customers on credit

Getting the terms of trade right: lessons for traders

09 September 2016

Many of our clients trade with customers on credit. When doing so, there is a risk that customers might be unable to pay.

Sometimes we find that businesses are not doing everything they can to ensure they are paid for the goods or services they provide, and sometimes they do not involve solicitors until it is already too late to correct their mistakes. There are, however, some basic steps a business can take to afford itself some protection from its customer’s financial issues.

1. Confirm which entity you are to be dealing with. In some cases, what may appear to be a single business could in fact be made up of several different entities or it may be a partnership of individuals. If the customer falls behind on payments, it can be difficult to take action for recovery of any outstanding amounts if it is not clear which entity you were trading with.

2. Ensure your customer signs a credit application with terms and conditions which clearly state what the terms of the engagement are, and which are tailor made to fit your business. When a party defaults on the terms, it should be clear based on the terms that they have done so. Where parties proceed on terms that are either not in writing or are poorly written and unclear it can complicate the recovery process.

If there are no terms of trade, for example, then it will be unclear when the customer is in default. It may also be in dispute who is responsible for certain charges, for example freight and storage charges and interest.

3. Consider asking for further protection for payment. Examples include:

  • a direct debit arrangement
  • a charging clause which will allow you to lodge a caveat over any real estate the customer may own
  • a personal guarantee from one or more of the directors.

In some cases it will not be possible to have your customers agree to these, particularly where you are trading with large established companies. Nonetheless, where it is possible, taking these simple steps can encourage customers to pay on time and increases the likelihood of recovery in the long term.

4.  If you sell goods to customers on a retention of title basis (meaning that the goods remain your property until the customer has paid for the goods in full), it is also critical that you register your security interest in these goods on the Personal Property Security Register (PPSR). Generally, registration must occur prior to the goods being supplied to your customer. If your customer becomes insolvent or bankrupt and you have not registered your security interest in the required time frames or at all, you will have no claim to the goods you have supplied to your customer which are unpaid. The fact that you ‘own’ the goods will not protect you.

If you register your security interest in the required time frame, you will have a stronger claim for return of the goods or the sale proceeds in respect of the goods in the event of insolvency or bankruptcy of your customer. You do not need to register every time you supply goods to a customer. A single registration in respect of each customer is sufficient if you are routinely supplying goods under a single set of terms and conditions.

We can help you to:

  • ensure your terms and conditions appropriately cover retention of title and your rights to register a security interest on the PPSR
  • register your security interest on the PPSR for each customer within the required time frames.

Many traders engage with customers in a manner that exposes them to risk. Rigby Cooke can assist with bringing the terms of trade up to date to ensure adequate protection and also assist businesses involved in disputes over unpaid debts.

This article originally appeared in the Spring 2016 edition of InDispute. Other articles in this newsletter include:

Disclaimer: This publication contains comments of a general nature only and is provided as an information service. It is not intended to be relied upon as, nor is it a substitute for specific professional advice. No responsibility can be accepted by Rigby Cooke Lawyers or the authors for loss occasioned to any person doing anything as a result of any material in this publication.

Liability limited by a scheme approved under Professional Standards Legislation.

©2016 Rigby Cooke Lawyers