How to Avoid Customers Delaying Payment
- creating robust trading terms

A recent report from Dun & Bradstreet noted that 80,000 Australian firms had their risk profile downgraded in the first quarter of 2010. What does this mean to you, if you run a small business? It means some of your clients/customers could be on this list and you may struggle to get paid if these firms get into financial difficulty.

When a firm gets into financial difficulty they look for loopholes and reasons to justify delaying payment, or not paying at all.

When a sale is made it's great to celebrate, but we all know things don't always turn out ‘rosy' down the track. One of the best ways to protect yourself and ensure you get paid is to have well prepared, clear and concise ‘Terms of Trade' between your business and those you transact with. Verbal and ‘hand-shake' agreements may be appropriate in some circumstances, but when things don't go to plan you want to have something solid in writing to back you up.

I spoke with RP Emery & Associates, who are providers of contract templates for business. They told me why smart businesses need good ‘Terms of Trade':

Manufacturing Agreement - A manufacturer and purchaser worked well together for a year, but then a dispute arose over an overdue account. The manufacture claimed substantial interest and late payment fees. The case ended up in court, because it was unclear whose terms of trade applied, as there had been express agreement on who made and supplied the goods, but not as to the terms of payment. In this case the Court held that by going ahead and fulfilling the purchaser's orders, the manufacture had effectively accepted the purchaser's terms.

The expense and aggravation of having such a dispute resolved by a court is always stressful (and a distraction), so when you enter into an agreement, just make sure that your terms of trade are also signed by the other party.

Similarly, when it comes to licensing and distribution agreements, it is important to make sure that there is a clear understanding between the parties, as to what the intellectual property component really means. It is commonly thought that one can get around design, copyright, or a patent merely by changing the product by x%, but that is folk-lore that is incorrect.

Just this year, Solitaire Homes won a landmark case in which an architect made what he thought were adequate changes to a Solitaire project home design. Once it was established that the architect had in fact based his drawings on the Solitaire design, he was guilty of copyright and trademark violation. So acknowledgment of your copyright and other IP in your terms of trade is critical.

Addressing matters such as these in your terms of trade will keep you out of court. Even the Judge commented in the Solitaire case that after 5 years, the legal costs exceeded the cost of construction of the house, let alone the damages awarded!

When thinking about terms of trade it is also wise to consider the Sale of Goods Act. For example, the recent Conrad Medical Systems case involved a dispute about the delivery of software, which the plaintiff claimed was not of merchantable quality, or not fit for the purpose. The provisions of the Act did not apply to digital products, and as a result the plaintiff (Gammasonics) was required to pay $58,000 in damages. The government is apparently looking at amendments to the act to cover software.

Another very important issue is the question of personal guarantees. There was a case in which a company delivered industrial design services and did not get paid by the purchasing company. A magistrate held that, because a Director of the purchaser used the word "I" in a letter (rather than "the company"), there was an implied personal guarantee, and awarded judgment against the Director. Now, the fact that this decision was clearly wrong at law is irrelevant - the Director had to appeal to the Supreme Court on a matter of law, and it was cheaper to pay the bill rather than incur the costs of a SC appeal.

The lesson to be taken from that case is that the terms of trade did not exclude Directors' guarantees.

Other items to be considered in your terms of trade are:

1. How will the goods be ordered?

1. How will the orders be confirmed?

2. Will buyer/seller be entitled to cancel orders?

3. How is the price to be paid?

4. Are there handling/admin fees?

5. Are there penalties for late delivery/late payment?

6. Can either party offset amounts owing against an order?

7. How are credit facilities to be assessed/granted?

8. What defines delivery/collection?

9. Can orders be canceled if not delivered by a certain date?

10. Must seller notify purchaser if delivery date changes?

11. Can goods/services be delivered in installments?

12. What are the consequences if purchaser fails to accept delivery?

13. Can seller retain title until paid?

14. Does retention of title outlive termination of agreement?

15. Is confidential information being imparted, and how is it protected?

16. Are there any Privacy issues?

17. Should either party have the right to terminate without cause?

18. What are the consequences of termination?

19. Have warranty and liability issues been adequately addressed?

20. Are there guarantors, and are the guarantee terms clear?

21. The laws of which State apply?

As you can see there is a lot involved in the delivery of a service or product. It just might save you a lot of money to have a clear understanding by all parties from the beginning, rather than having to go to court and incur a lot of unnecessary legal fees to sort out a problem later.