Terms of Payment: The Contract Clause That Decides Who Holds the Cargo

Before the first container leaves the factory, before the freight forwarder books vessel space, and before the customs broker prepares the declaration, one decision is already locked into the supply contract: how and when payment is made. That decision determines not only cash flow, but also who controls the cargo at each stage, who carries delay risk and who can release the containers from port.

Series

The Buyer's Desk: Commercial Decisions That Define the BESS Project

1. Current episode: Ep. 1 · Payment Terms - Who Controls the Cargo
2. Ep. 2 · Who Pays for the Delay - Deadlines and Penalties
3. Ep. 3 · Landed, Not Loaded - Who Is the Importer
4. Ep. 4 · Spare Parts - Warranty and Returns
5. Ep. 5 · Storage or Flow - The Customs Buffer

The Decision on the Table

The choice of payment instrument and the way payment tranches are tied to milestones such as FAT, Bill of Lading and delivery are fixed in the BESS supply contract before production begins. Once signed, the payment structure shapes who has leverage and physical control at every stage of the journey.

The Main Options

Cash in Advance

The buyer pays all or part of the contract value before production or shipment. A common structure is 30% at contract signature and 70% before loading. The commercial exposure sits mainly with the buyer: if the manufacturer fails to deliver, recovery depends on the contract and the supplier's jurisdiction.

For a BESS project involving dozens of containers, this can create substantial exposure before cargo ever leaves the factory.

Letter of Credit (L/C)

The buyer's bank undertakes to pay the seller against documents that comply with the credit. UCP 600 governs the documentary-credit process.

The key point is that the bank pays against documents, not against physical inspection of the equipment. If the documents comply, payment can be released even if the buyer later discovers a quality problem.

Open Account

The seller ships the cargo and documents directly to the buyer, who pays after an agreed period such as Net 30, Net 60 or Net 90. The commercial credit risk sits mainly with the seller.

For China-to-CEE BESS transactions, the source treats open account as more common in established relationships or where credit insurance is available than in a new supplier relationship.

The Hidden Obligation

The Letter of Credit and the Original Bill of Lading

Where an L/C requires an original Bill of Lading showing the cargo loaded on board, physical control can depend on the document reaching the buyer in time. The cargo may arrive in Burgas or Constanța while the original B/L is still moving through the banking/document chain.

If the vessel arrives before the documents, containers remain at the terminal and storage charges start to accumulate. On a project with 40+ containers, each day of delay multiplies across the whole shipment.

Incoterms 2020 and Transfer of Risk

The selected Incoterm determines where risk passes from seller to buyer.

FOB – Free On Board

Risk passes when the cargo is loaded on board at the port of origin. From that point, the buyer carries the sea-transit risk and should arrange appropriate insurance.

CFR / CIF

Under CFR, the seller pays freight to destination while risk still transfers at shipment. Under CIF, the seller also arranges the required insurance, but the buyer still needs to understand what that policy actually covers, especially BESS-specific risks.

DAP – Delivered at Place

The seller carries risk to the named delivery point. That may reduce the buyer's direct logistics burden, but it can also reduce control over carrier choice, routing and insurance structure.

Payment Tranches: FAT, Bill of Lading, Delivery

A typical BESS payment structure may include:

• 10–30% advance at contract signature.
• 30–50% after successful Factory Acceptance Test.
• 10–30% against Bill of Lading.
• 5–10% after delivery or Site Acceptance Test.

The hidden issue is the definition of each milestone. FAT is the last point at which the buyer still has strong leverage over the manufacturer. Once the FAT certificate is signed and a large tranche is released, negotiating power drops sharply.

If FAT criteria do not explicitly cover battery capacity, round-trip efficiency, BMS operation, HVAC and fire-suppression functions, the buyer may pay for equipment that formally “passed” but does not meet the intended performance standard.

Payment against the Bill of Lading creates a different risk: the B/L proves shipment, not equipment condition. Damage or latent defects may only become visible weeks later at destination.

