the value of the newly manufactured goods significantly exceeds the value of the original goods sold, courts may find it unreasonable that the seller should become owner of the new goods.133

II.  Other Means of Securing the Unpaid Seller

1.  Purchase Money Security Interest

36.58  In Australia, Canada, New Zealand, and the USA it may be possible for sellers to obtain a ‘purchase money security interest’.134 This security interest is created by agreement between the parties. Where the seller does not have possession of the goods, this agreement must typically be in writing.135 To be effective the security must be attached to the goods.136 It is furthermore necessary for the security interest to be ‘perfected’ in that either it is registered or the secured party takes possession of the goods. By obtaining a perfected purchase money security interest the unpaid seller obtains priority over most other creditors of the buyer.

(p. 469) 2.  Seller’s Lien and Right to Retain Possession

36.59  Common law jurisdictions give protection to unpaid sellers by allowing them to retain possession notwithstanding the passing of title.137 This right is available to a seller in circumstances where the seller satisfies the definition of an ‘unpaid seller’138 and (a) where the goods have been sold without any stipulation as to credit, (b) where the goods have been sold on credit but the term of credit has expired, or (c) where the buyer becomes insolvent.139

36.60  Civil law legal systems may give a similar right albeit in different ways. Where the buyer has acquired title but the seller has not yet delivered the goods,140 the seller may be able to suspend performance of the delivery obligation.141 In other instances the seller may be protected by the rules of property law. For example, if in a documentary sale delivery of the goods and passing of title occur by handing over the documents to the seller, then the contract has effectively been performed and, technically speaking, there is no possibility for the seller to ‘suspend’ performance. The buyer may then be able to bring a claim for possession based on its ownership. It is then for the applicable property law to decide whether the seller may invoke a right to retain possession based on the fact that payment has not yet been effected by the buyer.

3.  Seller’s Right to Reclaim the Goods

36.61  In the USA, unpaid sellers are able to reclaim possession of the goods after delivery if the buyer is discovered to have been insolvent at the time it received the goods.142 Typically, this opportunity only exists for a short period of time; however time limits may not apply where contrary representations had been made to the seller in the period leading up to delivery.143

4.  Right of Stoppage in Transitu

36.62  The third scenario in which the unpaid seller may act to secure payment is by exercising a right of stoppage in transitu. Such a right finds its origins particularly in common law144 as well as in Nordic jurisdictions.145 It is now also to be found in more recent civil law codifications.146 At the international level, the right of stoppage has found its way into Article 71(2) CISG. It can be classified as a specific case of the general right to suspend performance.147 This is due to the fact that this right is exercised against the buyer rather than the carrier. The typical scenario envisaged is that where there is endangerment of the contract in between legal delivery and physical handing over of the goods to the buyer.148 In practice, this comes up in distance contracts, where the dispatch of the goods fulfils the delivery obligation by the seller. If the seller is subsequently allowed to prevent the physical handing over to the buyer, this effectively amounts (p. 470) to a ‘suspension of performance after performance’.149 The situation obviously does not arise where the place of delivery is the place of the buyer. The stoppage of the goods in transit to that place in this scenario is none other than suspending performance before performance.150

36.63  The exact requirements for the right of the seller to stop the goods in transit are not uniformly established by legal systems. It is clear that there must be a serious threat to the seller’s claim for the purchase price, in that the buyer’s financial situation must deteriorate significantly. Whether such significance is only given in case of insolvency of the buyer depends both on the applicable law as well as the definition of insolvency employed by the respective legal system.151 The respective legal system usually also sets out in some detail what constitutes transit152 and how stoppage is to be effected.153

36.64  In common law jurisdictions the right of stoppage is of particular relevance for the seller as it typically loses title with legal delivery—that is, before transit. In the act of delivery it also loses possession of the goods and thus cannot exercise an unpaid seller’s lien to secure its claim for the purchase price. When exercising the right of stoppage the unpaid seller effectively regains possession of the goods and can thus exercise its lien. The right to stoppage in transitu may be lost when a buyer, who has lawfully received documents of title, transfers those documents to a bona fide third party purchaser.154

Footnotes:

