June 2020

Small and Medium-sized Enterprises (‘SMEs’) selling goods and services often compete in a market where offering credit to their customers is a given.

Amongst the predictions of a severe recession, it is timely for SMEs to review their credit policies (insisting on cash upfront or on delivery, where possible) and to ensure that their contracts with their customers (for example, terms of trade) are signed or accepted by their customers and contain provisions which:

• provide their customers with a clear incentive to pay on time and appropriate security for the debt owed by the customers (‘first category’); and
• lessen the risk of customers claiming they have grounds to pay less than the debt they have incurred (‘second category’).

With respect to the first category, a robust contract will include the following provisions for the benefit of the supplier:

1. The due date for payment.
2. The right to charge default interest for late payment.
3. An obligation on the customer to pay the supplier’s legal costs in attempting to recover the debt.
4. The right for the supplier to suspend supply until an overdue payment is made.
5. A personal guarantee from the directors and shareholders of the customer.
6. A retention of title to the goods supplied until payment of all debts is made together with the right to recover the goods. Depending on the circumstances, security over the customer’s and guarantor’s other assets to secure payment. For the retention of title and where additional security is taken, it is also essential to register a financing statement on the Personal Property Securities Register within the required time limits to ensure the supplier is paid ahead of others (as far as possible).

With respect to the second category, the following provisions will be included to the extent permitted by law:

1. An obligation to make payment without deduction, set-off or counterclaim.
2. The exclusion of all conditions or warranties implied by law in relation to the supply of the goods or services.
3. The exclusion of the supplier’s liability either generally or for at least the exclusion of liability for indirect or consequential loss, for example, the loss of profits, revenue, business or goodwill.
4. Where liability cannot be excluded, a limitation of the supplier’s liability to either the amount paid for the goods or services, the subject matter of the customer’s claim or, alternatively, an obligation to re-supply the goods or services in satisfaction of the customer’s claim.

Whilst none of the above will of themselves guarantee payment, they will increase the chances of payment being made where this might not otherwise be the case.

Accordingly, now is the time to review your contracts with your customers to ensure they are fit for purpose and maximise the chance of being paid in full and on time so that you are able to pay your own suppliers, staff and, just as importantly, yourselves.