Documents vs Reality

Under UCP 600, banks deal with documents rather than goods or performance. A compliant B/L and invoice can trigger payment even if a container later proves defective. That makes the FAT scope and final retained tranche commercially critical.

What It Costs When Things Go Wrong

Scenario: L/C with 60% against Bill of Lading and Only 10% Retained

An EPC company agrees 30% advance, 60% against the B/L and 10% after delivery. Three containers arrive with visible external damage. The Transport Condition Report records it, but 90% of the contract value has effectively already been released.

The manufacturer has less financial incentive to respond quickly, while the insurance claim takes documentation, inspection and time. A larger final retention after SAT would leave the buyer with stronger leverage.

Scenario: Open Account Net 60

A buyer with a long supplier relationship agrees payment 60 days after delivery. The system passes SAT, but before payment falls due the manufacturer experiences financial distress. The buyer still owes the invoice, while future warranty support may become uncertain. Credit insurance may address payment risk, but it does not replace warranty performance.

What to Agree Before Signing

Payment Tranches

• Retain at least 15–20% for the final tranche after SAT rather than only after physical delivery.
• Define FAT criteria explicitly: battery capacity, round-trip efficiency, BMS, HVAC and fire-suppression operation.
• Consider independent inspection or buyer sign-off for FAT.

Letter of Credit

• Where appropriate, include the agreed FAT evidence among the documentary conditions.
• Build enough time between expected vessel arrival and document presentation so the cargo does not arrive before the release documents.

Incoterms and Insurance

• Under FOB, arrange cargo insurance before loading.
• Declare insured value clearly and make sure the policy covers BESS-specific exposures.
• Check explicit treatment of thermal runaway and other exclusions.

Documentation

• Align VGM and Packing List before the Bill of Lading is issued.
• Require UN38.3 documentation and MSDS/SDS before loading where required by the carrier.
• Require a Transport Condition Report or equivalent condition evidence at destination discharge.

What to Remember

• An L/C releases payment against compliant documents, not a physical inspection of the cargo.
• Incoterms define where risk transfers. Under FOB, the buyer carries the sea-transit risk once cargo is on board.
• FAT is a critical leverage point; weak acceptance criteria create commercial risk.
• A meaningful final tranche after SAT is one of the buyer's strongest quality levers.
• An original Bill of Lading can control physical access to cargo. If it arrives late, storage costs and schedule delay can follow.

Further References

1. Incoterms 2020 – International Chamber of Commerce
2. UCP 600 – Uniform Customs and Practice for Documentary Credits

Frequently Asked Questions

Q: What is UCP 600 and why does it matter for BESS deliveries?

A: UCP 600 is the ICC framework governing documentary credits. It defines how banks examine documents and release payment under an L/C.

Q: What is the difference between FOB and DAP?

A: Under FOB, risk passes to the buyer when cargo is loaded on board; under DAP, the seller carries risk to the named delivery point. The trade-off is between control and responsibility.

Q: How much should the buyer retain for the final tranche?

A: The source recommends at least 15–20% after SAT to preserve meaningful leverage for defects discovered after delivery.

Q: What happens if the original Bill of Lading arrives after the cargo?

A: Containers may remain at the terminal until documentary control is resolved, causing storage charges and schedule delay.

Q: Why is FAT so important to the payment structure?

A: It is the last major point before substantial payment where the buyer can verify quality and performance at the factory and still retain strong leverage.

Q: What should cargo insurance cover under FOB?

A: It should be arranged by the buyer and reviewed for BESS-specific risks and exclusions, not treated as a generic marine policy.

Q: Can Open Account be used for BESS?

A: Yes, especially in established relationships, but it moves credit risk toward the seller and does not solve warranty-performance risk.

Next episode

Who Pays for the Delay: The Contractual Delivery Deadline and Allocation of Penalties

“Delivered” does not necessarily mean “commissioned”. The next article examines how contract penalties, logistics SLAs and delay insurance allocate the cost of a missed deadline.