Credit and claims management In practice for cross-border transactions within the EU

Credit and claimsmanagement

In practice for cross-border transactions

within the EU

The European Union (EU) is one of the largest markets worldwide

where small and medium-sized enterprises (SMEs) can find many

opportunities. However, sometimes small businesses

baulk at cross-border operations for various reasons . One of the

biggest obstacles for many entrepreneurs is not knowing

whether a customer in another EU Member State will pay bills on

time or how best to proceed in the event that this occurs and

default of payment results.

Introduction

2

Objectives

.

by describing measures that an entrepreneur can

take from the point of submitting a

quotation up to the point of recovering

unpaid amounts;

by describing measures available to an entrepreneur

should an actual case of bad debt

come about

Support SMEs and future and/or young entrepreneurs in managing credit and eventually

enforcing cross-border claims

3

A. Precontractual issues

B. Preparing the tender

2. The tender

4



2. The tender

5

A. Pre-contractual Issues

I. Credit check on potential customers

II. Governing law and competent jurisdiction in the event of disputes

6


• The more information the company has about the potential customer, the fewer problems it will face in the future.

• Obtain information about his recent business track features and rate it according to a established pattern to know its CREDITWORTHINESS.

CREDIT CHECK

RATE CUSTOMER

S

Creditworthiness indicates a potential

customer’s ability to pay


• 2 ways to check creditworthiness:

• OUTSOURCE it - e.g. to an outside service provider.

• Check it PERSONALLY.

COORDINATION AND INFORMATION

EXCHANGE WITH SALES DEPARTMENT IS CRUCIAL WHEN

COLLECTING INFORMATION

(1) Obtaining information


MAIN ISSUES TO CONSIDER

CONCERNING THE CUSTOMER

- customer’s annual accounts- time during which the customer has been in business- managers, shareholders and people involved

CONCERNING COMMERCIAL ENVIROMENT

- overall performance of the industry

- economic climate of the region

ADDITIONAL ISSUES

QUALITY OF THE CUSTOMER IN

TERMS OF COMPANY'S STRATEGY

- seasonal/one shot vs further deliveries

-goods or services from competitors

- time until delivery

(1) Obtaining information


Several ways to grade customers: • “Basic” method - grade

customers according to general issues –i.e. their overall “quality”- .

• Methods based on quantitative criteria - allows for estimating the repayment capacity of the customer within a defined period.

RATE POTENTIAL CUSTOMERS

ACCORDING TO A PATTERN ALLOWING THE COMPANY TO

ADAPT THE CONDITIONS IT CAN

OFFER TO THE CUSTOMER -PRICE, DISCOUNTS ETC.

(2)Rating customers


BASIC METHOD – Parameters

• One shot customers vs customers with potential.

• Price - late or prompt payment, payment without contesting the price or continuous requests for discounts, etc.

• Quality of work - work atmosphere with a customer.

• Promotion – the customer adds value to the company’s business and helps the company to grow.

(2)Rating customers


Basic method

Take a sample of companies (some bankrupted, some not) and identify trends and differences among their annual accounts. Then compare the potential customer’s figures within this information.

Complex models -SIM Model

Calculate some financial ratios from the potential customer’s annual accounts (level of self-financing, level of short term financial debt, etc.). The model gives a table providing the probability of going bankrupt within a certain period of time for a number of results of these ratios. Then compare the potential customer’s ratios with the figures in the table.

(2)Rating customers


• Using the tools described the company can:• Rate the potential

customers according to the customer’s categories previously established;

• Decide, according to that rating, whether they are or not creditworthy

• And to what extent they are so.

A

•No payment problems are expected•Credit insurance and / or high credit worthiness

B•Normal credit within a limit to be established•Additional guarantees beyond the limit

C

•To be cautious•Additional measures such as halting deliveries

D•To avoid as customers•Or payments in advance

(2)Rating customers


Governing law

Competent court

Important to know before entering into

any commercial agreement


Regulation 593/2008 of 17 June 2008 on the

law applicable to contractual obligations (“Rome I Regulation”)

Principle: free choice of law

(1) Law governing contractual obligations

Which law is applicable if parties did not choose a governing law?

Sale of goods

Provision of services

Distribution

Member State (MS) of residence of the main actor executing the

agreement

Immovable property

MS where the property is located

Carriage of goods

MS of residence of the carrier (if delivery) / MS of residence of the consignor

Insurance

Shipment

Normally MS of domicile of the carrier (if same place as

delivery); domicile of the consignoror place of delivery

Normally MS of domicile of theinsurer



Employment

contracts

Consumer contracts

MS of residence of the consumer / freedom of choice if respectful of consumer protection

MS in which the employee habitually performs work



Special protection

• Escape clause!