1  See for Art 53 CISG; OHADA Art 263(1) AUDCG; Afg Art 1035(1) CC; Are Art 489 CC; Arg Art 1323 CC; Aus (Vic) s 34 SGA; Ben Art 1582 CC; Bhr Art 381 CC; Bfa Art 1582 CC; Bol Art 584 CC; Bra Art 481 CC; Caf Art 1582 CC; Can (BC) s 31 SGA; Che Art 184(1) CO; Chl Art 1793 CC; Civ Art 1582 CC; Cmr Art 1582 CC; Cog Art 1582 CC; Col Art 1849 CC; Cri Art 1049 CC; Cub Art 334 CC; Cze Art 588 CC; Deu § 433 CC; Dza Art 351 CC; Ecu 1759 CC; Egy Art 418 CC; Eng s 27 SGA; Esp Art 1.445 CC; Est § 208(1) CC; Fra Art 1582 CC; Gab Art 1582 CC; Gha s 21 SGA; Gin Art 1582 CC; Gtm Art 1790 CC; Hkg Art 29 SGO; Hnd Art 1605 CC; Hun Art 365(1) CC; Ind Art 31 SGA; Irl s 27 SGA; Irn Art 338 CC; Isr s 1 Sales Law; Jor Art 465 CC; Jpn Art 555 CC; Ken s 28 SGA; Khm Art 554 CC; Kor Art 563 CC; Kwt Art 454 CC; Lbn Art 372 CO; Lby Art 407 CC; Ltu Art 6:305 CC; Lva Art 2002 CC; Mac Art 869 CC; Mar Art 478 CO; Mdg Art 1582 CC; Mex 2248 CC; Mli Art 1582 CC; Mng Art 243 CC; Mrt Art 489 CO; Mwi s 27 SGA; Mys Art 31 SGA; Ner Art 1582 CC; Nga s 27 SGA; Nic 2530 CC; Nzl s 29 SGA; Pan Art 1215 CC; Per Art 1529 CC; Phl Art 1582 CC; Prt Art 874 CC; Pry Art 737 CC; Qat Art 419 CC; Sco s 27 SGA; Sgp Art 27 SGA; Slv 1597 CC; Syr Art 386 CC; Tcd Art 1582 CC; Tgo Art 1582 CC; Tha Art 486 CC; Tun Art 564 CO; Tur Art 207(1) CO; Twn Art 367 CC; Tza s 27 SGA; Uga s 27 SGA; Ury Art 1661 CC; Ven Art 1474 CC; Vnm Art 428 CC; Art 50 Com C; Wal s 27 SGA; Yem Art 451 CC; Zmb s 27 SGA; Zwe s 29 SGA.

2  See for OHADA Art 263(1) AUDCG; Afg Art 1035(1) CC; Are Art 489 CC; Arg Art 1323 CC; Aus (Vic) s 6(1) SGA; Ben Art 1582 CC; Bhr Art 381 CC; Bfa Art 1582 CC; Bol Art 584 CC; Bra Art 481 CC; Caf Art 1582 CC; Can (BC) s 6(1) SGA; Che Art 184(1) CO; Chl Art 1793 CC; Civ Art 1582 CC; Cmr Art 1582 CC; Cog Art 1582 CC; Col Art 1849 CC; Cri Art 1049 CC; Cub Art 334 CC; Cze Art 588 CC; Deu § 433 CC; Dza Art 351 CC; Ecu 1759 CC; Egy Art 418 CC; Eng s 2(1) SGA; Esp Art 1.445 CC; Est § 208(1) CC; Fra Art 1582 CC; Gab Art 1582 CC; Gin Art 1582 CC; Gtm Art 1790 CC; Hkg s 3(1) SGO; Hnd Art 1605 CC; Hun Art 365(1) CC; Ind s 4(1) SGA; Irl s 1(1) SGA; Irn Art 338 CC; Isr s 1 Sales Law; Jor Art 465 CC; Jpn Art 555 CC; Khm Art 554 CC; Kor Art 563 CC; Kwt Art 454 CC; Lbn Art 372 CO; Lby Art 407 CC; Ltu Art 6:305 CC; Lva Art 2002 CC; Mac Art 869 CC; Mar Art 478 CO; Mdg Art 1582 CC; Mex 2248 CC; Mli Art 1582 CC; Mng Art 243 CC; Mrt Art 489 CO; Mys s 4(1) SGA; Ner Art 1582 CC; Nic 2530 CC; Nzl s 3(1) SGA; Pan Art 1215 CC; Per Art 1529 CC; Phl Art 1582 CC; Prt Art 874 CC; Pry Art 737 CC; Qat Art 419 CC; Sco s 2(1) SGA; Sgp s 2(1) SGA; Slv 1597 CC; Syr Art 386 CC; Tcd Art 1582 CC; Tgo Art 1582 CC; Tha Art 486 CC; Tun Art 564 CO; Tur Art 207(1) CO; Twn Art 367 CC; Ury Art 1661 CC; Ven Art 1474 CC; Vnm Art 428 CC; Art 50 Com C; Wal s 2(1) SGA; Yem Art 451 CC.

