DAL, Inc. Industry Note:

Maximize Your Return on Credit Sales -
Are you Being Proactive or Reactive? Review your Sales Documents, including your Credit Application to be sure that you are fully protecting your interests and add incentive for your customer to honor your credit terms.

by Scott Blakeley^[1] 

Customers failing to honor a vendor’s credit extensions are on the rise as the economy slows.  Given the increase in customer defaults on credit sales, what terms and condition may a vendor include in their sale documents, including credit application, vendor contract, invoices or order acknowledgements that may prompt a customer to honor the credit sales, or promptly pay when the customer fails to honor the extensions of credit?  Some terms a vendor may consider including in its documentation that may prompt the customer to honor the credit terms is considered below.

Contract With Your Customer

For vendors selling goods, Article 2 of the Uniform Commercial Code governs the rights and remedies of a buyer and seller with the sale of commercial goods.  Article 2 provides that with the sale of goods over $500, there must be a signed writing.  A signature certifies the writing for the sale of goods.  With the traditional sale of goods over $500, the credit executive may memorialize the credit documentation through a signed credit application and invoices or order acknowledgments.  If the customer refuses to sign a credit application or supply contract, the vendor generally will have a binding contract with the customer through purchase orders and corresponding invoices or order acknowledgments.

Likewise, where the vendor documents the sale electronically through a credit application posted on its webpage, or confirming electronic invoices or electronic order acknowledgement, under the federal digital signature act, a vendor may have a binding contract.

Encouraging Your Customer To Pay Through Credit Documents

Attorney’s Fees, Collection Agency Fees and Costs

Attorney’s fees and collection agency fees can be recovered from the customer as costs of a collection suit when there is an express provision in the credit application or supply contract that provides for the recovery of fees and costs.  Common language is:

Applicant further expressly agrees that it shall be liable and pay for all collection agency fees and all attorneys’ fees, collection costs and court fees, and any other expenses, whether or not incurred in connection with litigation, including but not limited to collection agency and attorneys’ fees and costs associated with the enforcement of any of the terms of this Application and collection agency and attorneys’ fees and costs resulting from a default under this Application.

The court has discretion to determine the amount of fees and costs to award. If the vendor does not have such a provision, the general rule is that the vendor is not entitled to its fees and costs and must bear those costs.

Interest and Late Fees

Like an attorney’s fee provision, a vendor may include an interest provision if a customer fails to pay pursuant to the credit terms. Common language is:

[Vendor] reserves the right to charge interest or assess a monthly service charge on account paid outside credit terms to the maximum amount permitted per jurisdiction. 

If the vendor does not have an interest provision in the credit application or supply contract, vendor contract or invoice, then a court may decide not to award interest to the vendor from the date of the breach.  If a court awards interest, then it is usually at a lower interest.

Waiver/Duty to Inspect

The vendor may use its credit application or supply contract to prompt a customer to complain of any problems with the product shipped.  To that end, the vendor may include a provision in its credit application or supply contract that requires the customer to investigate the product, as well as the documents that support the sale, and complain within a reasonable period.  Common language is: 

Applicant also agrees to examine immediately upon receipt, each of [Vendor]‘s statements, and to advise [Vendor] of any disputed transactions or statements within 10 days of receipt, together with a written statement specifying the reasons for such dispute. 

Failure to notify [Vendor] of any dispute with respect to defective goods or billing shall constitute a waiver of all such disputes. 

Key to imposing on the customer a duty to inspect is that if the customer fails to complain within the period set forth in the credit application or supply contract, the customer loses its right to later complain and legally withhold payment for the order.  As with the other provisions noted above, if the vendor refuses to sign the credit application or supply contract, this term may be challenged by the customer if later included in the vendor’s invoice.  The battle of the form doctrine, which addresses this defense, is considered below. 

Venue

For the vendor selling the out-of-state customer, the location of resolving the dispute may make a difference as to promptly resolving the dispute.  If the vendor has a provision in the credit application or supply contract that sets out that disputes will be resolved in the vendor’s local venue may prompt the customer to pay.  Common language is:

Applicant agrees that all issues and disputes relating to any credit arrangement extended hereunder shall be governed in accordance with a competent jurisdiction chosen at the discretion of [Vendor] and that Applicant expressly waives its venue rights without reference to conflicts of laws principles.

Arbitration

As an alternative to filing a lawsuit to collect on the delinquent account, the vendor may elect to arbitrate the delinquent account, provided the vendor has an arbitration clause contained in its credit application or supply contract.  Common language is:

Applicant agrees that Applicant will submit all disputes to final and binding arbitration, in _______________, in accordance with the National Association of Arbitrators. Applicant agrees to be bound by the arbitrator’s decision.

Like the terms and conditions above, an arbitration fee provision can prompt a customer to pay when the customer fails to honor the credit terms.  The vendor can invoke the arbitration provision upon the customer’s demand by sending a demand letter coupled with an arbitration form.  However, if the customer has not agreed to the arbitration provision through the credit application or vendor contract, but rather the arbitration provision is contained in the vendor’s invoice, the arbitration provision may be unenforceable.  The legal doctrine that the customer may use to block the enforceability of the arbitration provision is the battle of the forms doctrine.  This doctrine may also be used by a customer to block a vendor’s efforts to enforce an attorney’s fees and late fees provisions that may be set out in a vendor’s invoice.  

Battle of the Forms

In some settings, a customer may refuse to sign the vendor’s credit application or supply contract.  In this setting, the vendor may ship on credit terms based on the customer’s purchase orders.  The vendor matches the customer’s purchase order with an invoice that sets out favorable terms for the vendor, such as attorney’s fees, late fees and arbitration provision.  However, if the customer’s purchase order contains terms that conflict, which provision controls? 

The general rule provides that a written confirmation, such as invoice, which is sent within a reasonable time operates as an acceptance even though it states terms additional or different.  The additional terms are to be construed as proposals for additions to the contract, and between merchants, vendor and customer, such terms become part of the contract unless: (a) the offer, the purchase order, expressly limits acceptance to the terms of the of the offer; (b) the terms of the invoice materially alters the purchase order; or (c) the customer notifies the vendor, or vendor notifies the customer, that the new terms are objected to within a reasonable time.  This means that in those settings where the customer refuses to sign the credit application or supply contract which contains the provisions that may encourage the customer to pay, the vendor must review the customer’s purchase order to ensure that the customer does not include a provision that may bar the vendor’s provisions that may encourage the customer to pay.

Take Away

A credit application can be central to setting forth the rights of the vendor in the event of a dispute with the customer.  A credit professional may limit credit risk and address contingencies with an effective terms and conditions section of a credit application or supply contract, and therefore the vendor may refuse to extending credit terms without the customer agreeing to the credit application or supply contract.