Some must-have clauses needed for your client’s business terms

It is an integral step in us setting up debt collection for a new client.

The experience we have is that most SMEs have business trading terms which are quite inadequate.

It tends to be a backroom component of the business which falls through the cracks.

There are certain minimum clauses which I believe need to be incorporated in all business trading terms and which are often overlooked by even the smartest businesses.

Caveats

If your client’s terms allow it to lodge a caveat over the title to any real estate owned by the customer, this will provide an enormous benefit to them in the event of their customer going into default.

Caveats are a state matter and the actual processes for lodging a caveat vary from state to state, as do the costs involved.

The state with the most complex and expensive procedures is Queensland.  All other states provide relatively simple procedures and reasonable lodging fees.

The starting point to lodging a caveat is that your client must have a caveatable interest.

This can be obtained from a simple clause which should be inserted in to your client’s trading terms and be acknowledged in writing by their customer.

For example, the following clause would, in most cases, suffice:

“You charge in favour of the Creditor your legal and beneficial interest in any real property, both present and future, with the amount of the current and future indebtedness to the Creditor under this agreement”.

By virtue of having a charge over the title, your client will then be entitled to lodge a caveat in order to protect that chargeable interest.

In order to pre-empt a concern from potential customers, you could vary the charging clause to add the following:

“...agreement… provided that the Creditor will not lodge a caveat over your title(s) unless you are in default in payment of the amount due and have failed to comply with a notice in writing requiring you to rectify the default within seven days”.

If you include such a charging clause, you should also provide for a default clause, providing that in the event of default, the Creditor will be liable for all costs reasonably and properly incurred by the Creditor in enforcing its rights under the Agreement.

This way, the costs incurred for lodging and then for ultimately withdrawing the caveat, will be passed on to the customer.

A caveat will be registered on the title and any party searching the title will be aware of the caveat.  In the event where the customer seeks to deal with the title in any way, such as through a sale or refinance, he will be required to obtain the consent of the creditor.

Whilst lodging a caveat is not a foolproof means of obtaining repayment of a debt, the party with a caveat is in a far stronger position than the party which isn’t.

Normally the caveat would only be lodged if the account is heading into default or is in default.

Incorporated guarantee from a director

The ideal situation when your client is advancing credit to a company is to obtain guarantees from the directors of that company.  However, this is not always possible to achieve and it also requires additional steps which may slow down the process of the sale to the customer.

A good intermediate compromise position is to incorporate the following clause in your client’s trading terms:

“Where I accept these terms in my capacity as director of the customer company, I shall be liable personally for any losses suffered by the Creditor arising from default by the customer”.

For the sake of an additional clause in your client’s trading terms, there will be cases where this may lead to a claim directly on a director in the event of the customer being in default.  In that case, the chances of a successful recovery are greatly increased.

Verification clause 

A useful clause, which is rarely used, is the following:

“A statement in writing signed by either a director of the creditor or an authorized officer of the creditor setting out the amount due and owing by the customer to the creditor on a particular day shall be prima facie evidence of the amount owing”.

Clauses such as the above have been held by the courts to be effective and are thus a means of short circuiting the legal action process, because it becomes much easier to prove the debt.

Summary

The above recommended clauses are rarely used in business trading terms but there is every good reason why they should be.

Roger Mendelson, CEO at Prushka Fast Debt Recovery