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Protecting Small Businesses from Unfair Contract Terms

Protecting Small Businesses from Unfair Contract Terms

Are you a small business or is the party you trade with a small business; that is, an entity that employs fewer than 20 persons? If so, then you need to pay attention to the legal changes that will come into play on 12 November 2016.

The changes relate to the small businesses who trade on standard form contract terms; that is, contracts that are pre-prepared before any discussions relating to the transaction and where the terms are not usually negotiable. A clear example of a standard form contract is a credit application used by many of our clients for the provision of services or goods on credit terms.

Where your standard form contract (e.g. credit application) involves an upfront price payable of $300,000 or less, or has a duration of more than 12 months for an upfront prince payable of $1MIL or less, than you should review the terms of your contract before 12 November 2016 to ensure they are not unfair.

This is because by 12 November 2016, there will be changes to the ASIC Act and the Australian Consumer Law and those changes will state that if your contract is deemed unfair, then it will be treated as though the term never existed which means that you will not be able to rely on it in Court. This will obviously give a belligerent debtor customer scope to dispute their liability for monies owed to you. This could be critical for your cash flow as a small business.

So what does it mean for a term in a contract to be unfair? A term is unfair if:

  • it would cause a significant imbalance in the parties’ rights and obligations arising under the contact; and
  • it is not reasonably necessary to protect the legitimate interests of the party who would be advantaged by the term; and
  • it would cause detriment (whether financial or otherwise) to a party if it were to be applied or relied on.

Some examples of terms that would be unfair are:

  • A term that permits, or has the effect of permitting, one party to assign the contract to the detriment of another party without that other party’s consent.
  • A term that limits, or has the effect of limiting, one party’s right to sue another party.
  • A term will be deemed unfair if it is a term that permits or has the effect of permitting one party to vary the upfront price payable in a contract without giving the other party an opportunity to terminate the contract.

If you think your contract terms may be caught by the changes outlined above, it is critical you have them reviewed before 12 November 2016, including the covering sheet to your contracts, such as the front cover of your credit applications.

A good set of terms and conditions that is enforceable forms the crucial backbone for successful trading relationships in any business.

If you would like to talk to a lawyer about whether the changes apply to you and have your contract terms reviewed, please contact Su-Ann Loh (Senior Associate, Dispute Resolution Practice Group) or Peter North (Senior Associate, Business Practice Group) on 03 9629 9629 or by email at suannl@lewisholdway.com.au and petern@lewisholdway.com.au.

Debt recovery: keep your cash flow healthy

Debt recovery: keep your cash flow healthy

We’re nearing the end of the first quarter of this financial year, and many of our business customers may have recently reviewed their debt recovery processes and procedures, to ensure they maintain a healthy cash flow and minimise potential bad debts throughout this year.

When your business is winning new business, it’s great for your P&L but if you don’t follow up your invoices and get paid, it’s not great for your cash flow.

Do you need to review your credit terms or invoice frequency?

You may or may not have standard credit terms that you offer your customers.  How promptly do your customers pay against their credit terms and does this payment cycle work for the cash flow of your business?

It may be that you need to think about having shorter credit terms so that you are paid more quickly.

Similarly, you may also wish to look at how frequently you invoice. If you invoice monthly, would it be beneficial to your business to invoice weekly? The sooner you invoice for the goods or services you have provided, the sooner you will get paid.

Follow up your sales invoices

Follow up your customers by calling them to confirm delivery or satisfaction with the goods or services you have provided; if there are any reasons that could give rise to a dispute, find out early and not when payment is overdue.  The sooner you resolve any issues, the sooner you will recover the debt.

Stay close to your customers, ensure they are aware of your terms of trade and from the start, ensure they know that you chase up your invoices promptly. Those who shout loudest get paid first!

Do you need to review your terms of trade?

Do you have a clause in your terms & conditions that will allow you to recover your debt recovery costs back from your debtor in the unlikely event that they do not pay?

If you do incur costs, you want peace of mind that you can recover these as well as the debt.

