2009 Hot Legal Topics.Credit Applications
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Transcript of 2009 Hot Legal Topics.Credit Applications
UNDERSTANDING COMMERCIAL SALES TRANSACTIONS AND CONTRACT TERMS
• Sale of goods transactions are governed by article 2 of Uniform Commercial Code (UCC)
– Goods broadly defined as “all things movable”
• Service contracts are governed by common law
• Our focus will be sales transactions
SALE OF GOODS VS. SERVICE CONTRACTS
HISTORY LESSON
• UCC was specifically developed to regulate commercial transactions
– All contracts originally governed by common law
– Common law was not designed for commercial transactions and led to unpopular results
– Merchants developed separate code of laws and enforced amongst themselves
– Merchant codes eventually adopted as law
– UCC = modern merchant code
– UCC adopted in all states but Louisiana
WHY IS THIS IMPORTANT?
• Understanding origins of UCC permits better understanding of its functioning:
– Designed specifically for commercial transactions
– Emphasizes practicality over traditional formalities
– If transaction not documented, UCC provides default terms
– UCC provides unique remedies
HOW CAN I PUT THIS KNOWLEDGE TO WORK
• Because UCC is aimed at practical results, it imposes default terms in every contract– Price (default = reasonable)– Payment (reasonable method; e.g., check = ok)– Delivery (default = buyer pick-up where goods
are located)– Risk of loss (default = multiple variables)– Warranties (default = provided by seller)
HOW CAN I PUT THIS KNOWLEDGE TO WORK
• Understanding that these default terms are present allows you to contract around them by expressly excluding their application (freedom of contract)
Documents commonly utilized in sales transactions:
•Purchase orders•Delivery receipts / “pick” tickets / invoices•Credit application (if credit transaction)
* Put consideration of credit app on hold for now.
UCC INTERPRETATION OF TYPICAL SALES TRANSACTION
UCC INTERPRETATION OF DOCUMENTSCONTRACT = OFFER + ACCEPTANCE
• Offer = order– Written offer = purchase order– Oral offer = telephone call
• Acceptance = order confirmation– Written confirmation = delivery receipt,
pick ticket– Confirmation = shipment of goods– Silence = acceptance as between
merchants (e.g., transactions between distributors)
UCC INTERPRETATION OF DOCUMENTSCONTRACT = OFFER + ACCEPTANCE
Offer and acceptance together create contract
“Battle of the Forms”
• Buyers’ terms are part of contract by default• Buyers’ terms take precedence over seller’s by default Default: if terms disagree, buyer’s terms control!
UCC INTERPRETATION OF DOCUMENTSCONTRACT = OFFER + ACCEPTANCE
• How can I prevent buyer’s terms from becoming part of contract?
– Eliminate buyer’s offer via statutory counter-offer
– Vehicle for counter-offer = offer acknowledgement; delivery receipt; pick ticket
– Magic words to include = “acceptance expressly conditioned on assent to additional or different terms” (aecoatadt)
– Simply put: I reject your terms and offer to sell goods according to my own
– Effect: buyer fails to read acknowledgement and accepts goods on seller’s terms
CREDIT APPLICATIONS
What is the function of a credit application?
• Two primary functions of credit application:1. Acquire information from customer
2. Establish account: credit application is a contract for creditPrimary function of credit application is to govern terms of credit, as opposed to terms of specific transactions
1. ACQUIRE INFORMATION FROM CUSTOMER
Making the informed decision: should I extend credit?
• Who am I dealing with?– Business entity or sole proprietor?
• Trade names– Credit history
• References• Authorization to check references and other sources• Previous bankruptcies?
– Bank account information• Important if default
– Asset information• Yes, you can ask!
