Particularly in the case of international supply contracts, the situation is more complicated than simply ‘no goods, no money’. The buyer must decide whether to continue to demand performance, verify the alleged readiness for delivery, or terminate the contract and reclaim the deposit. Which response is correct depends on the contract, the actual circumstances and the applicable law.
Payment in advance turns the buyer into a lender
By making a deposit, the buyer finances the procurement or production of the goods. As long as delivery is pending and there is no security in place, the buyer also bears the risk that the seller may be unable to either deliver the goods or repay the deposit. An invoice, order confirmation or notification that the goods have been ‘reserved’ does not, as a rule, place the buyer in a position protected against insolvency. For larger sums, it should therefore be clear before payment is made how the deposit is secured.
Not every delay automatically allows the buyer to terminate the contract
The expiry of a delivery deadline does not automatically entitle the buyer to terminate the contract. Under German law, a reasonable grace period is generally required. Exceptions apply, for example, in the event of a serious and definitive refusal to perform or a genuine fixed-date transaction. In international sales of goods, the UN Convention on Contracts for the International Sale of Goods (CISG) may apply. There, too, a distinction must be made between a material breach of contract and non-delivery despite the granting of an additional grace period.
In practice, the final deadline should be specified in calendar terms, the delivery due should be precisely described, and this should be communicated in a verifiable manner. Once the deadline has passed without result, the buyer must clearly state that they are terminating the contract. A mere request for a refund leaves too much room for dispute.
‘Ready for delivery’ does not mean ‘delivered’
If, after the deadline has expired, the seller claims the goods are ready for delivery against final payment, the buyer should neither pay without checking nor reject the offer prematurely. Do the goods exist, have they been allocated, and are they immediately available for delivery in accordance with the contract? Serial numbers, recent photographs, dispatch documents or an on-site inspection may be decisive.
A valid contract is also binding on the buyer. An unjustified refusal to pay may constitute a breach of duty; following termination of the contract, the buyer should not send out contradictory signals regarding performance.
Insolvency risk: a claim is not the same as payment
A claim for repayment is only as valuable as the seller’s solvency. If the seller becomes insolvent, the buyer—due to their advance payment—is often merely an unsecured insolvency creditor and may only receive a pro rata share. For this reason, credit checks, securing accessible assets and choosing the competent court or arbitration tribunal should not be left until the end of the dispute. When warning signs appear, speed is of the essence.
Four alternatives to unsecured advance payment
The risk can be significantly reduced in new contracts
- Advance payment guarantee: A bank or insurance company guarantees repayment in the contractually defined circumstances.
- Escrow or trust account: The funds are only released upon the achievement of objectively verifiable milestones.
- Documentary letter of credit: Payment is made only against agreed shipping documents. However, the bank checks the documents, not the actual quality of the goods
- Milestone payments: Partial payments are linked to production, inspection and dispatch, and each is documented.
In addition, the contract must include clear delivery dates, repayment and termination rules, inspection rights, as well as a robust choice of law and dispute resolution clause.
Conclusion
Payment in advance is not just a payment method, but a transfer of risk. If delivery fails to materialise, a clear sequence of steps is essential: check the contract and applicable law, set a firm final deadline, verify service offers, and coordinate contract termination, recovery of funds and enforcement.
It is better – and usually more cost-effective – to secure the advance payment before making the bank transfer. The higher the advance payment and the more difficult it is to contact the supplier, the less likely it should be left unsecured.
Key points in brief
- An unsecured advance payment largely shifts the performance and insolvency risk onto the buyer.
- Whether the buyer can demand immediate repayment depends on the delivery date, grace period, termination of the contract and applicable law.
- A deposit guarantee, escrow, letter of credit or genuine milestone payments can significantly limit the default risk.