There are many clauses that can assist in the speedy recovery of your debts, they include some of the following:

  • Caveat / charging clause
  • Jurisdiction clause
  • Cost clause
  • PPS (Personal Property Security)

 

Kearley Lewis specialises in providing ‘business to business’ debt recovery services directly to Businesses.  They have an in-house Law firm, Lewis Holdway Lawyers which provides commercial legal services and experienced Law Clerks undertaking their collection services.

Debt collection tips for SMEs

debt collection tips

Debt collection tips for SMEs – position your business to get paid more quickly

Whilst some business owners are reluctant to chase late payers for fear of losing their business relationships, it’s becoming increasingly important as we see evidence of larger businesses choosing to extend the time they take to pay their suppliers.

The recovery of business debt can be frustrating, time consuming and often unsuccessful so having a good credit controller and utilising the services of a reputable debt collection agency can be invaluable for your business cash flow.

Below are some helpful credit control tips, and whilst not exhaustive, may assist if you are reviewing your own practices.

Set a credit management policy

In determining how vigorous a risk regime your business needs to adopt, it is perhaps prudent to relate the approach you take to your profit margin.

Businesses that have a low gross profit margin cannot afford significant bad debts, and thus they should consider having a more vigorous risk assessment regime than a business with high gross profit margins. It goes without saying that no business wants bad debts, however in setting up your credit management policy, being aware of how much tolerance your business can take should provide you with a good starting point.

Partnering with a trusted debt collection agency who has access to in house lawyers is often a cost effective way to leverage some assistance if you ever need it, and if your invoices are going too far overdue.

Establishing a relationship before you need external assistance is crucial in sourcing the right partner for your business.  Make sure you take the time to engage with a partner who will work with you to preserve your brand and reputation and who is prepared to take the time to understand your business.  You want to make sure anyone who is contacting your customers is not damaging these relationships, particularly if there is potential for more business.

Setting up new customers

Suggestions for assessing new customers:

  • Always have a signed credit application from your customer prior to setting up a new account, ensuring they have provided an ABN
  • Undertake a credit check, cross checking details to the credit application
  • Allocate a credit limit (if you are happy to extend credit)

Undertaking a credit check may not necessarily prevent you from giving credit to a customer who is slow to pay, however it will mean that you’ll avoid giving credit to a debtor who has previously defaulted.

Decide what steps should be satisfied in order for a customer to receive credit terms, as credit should not be automatic. Don’t be afraid to ask for cash payments to start with, and it is not uncommon to ask for trade references and/or personal guarantees.

Set a credit limit for each new customer and check regularly for adherence to this.  If a customer isn’t paying to terms, ask for payment before new goods or services are supplied.

Know your Debtors

Make sure your invoicing is accurate and make sure it is in line with the customer’s order, including delivery details.

Follow up your customers by calling them to confirm delivery or satisfaction with the goods or services you have provided; if there are any reasons that could give rise to a dispute, find out early and not when payment is overdue.

Get to know who pays the bills – building rapport with the person who pays the invoices could be invaluable and in a larger organisation they may not even be aware of the product or service you have provided.

Collection procedures

Consider categorising your customers into good, average and ‘challenging’, and set a collection policy for each customer type.

Phoning larger customers before the due date can be a way of ensuring payment will be made on time.

Be diligent in your collections, chase overdue payments within a week of them being due. Prioritise your collection activity, chasing larger balances first.

Know your aged debtors listing intimately and follow your credit management policy regarding standard letters, calls and referrals to your debt collection agency.

Can you recover costs?

Often terms of trade will stipulate interest charges will be incurred for late payment, however do you have a clause that will allow you to recover your debt collection costs in the unlikely event that a debtor does not pay?

Often reputable debt collection agencies will ask their in house lawyers to review your terms and conditions free of charge, which is recommended so your terms of trade are fully documented up front.

Proactively manage your credit policy

Consider having a regular review to identify problem accounts and define courses of action.

Make sure your sales team are involved in your reviews so they can assist in managing the accounts and setting expectations with customers.  Ensure they know the credit limits that are in place, and seek their assistance in getting paid, particularly if there are new orders coming in.

It’s not surprising how many debtors will pay when they want more goods or services provided, or how motivated your sales team will be to help you when they want those new sales!