3  See paras 8.16 et seq. See also Schwenzer/Kee, IHR (2009), 229–36.

4  The ICC INCOTERMS® in the respective B1 clause also require the buyer to pay ‘as provided in the contract of sale’.

5  See paras 10.14 et seq.

6  For a discussion of gross disparity see paras 21.05 et seq.

7  See paras 21.23 et seq, 21.05 et seq.

8  See on this issue in detail Ch 45.

9  See for Common Law (UK) Benjamin’s Sale of Goods, paras 9-023 et seq.

10  Are Art 355(1) Federal CC; Bhr Art 332(1) CC; Che Art 69(1) CO; BGer, 29 March 1949, BGE 75 II 137, 140; Deu § 266 CC; Dza Art 277 CC; Egy Art 342(1) CC; Jor Art 330(1) CC; Kwt Art 406(1) CC; Lby Art 329(1) CC; Mar Art 254(1) CO; Qat Art 371(1) CC; Syr Art 341(1) CC; Tun Art 268 CO; Tur Art 84(1) CO; Yem Art 412 CC.

14  This is rule is epitomously found in Pinnel’s Case (1602) 5 Co Rep 117a, and Foakes v Beer [1884] UKHL 1. See also discussion on consideration in paras 9.13 et seq and paras 14.02 et seq. In limited circumstances related but not directly concerning the sale of goods the rule has been amended by statute, see eg Can s 16 Mercantile Law Amendment Act (1990).

16  ibid.

17  Ibid.

18  Common Law (UK) Chitty on Contracts, para 3-086.

19  Arm Art 142 CC; Blr Art 141 CC; Chn Regulation on Exchange Control (revised in 2008); Jpn Arts 31(2), (3), 403 CC; Kaz Art 127 CC; Kgz Art 35 CC; Khm Arts 316, 317 CC; Kor Art 377 CC; Mac Art 543 CC; Mng Art 217 CC; Phl Art 1249 CC; Rus Art 140 CC; Tha Arts 196, 197 CCC; Tjk Art 155 CC; Twn Arts 201, 202 CC; Ukr Art 192 CC; Uzb Art 94 CC; Vnm Regulation on Exchange Control. Also see Ibero-America Muñoz, p 338.

20  Common Law (UK) Benjamin’s Sale of Goods, para 9-047; cf PT Berlian Laju Tanker TBK, Brotojyo Maritime Pte Ltd v Nuse Shipping Ltd [2008] EWHC 1330 (Comm); Che Schwenzer, paras 7.09 et seq; Deu MünchKommBGB/Westermann, § 433, para 76.

23  See eg Ibero-America Muñoz, p 338; Mar Safi, Aqd Al Bayaa, p 340.

24  Common Law (UK) Benjamin’s Sale of Goods, para 9-047, but note also practical considerations for CIF contracts discussed at para 19-087; Aus Deer Park Engineering Pty Ltd v Townsville Harbour Board [1975] VR 338 (VSC); Can Fridman, p 241; Eng Robey v Snaefell Mining Co (1887) QBD 152; Hkg Komala Deccof & Co SA v Perusahaam Pertanbangan Ninyik Dan Gas Bumi Negara (Pertamina) [1982] 1 HKC 47 at 51–2; Nir ICS Computing Ltd and Fargell Ltd v Capital One Services Inc [2002] NI 76 (QB); Sco Bank of Scotland v Seitz 1990 SLT 584 (First Division).

25  Are Art 361 CC; Bhr Art 338 CC; Arm Art 355 CC; Blr Art 297 CC; Bra Art 327 CC; Che Art 74(2) no 1 CO; Chn Art 160 CL (located in specific sales chapter); Dza Art 282 CC; Egy Art 347 CC; Geo Art 386 CC; Irq Art 396(1) CC; Jor Art 336 CC; Kaz Art 281 CC; Kwt Art 412 CC; Lby Art 334 CC; Qat Art 376 CC; Rus Art 316 CC; Syr Art 345 CC; Tjk Art 339 CC; Tkm Art 397 CC; Tur Art 89(2) no 1 CO; Uzb Art 246 CC; Vnm Art 54(1) Com C (located in specific sales chapter); Yem Art 416 CC.

