A component maker supplying a French main contractor on an Egyptian project sells in France, invoices in France, collects in France, and believes itself sheltered from any foreign risk. It is not. When the country stops paying the main contractor, the wave travels up the chain and reaches it, although it never had a relationship with that country nor signed a contract mentioning it. Understanding where that wave passes, and what a second-tier supplier can insure on its own account, is this module's subject, and it concerns far more companies than direct exporters.
The first path is contractual and explicit once looked for. Subcontracts on large export projects frequently contain clauses making the subcontractor's payment conditional on the main contractor's collection, or aligning maturities with the main contract's. Those stipulations transfer the country's credit risk to the second-tier supplier, without any line mentioning country risk, and they are signed all the more readily for looking technical. A supplier accepting a pay-when-paid clause does not hold a receivable on a French main contractor: it holds a receivable on an Egyptian buyer it has never assessed.
The second path is economic and operates even without a clause. A main contractor deprived of a major collection slows its own payments, stretches its terms, or files for insolvency. The supplier then holds a perfectly French receivable on a French debtor become insolvent, and its loss is a domestic credit loss whose cause is foreign. That dissociation between cause and debtor is what makes the cover hard to build well: what is covered is the main contractor's failure, not the Egyptian measure, and a political risk policy would not respond.
What a subcontractor can insure on its own account is therefore simpler than imagined, and more limited. Its receivable on the main contractor is an ordinary commercial receivable, insurable in a whole-turnover policy like any other, including when the reason for default lies on the other side of the world. What it cannot insure alone is country risk itself, since it has no insurable interest in the main contract: it is neither seller nor lender toward the final buyer. Country risk cover belongs to the main contractor, and the subcontractor reaches it only by contract.
That route exists and can be negotiated, which few suppliers attempt. An insured main contractor can have its principal subcontractors named as beneficiaries of part of its indemnity, up to their own receivables, a classic arrangement on large projects. It can also accept that the subcontractor's payment not be conditional on its own collection, which is the truly decisive point. And failing that, it can share the state of its collections on the project: dated information on what the buyer is paying or has stopped paying is worth more, to a second-tier supplier, than a guarantee clause it will not obtain.
The particular case of projects financed by a public agency or a multilateral bank must be added, because it works in the subcontractor's favour. Where the main contractor's payment comes from a buyer credit drawn against shipping certificates, the money no longer depends on the final buyer's cash and arrives on a predictable schedule. A subcontractor learning that a project is financed that way holds first-rate information about its own risk, and it is asked for at signature, not at the first delay.
The discipline comes to three questions a second-tier supplier should ask before signing, and almost never does. Is my payment conditional on my client's collection, explicitly or through aligned maturities. Is this project financed, and by what mechanism. And is my client itself insured on this project, in which case can I be named beneficiary up to my receivable. The three answers fit on one page, they are asked once, and they tell a supplier that believes it sells in France whether it is in fact selling in Egypt.
A sixty-person French component maker supplies 2.3 million euros of subassemblies to a French main contractor, on a 41 million water treatment project in Egypt. The subcontract provides for payment at sixty days from invoice, with a clause stating that maturities follow those of the main contract. The main contractor is insured with a public agency on its buyer risk. In September, the Egyptian buyer stops paying; the main contractor suspends payments to subcontractors, invoking the clause. The component maker has a whole-turnover credit policy covering its French customers. What can it do?
The maturity-alignment clause is the heart of the file and the component maker signed it without reading it for what it is: it transfers Egyptian risk to a sixty-person company that has never assessed that buyer and believed it was selling in France. Its exact scope must be checked first: a mere alignment of calendars is not a condition of payment, and if the wording does not expressly make settlement conditional on collection, the component maker remains a creditor at sixty days and the main contractor is late. That is the first question to have settled, because it decides everything else. On its own cover, its position is better than it thinks: its receivable on the main contractor is an ordinary French commercial receivable, covered by its whole-turnover policy, and the foreign cause of default changes nothing. It must therefore notify the overdue within its policy's period from the first missed maturity, without awaiting the outcome of the contractual dispute, failing which it will lose the cover for lateness on a perfectly valid receivable. What it cannot do alone is cover itself against Egyptian risk, for want of an insurable interest in the main contract. But it can ask the main contractor for two things, and now is the moment since the latter needs its deliveries: to be named beneficiary of part of the agency's indemnity up to its receivable, a classic arrangement on this kind of project, and to obtain the dated position of Egyptian collections. The second costs the main contractor nothing and is worth more, to a second-tier supplier, than a clause it will not obtain.
- 01A subcontractor selling, invoicing and collecting at home can carry an entire country risk without a single line of its contract naming it.
- 02A pay-when-paid clause transfers the country's risk to the second-tier supplier, and it is signed because it looks technical.
- 03Its receivable on the main contractor remains an ordinary commercial receivable, insurable like any other: notify it on time despite the dispute.
- 04It cannot insure country risk itself, for want of an insurable interest in the main contract: that cover belongs to the main contractor.
- 05Three questions before signing: is my payment conditional, is the project financed, and can I be named beneficiary of the indemnity.