If no applicable law can be determined or if the contract is more closely related to another Member State than the one indicated by these rules, the law of that Member State will apply.




a) Mediation

Directive 2008/52 on mediation in civil and commercial matters

• Suspension of time limits for proceedings before national court or arbitral tribunal

• Enforcement of the agreement possible• Confidential• Personalised solution leaves door open to continue

business relations• Less expensive than arbitration or court proceedings

(2) Competent jurisdiction



b) Arbitration• United Nations Commission on International Trade Law

(UNCITRAL)’s Model Law on International Commercial Arbitration 1985

• New York Convention 1958

• Agreement is conditio sine qua non! It is crucial to draft a clear arbitration clause.

b) Arbitration



Advantages• Parties are free to

organise proceedings• Less formal• Confidential• Possibility of covering

full legal costs

Disadvantages• Expensive


If no valid arbitration agreement exists, Regulation 44/2001 on jurisdiction and the recognition and enforcement of judgments in civil and commercial matters (“Brussels I Regulation”) will apply.


http://eur-lex.europa.eu/LexUriServ/LexUriServ.do?uri=CELEX:32001R0044:DE:NOT


c) National courts• General rule: Domicile of the defendant

Natural person• Domicile (applying the Member

State’s internal law)

Legal person• Statutory seat• Central administration• Principal place of business



c) National courts

• Exclusive jurisdiction In the following matters: Real estate disputes; the

existence of legal persons; the entries in public registries or the registration of intellectual property rights.

Irrespective of where the defendant has its place of residence (in an EU Member State or not)


c) National courts• Express choice of jurisdiction

According to Brussels I, if the parties have agreed on a concrete court to deal with the dispute, this court will be exclusively competent

Requirements• written/evidenced in written; or• in a form which accords with practices between the parties; or

• in international trade in a form which accords with a usage of which the parties are aware.




c) National courts• Protective jurisdiction for consumers, employees and

persons insured under insurance

Always have the right to choose between suing before their own “home” courts; or before the courts of the Member State where the other party has its domicile.

The other party however can only sue them before the

national courts of the Member State where they are domiciled.



c) National courts• Special jurisdiction rules Contracts regarding sale of goods or provision of services

(alternative to general rule of domicile of defendant).

Sale of goods

Provision of

services

Place in a Member State where, under the contract, the services were or should

have been provided

Place in a Member State where, under the contract, the goods were or should

have been delivered



Exclusive jurisdiction

(Real Estate, IPR...)

Express choice of jurisdiction

Protective jurisdiction (consumers, employees, insurance)

Special jurisdiction (place of performance of the agreement –alternative to general rule-)

General rule: domicile of the defendant



b) National courts• Recast of the existing Brussels I Regulation • Enters into force in January 2015• Extension of the scope to disputes involving

third country defendants• Preference to the court chosen by the parties

regardless of when proceedings are started.




2. The tender

30


I. Individual tender

II. General Terms and Conditions of Business

III. Payment terms

IV. Incorporation of General Terms and Conditions of Business or payment terms

V. Competent legal consultancy

31

I. Individual tender(1) Designation of the contracting parties

• Full name.• Address.• Profession and individual trading name as well as the business

proprietor’s first and last names.• In the case of companies: full name, head office, Register of

Companies number and legal representative’s details.

(2) Designation of goods and services • Goods: as precise description as possible- refer to a catalogue

or sample if necessary.

• Services: precise description of the services to be provided and the timeframe during which the work is to be performed.

I. Individual tender

(3) Price Customarily a designated fixed purchase price, or reference to a

price list.• Rebate: discounts on major orders may attract customers.• Discount: granted to incentivise early payments.• Value-Added-Tax (VAT): important to mention whether the price

quoted is inclusive or exclusive of VAT. Whether goods/services are taxed and at what rate depends on the applicable laws. For goods, VAT is payable where they are delivered; for services, where they are supplied.

• Currencies: in the case of deciding to sell in different EU currencies, it is necessary to determine the exchange rate.

I. Individual tender(4) Period of performance

• Determine a specific period or specific point in time of performance.

• The period of performance fundamentally differs between a service provided on the one hand, and a service resulting from trading in / supplying with goods on the other.

(5) Quotation validity periods• If a customer is sent a quotation in the form of a contract, it should

specify the period during which the quotation remains binding on the business making the offer.

(6) Nature and scope• Performance should be defined exhaustively and unambiguously.• Prices should be expressed in a way they can be easily identified or

calculated.

