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How to stop your customers using you as a bank?

How good are your retention of title clauses and your credit control procedures?

The below abstract from RNF’s recent presentation is an easy to follow step by step guide to make sure you get paid when supplying goods and service.

  • Establish the customer’s creditworthiness. There are a number of ways of doing this, including taking references, carrying out county court judgment searches, examining the customer’s accounts, and doing background checks on its directors to see if they personally have a good credit history.
  • Set credit limits – the amount the business is prepared to risk on a particular customer at any time – and stick to them. Review these limits periodically – they can be amended up or down depending on the customer establishing a good payment history, and remaining financially sound. A customer’s financial status should be re-checked at least annually. If it has a poor payment record, reducing the limit will reduce the risk to the supplier.
  • Set payment terms – how long the customer will have to settle the debt, and the cost of late payment – the entitlement to charge interest if the debt becomes overdue. Some businesses allow an early settlement discount to improve cash flow. Suppliers have a statutory right to charge interest on overdue accounts, but why rely on this when they can set and apply the rules themselves?
  • Adopt robust systems to verify delivery, monitor payments, identify overdue invoices, take steps to collect any arrears; and suspend supplies if necessary.
  • Adopt systems to deal with customer queries or complaints – inevitably these will arise, so it is important that the procedure is set out clearly to avoid customers trying to “play the system” to delay payment. Deal with all customer queries and complaints quickly, efficiently, and in a firm but friendly manner, even if you think the customer is trying it on. Threats of legal action etc. should only be a last resort, if all other avenues have failed, and the trading relationship has completely broken down.
  • Establish excellent customer relationsfor example by calling the customer on delivery to confirm that everything is ok with the order. This is particularly important with larger orders, and more difficult customers –not only is it an excellent way to develop and improve relationships, it also reduces the risk of the customer raising a dispute later to try to delay or avoid payment. Some companies make a point of calling their customers shortly before the due date of larger invoices to confirm everything is in order, and that payment will be made on time.
  • Monitor average debtor days monthly – and if these slip towards or even above the standard credit term, take steps to tighten credit control procedures.
  • Credit insurance – insuring invoices against non-payment – however this can be very expensive compared to the benefits of having excellent credit control.
  • Adopt written standard terms and conditions – get these drawn up by a solicitor – it’s a great investment – and ensure that they are signed by the customer before doing business with it. These should be reviewed periodically and updated to reflect any changes in the law – which happen more frequently than most business owners suspect.
  • Incorporate retention of title terms – these provide that ownership of the goods does not pass to the customer until it has paid for them, so that the supplier can repossess its goods if they aren’t paid for, or recover the invoice cost from an administrator if he wants to use those goods to continue the business of an insolvent company.
  • Retention of Title Clauses aka Romalpa clauses are provisions in a contract for the sale of goods that ownership remains with the seller until payment is received in full. The concept is very simple but are becoming increasingly widely drafted.

Include in your clauses 

  • Legal ownership, or title, to the goods will not pass from the seller to the buyer until the buyer has paid for the goods
  • store the goods separately from goods belonging to third parties;
  • mark the goods as the seller’s property;
  • allow the seller access to the buyer’s premises to verify that the obligations are being complied with.
  • right for the seller to enter the buyer’s premises to repossess the goods should be include

Don’t include in your clauses

  • Unregistered charge: the buyer takes legal ownership of the goods but the seller retains the right to seize, and usually sell, the property to discharge the buyer’s debt.
  • Proceeds of sale clause: the seller claims the proceeds of any subsequent sale.
  • Mixed goods clause: the seller to claim an interest where the goods have been mixed in the manufacture of other goods.

Some points to consider

  • All monies clause:

reserves title in all goods supplied to the buyer until the buyer has settled all outstanding invoices from the seller. If used, this should be in a separate subclause from the basic ROT
clause. This means that if the all monies clause was ever held invalid as an unregistered charge by a court it could be severed, and so would not invalidate the rest of the clause.

  • Insurance:

a clause stating that risk of damage or loss will pass to the buyer on delivery, as opposed to passing with title as this is reserved to the seller;

an obligation on the buyer, on delivery, to insure the goods with a reputable insurance company;

reservation of a right to pre-approval of the insurance company, if necessary;

an obligation to note the seller’s interest in the goods on any insurance policy.

  • Termination

a clause stating the contract can be terminated is one ‘reasonably believes’ that an insolvency event will occur including administration, administrative receivership, liquidation,      company voluntary arrangement, deed of arrangement, bankruptcy, individual voluntary arrangement, partnership voluntary arrangement.

  • Severance

if any of the sub-clauses are found to be invalid they will not strike down the whole ROT.

  • Conversion

Tort: selling the goods before they have been paid for and while the seller retains title. Gives rise to damages claim.

  • Do not include any express or implied terms allowing the buyer to sell goods that are subject to an ROT.
  • Practical difficulty – the buyer needs to sell the goods before he can pay for them.
  • Need not enforce, but then conduct may imply consent.
  • Foreign jurisdictions

Please bear in mind that that retention of title clauses are not recognised or enforceable to the same extent in other jurisdictions.

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