Safeguard Your Interest When Selling On Credit Terms
Safeguard Your Interest When Selling On Credit Terms
Know Your Customer
From a legal perspective, businesses should consider the credit-worthiness of their customers before agreeing to sales on credit terms. For example, how much credit would your business extend to a company that was incorporated merely a week before approaching you and with a paid up capital of only $1? Or on the other hand, how trustworthy is a business that has been sued by their suppliers on multiple occasions?
Businesses can avail themselves of the following resources:
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Credit bureaus – you can obtain a credit report on your prospective customer which will show whether or not they have a history of defaulting on payment if such defaults have been reported to the bureau;
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Business profile search – this can be obtained from the Questnet database and will show when the company was incorporated, what is the paid up share capital of the company and who are its directors and shareholders. You can ask your prospective customer to send you an updated copy or you can purchase one yourself for a nominal fee; and
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Litigation search – also found on the Questnet database, you can see how many lawsuits your prospective customer has been involved in whether as plaintiff or as defendant. You can even see what was the nature of the case which may alert you to whether or not this customer is a habitual defaulter.
Make Your Sales Contract Watertight
As a starting point, every business should have a proper sales contract with clear terms written in plain and simple English. The sales contract should set out the following non-exhaustive terms:
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Who are the parties to the contract? If you are dealing with an agent, the name of the principal should be stated in the contract;
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What is the contract for? What goods or services are you supplying and when must these goods / services be delivered or provided?
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What are the payment terms? When must payment be made – within [x] number of days of delivery of goods or presentation of invoice?
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Credit terms must be clearly defined. Sellers should not rely on “industry norms” or terms which are assumed to be understood when it comes to the interpretation of credit terms;
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A dispute resolution and governing law clause – what happens if there is a dispute or default of payment? Should parties as a first step sit down and negotiate a payment plan, or is the seller entitled to go to court right away and sue the customer? Or will parties attend mediation at an accredited mediation institution like the Singapore Mediation Centre? A clearly drafted dispute resolution and governing law clause will provide parties with clarity on how a dispute should be dealt with which may go a long way in preserving valuable business relationships.
Businesses which rely on the exchange of quotations, purchase orders, delivery orders and invoices instead of a formal sales contract should consider having a standard terms and conditions sheet to be attached to their quotations if the quotations, delivery orders and invoices are silent on the contract terms.
What if your customer doesn’t pay you?
In the event of a default, the business must first look at its contractual terms – what does the contract entitle the business to do? Is the business supposed to give notice to the customer and grant a grace period for e.g. 10 days for the customer to pay? Is the business supposed to initiate a meeting with the customer to negotiate for payment terms, or can the business simply proceed to sue the customer? Businesses who wish to recover a bad debt should study the contract terms carefully because failing to approach the dispute in accordance with the contract terms may amount to a breach of contract.
If the contract is silent on a dispute resolution mechanism, then businesses may issue a letter of demand to the customer. Businesses should note that as of August 2019, the State Courts (for claims $250,000) have put in place a practice direction relating to “Business to Business Debt Claims” which require businesses who are commencing an action against another business to comply with a pre-action protocol which provides that a letter of claim must be issued to the debtor before proceedings can be commenced in court. There is specific information which the letter of claim must contain, which a lawyer is in the best position to advise.
If a business acts in breach of the pre-action protocol, the court will take the breach into account in exercising its discretion to award costs at any part of the proceedings as well as interest payable by the debtor unless there are good reasons for the breach. The burden is on the party in breach to justify the breach to the court.
Disclaimer
Any opinions or views of third parties expressed in this article are those of the third parties identified, and not those of OCBC Bank. The information provided herein is intended for general circulation and/or discussion purposes only. Before making any decision, please seek independent advice from professional advisors.
No representation or warranty whatsoever in respect of any information provided herein is given by OCBC Bank and it should not be relied upon as such. OCBC Bank does not undertake an obligation to update the information or to correct any inaccuracy that may become apparent at a later time. All information presented is subject to change without notice. OCBC Bank shall not be responsible or liable for any loss or damage whatsoever arising directly or indirectly howsoever in connection with or as a result of any person acting on any information provided herein. Any reference to any specific company, financial product or asset class in whatever way is used for illustrative purposes only and does not constitute a recommendation on the same.
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