• Recitation that information is accurate – If info is inaccurate, may prevent discharge ability of debt in event of
bankruptcy – debt incurred through fraud may not be discharged under barcode
2. ESTABLISH ACCOUNT: CREDIT APPLICATION IS A CONTRACT FOR
CREDIT
“Umbrella function”: credit application ties multiple transactions under single account
• Without credit application, sales are series of separate and independent contracts
• Properly entered credit application brings separate transactions under single “open account”
ESTABLISH ACCOUNT: CREDIT APPLICATION IS A CONTRACT FOR CREDIT
– Open account has unique legal significance • i.e. Established open account has unique
statute of limitations– SOL runs from date of last payment on
account, as opposed to date of breach of independent sales contracts
• i.e. If guaranty, guaranty extends to entire account, as opposed to having to consider each transaction separately
ESTABLISH ACCOUNT: CREDIT APPLICATION IS A CONTRACT FOR CREDIT
Credit application allows seller to control credit terms:
Interest rate• Attorneys’ fees• Payment terms
caveat: specific sale of goods terms (e.g., risk of loss, disclaimer of warranties, etc.) are often also incorporated in credit app; however, these terms can be excluded by a buyer’s carefully drafted purchase order! • Personal guaranty
CREDIT TERMSINTEREST
• Default interest rate in NC is 8% APR the maximum interest rate permitted in NC is 1½% per month (18% APR)
• A contract provision seeking 2% per month is considered usary and attempts to recover (e.g., send demand letter) are subject to penalties
• Unique interest rate allowed for delayed payment to subcontractor on construction projects – 1% per month
CREDIT TERMSATTORNEYS’ FEES
• US rule: attorneys’ fees are not permitted absent specific statute
• No attorneys’ fees if not expressly included in contract (i.e., Credit application or delivery receipt)
• Maximum attorneys’ fees on open account = 15% of principal balance owed
• Award always subject to judge’s discretion• Magic words: “reasonable attorneys’ fees pursuant
to N.C. Gen. Stat. 6-21.2”
CREDIT TERMSPERSONAL GUARANTY
• Most significant credit term
• Often difference between getting paid and writing of account
• Greatest single form of leverage for repayment
• Recommend uniform policy of mandatory personal guaranty
CREDIT TERMSPERSONAL GUARANTY
• Different forms of guaranty• Guaranty of Payment vs. Guaranty of
Collection– Guaranty of Collection requires judgment against
principal debtor before seeking recovery from guarantor
– Guaranty of Payment allows direct pursuit of guarantor
– Default = Guaranty of Collection
– Magic words: “. . . as guarantor of payment”
CREDIT TERMSPERSONAL GUARANTY
• Use of “continuing guaranty” in conjunction with credit account
• Continuing guaranty allows guaranty to extend to each transaction under open account
• Magic words: “continuing guaranty, which may only be revoked by signed writing”
• Continuing guaranty also extends SOL under same principle as credit account
– SOL runs from date of last payment, as opposed to breach of underlying transactions
THANK YOU!
1720 Hillsborough Street, Suite 200 | Raleigh, NC 276051720 Hillsborough Street, Suite 200 | Raleigh, NC 27605
Tel: 919-510-8585 | Fax: 919-510-8570Tel: 919-510-8585 | Fax: 919-510-8570
1200 East Morehead Street • Suite 251 • Charlotte, NC 28204 1200 East Morehead Street • Suite 251 • Charlotte, NC 28204
Phone: 704-496-7495 • Facsimile: 704-496-7480Phone: 704-496-7495 • Facsimile: 704-496-7480
www.vannattorneys.comwww.vannattorneys.com
1720 Hillsborough Street, Suite 200 | Raleigh, NC 276051720 Hillsborough Street, Suite 200 | Raleigh, NC 27605
Tel: 919-510-8585 | Fax: 919-510-8570Tel: 919-510-8585 | Fax: 919-510-8570
1200 East Morehead Street • Suite 251 • Charlotte, NC 28204 1200 East Morehead Street • Suite 251 • Charlotte, NC 28204
Phone: 704-496-7495 • Facsimile: 704-496-7480Phone: 704-496-7495 • Facsimile: 704-496-7480
www.vannattorneys.comwww.vannattorneys.com