Payment disputes are disputes arising from the non-payment, delayed payment, partial payment, or contested payment of amounts due under supply contracts. Under Iraqi law, the framework is established by the Iraqi Civil Code No. 40 of 1951, the Commercial Code No. 30 of 1984, the regulations of the Central Bank of Iraq governing the financial system, and the contractual provisions agreed between the parties. The categories of payment dispute engaged in Iraqi supply chain operations include late payment by purchasers, withholding of payment in response to alleged supplier breach, disputes arising from the operation of letters of credit, disputes arising from currency and exchange considerations, and disputes engaging the calling on payment-related guarantees.
Late Payment
Late payment by the purchaser is the most prevalent category of payment dispute in supply chain operations. The supplier’s remedies engage the principal sum due, damages for the delay in payment, and the right to suspend further performance under the doctrine of inadimplenti non est adimplendum (exception of non-performance) reflected in Iraqi law. The damages for delay in payment are addressed by Civil Code, which provides for compensation for the loss caused by the delay, calculated in accordance with the principles applicable to delay damages generally. Where the contract specifies a rate of interest or compensation for late payment, the contractual provision applies subject to the general restrictions on interest under Iraqi law.
Interest and Compensation for Delay
The position of Iraqi law on interest engages substantive considerations of public policy and Islamic legal principles. The Iraqi framework recognises the right to compensation for delay in payment, although the structuring of such compensation requires care in light of the broader framework on interest. Commercial transactions between merchants under the Commercial Code may engage different treatment from civil transactions. The contract should structure the compensation for late payment with attention to its enforceability under Iraqi law, and the supplier seeking to recover late payment compensation should anticipate the framework that will be applied to its claim.
Set-Off and Withholding
Set-off under Iraqi law engages the discharge of mutual obligations between parties to the extent of their respective amounts. The Civil Code recognises set-off both as a matter of operation of law (legal set-off) and as a matter of contractual agreement. Where the parties to a supply contract have mutual claims against each other, set-off may operate to extinguish the claims to the extent of the lesser amount, with the remainder continuing as a single claim. Withholding of payment by the purchaser in response to alleged supplier breach engages the doctrine of exception of non-performance, under which a party to a synallagmatic contract may refuse to perform its obligation where the counterparty has failed to perform. The exercise of withholding should be proportionate to the alleged breach and conducted with attention to the contractual notification requirements.
Letter of Credit Disputes
Letters of credit are widely used in Iraqi supply transactions, particularly in international trade. Disputes arising from the operation of letters of credit engage the doctrinal frameworks established by the Uniform Customs and Practice for Documentary Credits (UCP 600) published by the International Chamber of Commerce, incorporated into credit terms by reference, and the broader principles of Iraqi banking law. The principal categories of letter of credit dispute include:
- Disputes over the conformity of presented documents to the credit terms, engaging the principle of strict compliance
- Disputes over discrepancies in presented documents and the right of the issuing bank to refuse payment
- Disputes between the applicant and the issuing bank over the propriety of payment or refusal
- Disputes engaging the autonomy principle, under which the bank’s obligation is independent of the underlying transaction
- Disputes engaging allegations of fraud as an exception to the autonomy principle
Letter of credit disputes engage particular procedural considerations, including the engagement of multiple banking parties and the cross-border character of substantial transactions.
Currency Considerations
Currency considerations engage the currency of the contract, the currency of payment, the exchange mechanism for cross-currency settlement, and the position with respect to changes in the exchange rate between the contract date and the payment date. Iraqi commercial practice engages both Iraqi dinar (IQD) and foreign currency contracts, principally United States dollar (USD), with the currency of payment depending on the contractual provisions and the broader regulatory framework. The Central Bank of Iraq regulates foreign exchange transactions, and substantial cross-border payments engage the CBI framework alongside the contractual arrangements. Currency-related disputes may engage the question of which currency governs the obligation, the appropriate exchange rate for conversion, and the consequences of currency movements between accrual and payment.
Foreign Exchange Framework
The Central Bank of Iraq operates the framework for foreign exchange transactions, including the CBI dollar auction and the regulations governing the conversion of Iraqi dinar to foreign currencies. The framework engages substantive considerations for supply chain operations, including the access of importers to USD for payment of foreign suppliers, the documentation requirements for foreign exchange access, and the compliance requirements applicable to international payments. Operators engaging in substantial international supply transactions should structure their payment arrangements with attention to the foreign exchange framework and the practical accessibility of foreign currency for settlement.
Performance Security Calls
Disputes engaging the calling on performance bonds, advance payment guarantees, and bid bonds engage substantive considerations of the conditions for calling, the documentary requirements for the call, the autonomous character of the guarantee, and the relationship between the call and the underlying contractual position. Where the guarantee is a demand guarantee structured on autonomous principles, the call is, in general, payable on the satisfaction of the documentary requirements specified in the guarantee, independently of the underlying merits. The dispute between the parties on the underlying merits, where one exists, proceeds separately. Operators should structure both the issuance and the response to guarantee calls with attention to the autonomous character of the instrument.
Debt Recovery Procedures
Where amicable recovery fails, formal debt recovery proceeds through the Iraqi courts in accordance with the Civil Procedure Code No. 83 of 1969. The procedures engage:
- Initial demand on the debtor, including the formal notice (إعذار) where required
- Conservatory measures including the attachment of assets where the prospect of recovery is at risk
- Substantive proceedings before the competent court for the establishment of the debt and the issuance of an enforceable judgment
- Enforcement proceedings before the enforcement directorates (دوائر التنفيذ) of the courts, engaging the seizure and disposition of the debtor’s assets
- Bankruptcy and insolvency considerations where the debtor’s overall position is impaired
The procedures engage substantial procedural complexity and should be conducted with the engagement of qualified counsel.
Insolvency Considerations
Where the debtor is, or becomes, insolvent, the framework for recovery engages the Iraqi insolvency provisions, principally embedded in the Commercial Code No. 30 of 1984 and supplementary legislation. The insolvency framework affects the position of creditors, the priorities for distribution of the debtor’s assets, and the procedures for the conduct of insolvency administration. Substantial supply chain creditors should monitor the financial position of significant counterparties and engage with potential insolvency situations at an early stage to preserve their position.
How We Can Help
Etihad Law Firm advises on payment disputes in Iraqi supply chains, including the recovery of late payments, the calculation of delay damages, the structuring and exercise of set-off and withholding rights, the conduct of letter of credit disputes, navigation of the foreign exchange framework, calls on performance security, the conduct of formal debt recovery proceedings before the Iraqi courts, enforcement proceedings, and the management of counterparty insolvency.