International buyer credit - mechanisms and legal structure

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In international trade, export financing is often a major challenge. Among the solutions available, buyer credit is emerging as a sophisticated instrument making international transactions smoother and spreading risk more effectively. This triangular mechanism merits a closer look to understand its legal subtleties.

Features and benefits of buyer credit

Buyer credit differs from other financing mechanisms in its special structure. Unlike supplier creditBuyer credit involves a bank or credit institution in the exporting country making a direct commitment to the foreign buyer.

As Gautier Bourdeaux points out in the JurisClasseur Banking and Financial Law : "In buyer credits, a bank or public export credit agency in the exporting country undertakes to make a loan directly to a foreign buyer to enable the buyer to acquire goods or services from a supplier in the exporting country.

This approach offers a number of advantages:

• A better division of roles between banker and exporter
• A lighter balance sheet for the exporter, who receives payment directly
• A simplified process for foreign buyers

The triangular diagram and the group of contracts

Buyer credit is a typical triangular arrangement. Three main players are involved: the foreign buyer (borrower), the lending bank and the exporting supplier.

This mechanism generates a group of interdependent contracts:

1. The commercial contract between the exporter and the foreign buyer
2. The credit agreement between the bank and the foreign buyer
3. A direct payment mechanism enabling the bank to pay the funds to the supplier

Case law has recognised the importance of this interdependence. The Court of Cassation, in its judgment of 22 May 1991 (Cass. com., 22 May 1991, no. 89-21.018), confirmed the specific nature of this contractual group.

Buyer credit is referred to as "tied credit" - it exists solely to enable a basic commercial transaction to be carried out.

Setting up a buyer credit facility

Link with the basic commercial contract

During the set-up period, there is a close legal link between the finance contract and the commercial contract. The two agreements understand each other.

This mutual dependence can be seen in a number of ways:

• Commercial contracts generally provide for the need for buyer credit financing.
• Credit facility agreements require the commercial contract to be in force

Essential contractual clauses

Standard buyer credit facility agreements, which are often standardised, contain a number of essential clauses:

• An applicable law clause (generally that of the creditor bank)
• An arbitration clause providing for recourse to arbitration
• An "Isabel" clause preventing the borrower from raising exceptions against the lender arising from its relationship with the supplier

As stated in the JurisClasseur : "Banks may fear, in the case of buyer credit, that the borrower will refuse to repay the credit or pay the interest [...] by invoking an exception based on poor performance of the basic commercial contract.

Notification and undertaking by the bank

A crucial legal element of the system is the notification of the buyer credit. As soon as the agreement is signed, the bank informs the supplier that the credit has been set up and that irrevocable instructions for direct payment have been issued.

Does this notification create a direct commitment between the bank and the supplier? The question divides the doctrine. Some authors see it as a simple act of information, while others see it as a genuine personal commitment.

Case law has provided a nuanced response. In a judgment of 13 February 1996, the Court of Cassation (Cass. com., 13 Feb. 1996, Juris-Data no. 1996-005532) held that the banker remained the borrower's agent and had to carry out the borrower's instructions.

The credit utilisation period

Prerequisites and certifications

A number of conditions must be met before the credit can be used:

1. Bringing the commercial contract into force
2. Payment of scheduled instalments
3. Preparing the credit insurance file
4. Submission of documents required for the execution of the loan

Among these documents, the attestations of jurisconsults play a decisive role. These attestations certify :

• Whether the debtor's situation complies with the company law of its country
• Compatibility of commitments with the corporate purpose
• The validity of representatives' credentials

Direct payment mechanism and documentation

The heart of buyer credit lies in its direct payment mechanism. The foreign buyer instructs the bank to pay the supplier directly.

Buyer credit facilities can provide for two types of payment:

• Monobloc" credits, where the exporter is paid once the services have been fully performed
• Loans with "progressive payments" to finance the manufacturing period

Two types of documents may be required for these payments:

• Internal credit documents (legal certificates)
• Documents relating to the dispatch of goods or the completion of work

In practice, a distinction is also made between use of "external services" (recorded by a third party) and use of "internal services" (according to a set schedule).

There are risks of over-financing, particularly in loans with progress payments on internal services. In such cases, COFACE requires special protection to avoid excessive compensation payments.

Banking round table and risk sharing

For large buyer credits, a bank round table is often set up. This syndication has several advantages:

• Risk sharing between financial institutions
• Pooling resources to obtain substantial funding
• Geographical diversification of country risk

The lead banker plays a central role in this arrangement. It negotiates the terms of the credit facility and solicits other institutions. The lead banker may be held liable for any inaccuracies in the information provided to the participants.

Relations between the banks in the round table are governed by the "Charter for relations between banks in medium-term buyer credits" or by specific agreements.

An important legal point concerns solidarity between banks. The French charter provides for such joint and several liability, but this is generally not the case in syndicated unrestricted buyer loans.

To protect banks, promissory notes are often used to evidence maturities. As indicated in the JurisClasseur : "The use of such instruments enables the banker to benefit from the principle of the unenforceability of defences under the law of exchange, which prohibits the borrower from invoking defences arising from the basic commercial contract.

Practical advice on securing operations

Companies wishing to use international buyer credit should take a number of precautions:

1. Check the consistency between the commercial contract and the credit agreement
2. Pay particular attention to the conditions precedent to the use of credit
3. Ensure the quality of the legal certificates provided
4. Anticipating currency and interest rate risks
5. Examine public support mechanisms (credit insurance, stabilisation)

The involvement of a lawyer specialising in international banking law is essential for :

• Negotiating credit agreement clauses
• Securing legal documentation
• Anticipating contract performance risks
• Optimising the financing structure

Due to its legal complexity and international dimension, buyer credit requires a rigorous approach. Companies engaging in this type of financing should seek competent legal advice to avoid potential pitfalls and maximise the benefits of this mechanism.

Our firm regularly assists exporters and importers in structuring and negotiating their buyer credit transactions. Contact us for a personalised analysis of your project.

Sources

• JurisClasseur Droit bancaire et financier, Fasc. 1050: Export credits. Buyer and supplier credits, by Gautier Bourdeaux
• Cass. com. 22 May 1991, no. 89-21.018
• Cass. com. 13 Feb 1996, Juris-Data no. 1996-005532
• Cass. com. 7 Apr. 1992, no. 90-14.955
• CA Bordeaux, 12 Nov. 1992, JCP E 1993
• OECD Arrangement on officially supported export credits

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