Definition: Penalties arising from commercial contracts

Category: External debt - IMF

Under the terms of a commercial contract, one party(resident) may be required to compensate another party (nonresident) (that is, pay a penalty) in the event of the first party failing to meet its obligations, or some of its obligations, under the contract. Once the penalty is owed and until it is paid to the nonresident,it is external debt, and recorded under other debt liabilities. The debt should be recorded from the time when the resident becomes liable under the contract for the penalty. http://ec.europa.eu/eurostat/ramon/statmanuals/files/external_debt_guide_2003_EN.pdf#page=227