I. Individual tender(7) Signatures – Ensure that

• The final contract text is signed by the parties;• The date and place of signature are recorded.

If the contract consists of several pages it is advisable for the contracting parties to initial each of these.

(8) Form of the tender (and subsequent contract)• In principle, no requirement exists for contracts to be drawn up in

writing (however, it is important to check national laws to be sure)• In any case, for purposes of preservation of evidence contracts

should always be drawn up in writing• Alternative forms of evidence - attested by witnesses or recorded

on tape.


Reduce the financial exposure to late and non-payers

Increase the likely hood of getting paid on time

Enhance the company's rights and limit its liabilities

General Terms and Conditions of Business

(1) Preliminary considerations


• General Terms and Conditions need to be tailored to our requirements -3 questions to answer:

• Are the terms and conditions appropriate for the business the company is dealing with?

• Are the terms and conditions updated?

• Which issues are to be covered?

• There are some specificities to take into account when trading with consumers.

(1) Preliminary considerations

II. General Terms and Conditions of Business –

(2) General provisions • Preamble - Useful for interpretation of the contract provisions

• Definitions - Defining some contractual terms may also help

• Conclusion, commencement and termination of the contract - Especially important for service contracts

• Written form clause• Severability clause• Choice of language • Choice of governing law • Legal venue agreement• Arbitration tribunal agreements


• Transfer of risk clauses

• Provisions regarding liability for defects and impairment of performance

• Other liability provisions

(3) Assumption of risk, warranties, liability, damages


.

Performance risk

Who has to bear the risk or disadvantage in the event of the loss,

damage or destruction of the object of

purchase?

Price risk

In spite of damage, loss or destruction of

the object of purchase, does the purchaser still

have to pay the purchase price?


In the interest of the vendor to:- set transfer of the price and performance

risk at the earliest point in time as possible (i.e. not only until the goods are received by the purchaser), and

- provide that the place of performance is the registered domicile of their own business so that the purchaser is required to collect the goods.

• Liability for defects and impairment of performance

- Principle: a vendor is liable for defects in the object of purchase.

- Should endeavour to contractually exclude or limit their liability for defects and warranty obligations to the necessary extent.

- Should protect itself against (extensive) liability for impairment of performance (i.e. failure to meet delivery dates or delivery periods).


TWO-YEARS WARRANTY- Consumers are entitled to demand

repair or replacement if the goods turn out to be defective or fail to meet the product description.

- If repair or replacement is not possible within an appropriate period and without considerable inconvenience, consumers have the right to claim a refund or reduction of the purchase price.

- Two-year warranty following the delivery of the goods.

http://europa.eu/youreurope/citizens/shopping/shopping-abroad/repairs-replacements-refunds/index_de.htm




SECOND-HAND GOODS

Two-year warranty. However, Member States may provide that the seller and the consumer may expressly agree at the time of purchase a shorter time period for the liability of the seller. However, this period may not be less than one year.


REPAIRS, REPLACEMENT AND REFUNDS

If goods or services are purchased via mail order, telephone, fax or online from a commercial dealer domiciled in the EU the same rights to repair, replacement or refunds may be enforced against the vendor as with purchase in a shop.

• Other liability provisions

The vendor should also endeavour to rule or limit for other liability risks (e.g. for breach of secondary contractual obligations).

Damages compensation clauses and lump-sum allowances for damages should be established in the contract (they limit liability to the extent permitted by the relevant legal system, for example, to liability solely for damage caused by intent or gross negligence).


• Individual delivery terms – Who bears the cost of delivery – purchaser or vendor? • Freight charges (carriers, freight and loading charges,

etc.) AND•Transport insurance.

• Standardised terms - Advisable to resort to standardised terms. • “International Regulations for Interpretation of Customary

Contract Terms (Incoterms)” regulate the basic obligations of purchaser and vendor.

(4) Delivery terms


• All customers and those involved in distance selling must be accorded a right of cancellation in certain cases. The General Terms and Conditions should foresee:

Instructions regarding cancellation (form, qualifying period, addressee) Consequences of cancellation and withdrawal. Damages compensation in the event of deterioration of goods. Costs of return shipment borne.

• The right to cancel purchases made on the Internet or any other purchase done outside a shop exists within seven working days from receipt of the goods.

(5) Rights of cancellation and return.


Retention of title (ROT) - provision in a contract for the sale of goods which states that the seller retains legal ownership of the goods until certain obligations are fulfilled by the buyer – usually payment of the purchase price.

• It may need a specific form.

• It should:

state that risk of damage or loss will pass to the buyer on delivery;

oblige the buyer, on delivery, to insure the goods; note the seller's interest in the goods on any insurance

policy.

