Performing a foreign trade contract: the payment side

Performance of a foreign trade contract is usually discussed from the delivery side: logistics, customs, acceptance. The payment side seems simpler. In practice, it is the payment side that draws most of the bank’s questions, and it is the payment side that stays open the longest. Let’s look at what to build into the contract and how to run payments until the contract is closed.

Contract terms the payment depends on

The payment starts with the text of the contract. Check that it includes:

• Price currency and payment currency. They may differ. In that case the contract needs a conversion rule: at what rate and as of what date.
• Payment terms. Advance payment, payment after shipment, payment in installments. For each part: the amount or percentage and the deadline.
• Delivery deadline after the advance payment. It determines when the advance becomes “open” for the bank.
• Bank details and how they are changed. Bank details are changed only by a supplementary agreement or a signed letter, not by a messenger message.
• Payment by a third party. If you pay through an agent, it helps to state explicitly that payment may come from a third party. Article 313 of the Russian Civil Code allows this, but it is easier for the beneficiary’s bank when it is written in the contract.
• Bank charges. Who pays the intermediary banks’ fees. Otherwise the supplier will receive less than the invoice amount and ask for a top-up.

Choose the form of settlement separately. Prepayment is the simplest, but the whole delivery risk is on the buyer. A letter of credit and a documentary collection share the risk between the parties, but they take longer to arrange and are not available in every country. Companies from Russia most often choose prepayment in installments through an agent.

Registration with the bank

If the contract amount is above the threshold set by Bank of Russia Instruction No. 181-I, the contract is registered with your bank. The thresholds differ for imports and exports. The bank assigns the contract a unique contract number (UCN). This number is stated in payment documents and in the customs declaration. More: contract registration with the bank.

Paying through an agent does not cancel the registration. The contract stays registered with your bank, and the bank expects you to confirm that the parties’ obligations have been fulfilled.

A series of payments under one contract

A contract is rarely paid in a single payment. An advance, interim payments, the balance after acceptance. A convenient structure: one agency agreement for the whole contract and a separate payment order for each payment. Each payment order has its own rate and fee, so the cost of each part is visible.

Watch the dates. In the bank control statement, the bank goes by the deadlines in the contract: when delivery is expected after the advance and when payment is expected after delivery. If deadlines shift, this is documented in a supplementary agreement in advance, not after the deadline has passed.

Keep a payment register: date, amount, currency, rate, invoice number, payment order number, what has been delivered. This register is later reconciled with the bank control statement and with the supplier’s reconciliation statement.

Changes during performance

The price changes, a consignment is split, the supplier asks you to pay to a different account or to a different company. Any such change is documented in a supplementary agreement before the payment, not after.

• The amount or the deadlines have changed: the bank where the contract is registered must be informed. The bank will tell you the procedure and the deadline.
• The supplier asks you to pay another company: you need a document that explains this. Otherwise a payment to a party that is not in the contract will raise questions at both your bank and the beneficiary’s bank.
• A party to the contract has changed: this is a separate legal procedure, for example a change of party by agreement or an assignment of claim (cession). A lawyer confirms the structure.

Supporting documents

The bank sees payments from your account. A payment through an agent does not go from your foreign currency account, so fulfillment of the obligation has to be confirmed with documents: the agent’s report, the payment confirmation, the completion certificate. For goods, the bank matches payments against import data; for services, against completion certificates.

When goods are delivered in consignments, each consignment goes under its own declaration, and each must be linked to a payment. If one consignment closes several advance payments, this must be visible from the documents, not only from your register.

Documents are submitted within the deadlines set by the bank and by Instruction 181-I. Late submission is a violation in itself, punishable by fines under the Russian Code of Administrative Offenses (KoAP).

Closing the contract

The contract is fulfilled when payment and delivery match. To get there:

1. Reconcile the payment register with the bank control statement.
2. Sign a reconciliation statement with the supplier.
3. If an advance remains without delivery, resolve it before the contract deadline: delivery, return of the advance or a supplementary agreement. Federal Law No. 173-FZ requires the company to ensure that money paid for goods not delivered is returned.
4. Deregister the contract with the bank.

A forgotten open advance is the most common reason for currency control claims. Failure to meet the obligation to have the money returned is punishable by fines under the Code of Administrative Offenses.

This is a general overview. We will give you an answer on your deal after reviewing the documents and before the roubles are transferred.

VEDmost follows the payments under the contract through to execution. For the contract or a series of payments, we select a company from our own network: you sign the agency agreement with it once, and a payment order with the rate and fee is issued for each payment before the roubles are debited. We put together the documents for the bank. More on the “Contract support” and “Currency contract payments” pages.