26  See s 48(1) of the respective sale of goods Acts; Dnk, however, seems to no longer establish a specific provision.

27  See Art 57(a) CISG; OHADA Art 266 AUDCG.

28  See Art 6.1.6(1)(a) PICC; Art 7:101(a) PECL; Art III.-2:101(1)(a) DCFR.

29  Hrv Art 438 CO; Mda Art 18 SL; Prt Art 885(2) CC.

30  See in detail on the place of delivery paras 29.37 et seq, noting in particular that the default place of delivery (and thus payment) may be where goods are located at the time of contracting.

32  For a possibly different approach to the place of payment in general see para 36.06.

33  Jpn Art 574 CC; Khm Art 555 CC; Kor Art 586 CC; Phl Art 1528 CC; Twn Art 371 CC; Vnm Art 438(1) CC;

34  Arg Art 1424 CC; Bol Art 636(II) CC; Art 862 Com C; Chl Art 1872 CC; Art 155(2) Com C; Col Art 1929 CC; Ecu Art 1839 CC; Esp Art 1.500 CC; Gtm Art 1825 CC; Mex Art 2294 CC; Art 380 Com C; Nic Art 2661 CC; Per Art 1558 CC; Prt Art 885(1) CC; Pry Art 763 CC; Slv Art 1674 CC; Ury Art 1728 CC; Ven Art 1.527 CC.

35  See Afg Art 1109 CC; Are Art 562 CC; Bhr Art 428 CC; Dza Art 387 CC; Egy Art 456 CC; Irq Art 573 CC; Al Fadly, p 154; Jor Art 526 CC; Kwt Art 501 CC, Omran, pp 229–30; Lby Art 445 CC; Qat Art 467 CC; Syr Art 424 CC; Tun Al Ahmadi, pp 404–5; Yem Art 551 CC.

36  Hrv Art 438 CC; Est § 213 CO; Ltv Art 2033 CC; Ltu Art 6.314 CC; Mda Art 18 SL.

37  See Art 57(1)(b) CISG; OHADA Art 266 AUDCG.

38  See para 29.05.

40  See von Caemmerer, Zahlungsort, pp 3ff, noting parties regularly opt out of this rule.

41  Fra Art 1247(3) CC. See also von Caemmerer, Zahlungsort, pp 3ff, noting parties regularly opt out of this rule.

42  Aut Art 905(2) CC.

43  Deu §§ 270(1), (4), 269 CC.

45  See Shari’a (Are) Al Shamsy, pp 578–9; Afg Art 1109 CC; Are Art 562 CC; Bhr Art 428 CC; Dza Art 387 CC; Egy Art 456 CC; Irq Art 573 CC, Al Fadly, pp 154–5; Jor Art 526 CC; Kwt Art 501 CC, Omran, pp 229–30; Lby Art 445 CC; Per Art 1558 in fine CC; Qat Art 467 CC; Syr Art 424 CC, Al Ahmadi, pp 404–5; Ven Art 1.527 in fine CC; Yem Art 551 CC.

46  Esp Art 22 Spanish Procedural Civil Code; Prt Art 65 Portuguese Procedural Civil Code; Che Art 31 CCP; Deu § 29 CCP.

47  EU Art 5 no 1 Brussels I Regulation; Art 5 no 1 Lugano Convention (with regard to Che, Isl, and Nor).

49  See ibid; Schwenzer, IPRax (1989), 274ff.

50  See Schlechtriem/Schwenzer/Mohs, Art 57, para 25 relying on the drafting history and citing further references.

51  See paras 29.45 et seq.

52  See on the concept of timely performance paras 47.61 et seq, 47.125 et seq.

53  See for Are Art 360 CC; Bhr Art 337 CC; Dza Art 281 CC; Egy Art 346 CC; Grc Art 323 CC; Jor Art 335 CC; Kwt Art 410 CC; Lby Art 333 CC; Mar Art 127 CO; Qat Art 375 CC; Syr Art 344 CC; Tun Art 136 CO; Yem Art 415 CC.

54  See for Bra Art 331 CC; Che Art 75(1) CO; Deu § 271(1) CC; Tur<