(6) Security for claims.


Include a list of related events which will trigger the seller's right to terminate, and demand payment or repossess the goods (those events being linked to insolvency or risk of insolvency on behalf of the customer).

• There is still not enough harmonisation of laws governing ROT clauses – there are few EU instruments.

• National law of the place of location of the goods is applied to judge the validity and effectiveness of ROT clauses - undertakings should adapt their ROT clause to their specific transaction and bear in mind the particularities.

(6) Security for claims


• For data protection law reasons, communication of credit rating information is not always readily possible. In some cases, it may be necessary to obtain the customer’s consent in this regard.

(7) Commercial credit rating agencies

(8) Non-provision of goods – legal remedies• EU law goods ordered via the Internet must be

delivered within 30 days from the date of order – unless an agreement to the contrary has been made with the vendor.

• If the goods paid for by the recipient are not available: the vendor must inform the buyer within 30 days and refund the amount paid.

III. Payment terms

• Attention to balancing these interest positions - deciding factors:• customer creditworthiness according to

the company’s cash and credit management policy

• customer sector business and payment practices

• customer recruitment and loyalty aspects

• costs of individual payment methods• typical national practices

The purchaser wants to pay as late as possible so he preserves his own liquidity.The vendor wants to receive payment ASAP.

(1) Respective interests situation

III. Payment terms

• In light of the points listed, the company should decide the concrete method of payment that will be offered to the potential customer:

• Payment in advance or down-payment• Collecting progress payments linked to milestones• Payment at time of order• Payment on delivery – credit card, cash, debit note, by draft • Payment after delivery - on straightforward account, on account

with a specified payment date

(2) Methods of payment.

III. Payment terms

• Date when the purchase price is due.

(3) Maturity

(4) Payment by instalment• Equal payments are made at fixed intervals – in this

case the number, level and maturity dates of instalments as well as the interest rate payable by the customer should be established.

(5) Rights of offset and retention

• To what extent the debtor is permitted offset and retention rights.

III. Payment terms

• Directive 2011/7/EU: Late Payment Directive. Deadline to transpose March 2013.

The creditor is entitled to charge penalty interest for late payment upon expiration of: • 30 calendar days since debtor received invoice (or

equivalent) –default payment period – • if the previous date is not certain; 30 calendar days after

the date of receipt of the goods or the provision of the services

(6) Late payment provisions

III. Payment terms

Late Payment Directive

To avoid abuses where payment is conditional on acceptance/verification: the maximum duration of that procedure will not exceed 30 calendar days from receipt, unless otherwise expressly agreed in the contract (if not grossly unfair to the creditor)


III. Payment terms

Late Payment Directive

Public authorities will have to pay suppliers within 30 days or, in very exceptional circumstances (e.g. the healthcare sector), within 60 days


IV. Incorporation of GTCB or payment terms

• General Terms and Conditions of Business (GTCB) may either be incorporated directly into the main contract or structured as a separate text.

• If structured as a separate text, it should be stipulated expressly in the contract that the GTCB will apply + acknowledgement by the customer.

(1)Textual wording


• GTCB should be attached to the main contract and be signed.

• GTCB should be included to conclusion of the contract in all further quotations, proposals, orders, commissions, (supplementary) contracts.

(1)Textual wording


• Different versions of GTCB according to the profile of the customers. Is the customer a professional or a consumer? Is he a national or international customer?

• No copy-paste

• Update

(1)Textual wording


• Both the offer and the declaration of acceptance refer to application of the parties’ own GTCB...

• Different solutions:- First-shot theory- Last-shot theory- Knock-out rule

(2) Battle of forms


• No rule or theory that prevails in international law important and real doubt.

• Avoid simple formulations that merely indicate the applicability of one’s own GTCB.

• Solution: to incorporate a “defence clause” that expressly rules out the simultaneous applicability of competing GTCB, and clearly expresses the intent of precedence of the company’s own GTCB.

(2) Battle of forms


Compulsory information on the e-commerce homepage prior to the placement of an order:

the merchant’s postal address and e-mail address; the essential characteristics of the relevant goods or services; the total price of the goods or services inclusive of all taxes; shipping charges; payment procedures; indication of whether or not the order may be cancelled; expiry date of the offer or the price; minimum duration of the contract.

(3) Obligation to supply information in online trading

V. Competent legal consultancy

Before drafting specific contracts or templates, seek legal advice to ensure that:

• provisions are actually effective and meet the desired objectives;

• provisions are free from contradictions; • all essential aspects of the real-life situation that need to

be regulated are covered;• wording is clear and precise.

Documents

Credit and claims management In practice for cross-border transactions within the EU