If no debt security has been agreed – the worst-case scenario
If the foreign buyer defaults on payment and no security agreement has been made, the exporter’s only option is to file an unsecured payment claim. This means they bear the full insolvency and enforcement risk: they must prove the claim before the competent court, pre-finance all legal and translation costs and then attempt to trace the debtor’s assets in the destination country. Even a successful judgement does not guarantee liquidity if there are no enforceable assets or enforcement fails due to formal hurdles.
Without upstream collateral, the duration, costs and probability of default increase significantly. However, even contractually agreed collateral can be difficult to enforce in court in individual cases if it is not properly drafted.
Contract-based securities and their judicial enforcement
Jurisdiction and choice of law clauses form the foundation of any subsequent enforcement. If they are clearly agreed, the court called upon accepts its jurisdiction without lengthy preliminary questions – a considerable gain in time. An arbitration clause is often a prerequisite for enforcement in the first place, as under the NY Convention arbitral awards can often be enforced if a German judgement cannot be enforced abroad.
In the event of a dispute, a retention of title is enforced by means of an action for restitution. It is important that the retention of title is recognised in the importing country. In some countries, a reservation of title must even be recorded in registers in order to be effective.
In the case of a letter of credit, the action is not directed against the defaulting buyer, but (in the absence of payment) against the issuing bank. The bank is strictly liable for documentary conformity. With a conclusive claim and the original documents, the exporter quickly receives a default or performance judgement that can be enforced directly against the bank as a monetary title. However, the devil is in the detail here, as the actual execution of the contract must be such that it enables the documents provided for in the letter of credit to be obtained. A confirmed letter of credit is also advisable, as this is the only way to utilise the domestic bank that confirms it.
Bank or group guarantees open up two avenues: If the guarantee is structured as an abstract promise payable “on first demand”, the beneficiary can immediately bring an action for payment against the guarantor in the event of non-payment. The court only examines the formal requirements of the claim, not the underlying business relationship – this means that the judgement can usually be enforced quickly. Otherwise, the action for surety must set out the full claim and include offers of proof.
In the case of credit insurance, the insurer pays first. After settlement, the claim is transferred to the insurer by operation of law (legal assignment). The insurer then takes legal action in its own name against the buyer, based on the insurance policy and the exporter’s documents. The conditions are varied and differentiate between political risks and commercial default risk.
Without contractual collateral, there is the threat of a long, expensive road to money – with an uncertain outcome. With specifically agreed instruments, however, the exporter can enforce collateral in court. However, a meticulous approach to drafting contracts is required if you want to be successful in court.
