Contracts do not need to be complicated or convoluted, but they do need the right Terms and Conditions in place to ensure your business is properly protected. A robust set of Terms and Conditions can eliminate loopholes and put your business in the best possible position to recoup monies owed.
Having appropriately worded Terms and Conditions can mean the difference between a successful recovery and a write-off. In the context of a Commercial Credit Agreement for trade credit suppliers, the following Terms and Conditions should be considered:
- Personal guarantee and indemnity.
The inclusion of a properly formulated personal guarantee can mean the difference between a successful recovery and a write-off. Care should be taken in the drafting of a personal guarantee to ensure enforceability by a court (including whether it takes the form of a deed and is properly executed by the parties).
- Enforcement costs and expenses
Creditors may wish to include in the Terms and Conditions a clause allowing for the recovery of all legal costs and expenses from the debtor. It is important that the wording of such an indemnity clause is compliant with court and judicial expectations. In particular, courts typically require that the subject clause is “sufficiently plain and unambiguous”.
- Contractual interest
Parties can agree between themselves for a contractual rate of interest which is higher than the rate provided by statute. Depending on which state you are operating in, the statutory rate of interest can be quite low. Currently, in NSW it is only 4.1%. We regularly observe credit Terms and Conditions including interest rates exceeding 12%.
- Charging clause
Creditors may want a clause where the customer or guarantor charges real property to secure all amounts outstanding to the creditor, and for the creditor to lodge a caveat over any such real property.
In addition to the ability to lodge a caveat, the inclusion of such a clause can have a dual purpose with regard to defending a preference claim on the basis that the creditor is a secured creditor and not an unsecured creditor (which is a necessary pre-condition of a preference claim).
- Retention of title – PPSA
Creditors that supply goods on credit may want a clause by which the customer grants a security interest to the creditor/supplier for the purposes of the PPSA. Depending on the circumstances, a creditor may wish to require a PMSI and/or an ALLPAP.
The Terms and Conditions may also include a clause pursuant to which the supplier retains ownership of the subject goods until such time as payment for those goods has been received.
The inclusion of such a clause can also have a dual purpose with regard to defending a preference claim on the basis that the creditor is a secured creditor and not an unsecured creditor (which is a necessary pre-condition of a preference claim).
- Certificate clause
Creditors may want to include a clause whereby an authorised representative of the creditor can issue a written certificate specifying various matters, including the amounts outstanding under the credit agreement, the delivery of goods under the credit agreement, the legal costs incurred and interest accrued.
The certificate will be treated as conclusive proof of the matters stated therein (including the customer’s indebtedness to the creditor).
- Privacy clause
Creditors may want a clause enabling the creditor to undertake credit worthiness checks at the time of opening the account and on an ongoing basis (for example, at the time of an application to increase a credit limit).
A properly worded privacy clause will also enable a creditor to report any credit defaults to the relevant credit authorities and to be aware of any such defaults impacting its customers. The absence of such a clause (or a poorly drafted clause) will prevent a creditor from lawfully undertaking the necessary searches and exposing the creditor to claims under the Privacy Act 1988.
- Other form of security
Depending on the nature of the customer and industry, creditors may also wish to incorporate more stringent security clauses as a safeguard measure. Such measures might include the granting of a mortgage in favour of a creditor, the provision of a bank guarantee, or a guarantee to be provided by a third party (e.g. a parent or holding company).
If you have read through this list and find that your Commercial Credit Contract is incomplete, now is the perfect time to review and update your Terms and Conditions.
Holman Webb’s Commercial Recovery and Insolvency Group has decades of experience in the credit industry and understands the importance of implementing suitable credit agreements and Terms and Conditions.
If you have any questions regarding the content of this article, please don’t hesitate to get in touch today.
We are pleased to invite you to join Holman Webb's Commercial Recovery and Insolvency Group for our upcoming webinar: 'Tips to improve commercial recoveries and increase cashflow', taking place from 11:30am (AEST) on Thursday 4 August.
Presented by Holman Webb Commercial Recovery and Insolvency Partner Christopher Hadley, and Collections Software Specialist Griffin Swanson, this interactive seminar will cover best practices for collections leaders.
Topics covered will include:
- What are the impacts of the risk you take on?
- What’s the worst that can happen?
- Why does this matter?
- Could increased ATO activity bring about more insolvency?
- Why does this impact on trade creditors?
- What are we expecting to see in the coming year?
- What can you do now, to mitigate this risk?
- What is the simplest, and most effective way to protect your credit risk?
- Important terms and conditions
This seminar will be highly relevant for CEOs, CFOs, Credit Managers and Collections Specialists.
Date: Thursday 4 August 2022
Time: 11.30 – 12.30pm AEST
CPD Accreditation: Attendees will be eligible to receive 1 CPD point
Lunch is on us!
- All webinar registrants will go into a draw to win one of ten $30 Uber Eats vouchers!
- Winners will be selected at random at 9.00am on Thursday 4 August.
- Winners will receive their Uber Eats voucher code by 10:30am on Thursday 4 August.