Selling on 30-day terms is really a small unsecured loan to your customer. A Brampton building supply yard that ships $25,000 of materials on an open account has become a lender, usually without checking the borrower’s identity, asking for financial information, or signing a loan agreement. Banks would never do that. Plenty of suppliers do it every day, because the customer seems reliable and the sales rep wants the order.
Good paperwork will not make a bad customer pay. It will, however, tell you who you are actually dealing with, give you a second person to pursue if the company fails, make your interest and collection costs recoverable, and sometimes give you a claim on the goods themselves. It also gets you through a Small Claims Court hearing much more quickly. All of this has to be set up before the first shipment, because customers rarely sign anything helpful once they are already behind.
This is general information about commercial sales in Ontario, not legal advice. It assumes business-to-business sales. Sales to consumers are subject to the Consumer Protection Act, 2002, which restricts many of the terms discussed here.
What a Useful Credit Application Asks
A credit application does two jobs: it gathers the information you need to make a decision, and it creates a signed contract. Keep it to two pages or so, since a form customers refuse to complete helps nobody. It should include:
- The customer’s exact legal name, and any trade name used
- Whether it is a corporation, partnership, or sole proprietorship
- Ontario corporation number, business address, and years in business
- Names and home addresses of owners and directors
- Bank and branch, along with authorization to contact them
- Three trade references that you actually intend to call
- The credit limit requested and the expected monthly purchases
- Accounts payable contact and invoicing email address
- The name and position of the person signing, and a statement that they have authority
Legal name is the single most common failure. “Peel Custom Homes” could be a registered trade name of a numbered company, of a person, or of nobody at all. If your invoices are made out to a trade name and the numbered company behind it later disappears, you may spend months trying to establish who owed you the money. Run a corporate profile search, and check whether the company is active. A search of Ontario’s Personal Property Registry can also show which lenders have registered against the customer and how many.
Treat changes as a warning sign. If a long-time customer starts ordering under a different company name, ask for a fresh application before extending credit. New corporations are sometimes formed with the same people and trucks, and your old guarantee and old account may not follow.
Credit Checks and Privacy
Checking a corporation’s trade references or commercial credit report is routine. Checking an individual is more sensitive, and individual owners or guarantors are often involved in small business deals. Ontario’s Consumer Reporting Act regulates how consumer reports can be used, and privacy legislation may apply to the personal information you collect in the course of commercial activity.
So include plain wording in which each individual signing consents to your obtaining credit reports and exchanging credit information with references and agencies, and explain what the information is used for. Keep the forms secure and limit who can read them. If you refuse credit because of a consumer report, the Act may require you to tell the person so and to provide information about the agency.
Make Your Terms Part of the Contract
Many suppliers print excellent terms on the back of the invoice. That is often too late. A contract is usually formed when the order is accepted, and terms that first show up on a document sent after delivery may not be part of it unless the customer agreed to them, or a clear course of dealing supports that argument.
The more dependable route is to have the customer sign the application with a line such as: “All present and future sales are governed by the Terms of Sale attached, as amended by notice from time to time.” Attach the terms, or at minimum make a current copy available at a stable web address that is named in the document. Repeat the reference on quotes, order acknowledgments, and invoices. Electronic signatures are generally acceptable in Ontario under the Electronic Commerce Act, 2000, subject to exceptions, but make sure your system can prove who signed and when.
Conflicting forms can be a problem too. If your customer’s purchase order has its own terms, each side may claim its terms govern. Include a line stating that your terms prevail over any other terms unless agreed in writing by an authorized person, and instruct your sales staff not to casually sign customer forms. No clause wins every such argument, but it improves your position.
The Clauses Worth Having
Terms of sale need not be long. These are the provisions that most often matter.
Payment and credit limit. State the due date, how it is calculated, and the fact that credit can be cut off or changed at any time. Say that you may suspend shipments on default, and that all amounts become due if an account goes into default.
Interest. This one must be worded correctly. Under section 4 of the federal Interest Act, when interest is stated at a rate for a period of less than a year, such as “2% per month,” and the contract does not state the yearly equivalent, the recoverable rate is limited to 5 per cent per year. Write: “2% per month (24% per year).” Keep the rate lawful as well. The Criminal Code’s criminal rate is 35 per cent APR, with limited exemptions by regulation for certain larger commercial loans to non-individuals. Most ordinary trade rates are well below this, but fees and other charges may be counted, and accounts with individuals deserve extra care.
Collection costs. Add a clause under which the customer pays reasonable legal and collection costs. A court retains its discretion over costs in litigation, and Small Claims Court has its own limits, so this is no guarantee of full recovery. Still, the clause usually strengthens your position.
Delivery and risk. State when risk passes and how shortages or damage must be reported. A short inspection window, such as 48 hours or seven days, reduces late complaints, if the period is reasonable for the type of goods.
Warranty limits. Business customers can generally agree to limit or exclude the implied conditions in Ontario’s Sale of Goods Act, as long as the wording is clear. Courts will not always uphold such a clause in every circumstance, so it should be clear and suit your actual sales. Include a limit on consequential damages if that is appropriate.
Limitation period. Ontario’s Limitations Act, 2002 allows parties to vary the usual two-year period in a “business agreement,” being an agreement made by parties none of whom is a consumer. This can be useful, but the clause needs careful thought. You can also ask a slow-paying customer to confirm the balance in writing, because a signed acknowledgment of a liquidated debt generally restarts the time.
Governing law and court. Choose Ontario law, and name the courts you want. Include a clause allowing you to pursue claims in Peel Region where possible, although court rules still determine the proper venue.
Set-off and returns. State whether the customer may withhold amounts due because of a dispute on another order. Set out a return policy and any restocking charge.
Getting a Personal Guarantee That Holds
If the customer is a small corporation, a promise from the company alone may be worth little. A corporation’s owners generally aren’t responsible for its debts. The personal guarantee is the usual way to bridge that gap.
Under section 4 of the Statute of Frauds, a promise to answer for another’s debt has to be in writing and signed by the person giving it. Signing a credit application “per John Singh, President” usually binds only the company. A guarantee needs its own section with its own signature line, a statement that the person is signing personally, and a home address. Ideally, have the guarantor’s signature witnessed. Consider these features:
- Coverage of all present and future debts, not one invoice
- Interest and collection costs
- A waiver of defences based on changes to the account, extensions of time, and releases of others
- Joint and several liability where there are two or more guarantors
- A clause stating that it continues until revoked in writing, and that it still covers debts up to the revocation date
Guarantees are read strictly. If you substantially change the arrangement without the guarantor’s consent, for example by greatly raising the credit limit, you may risk releasing the guarantor unless the wording covers it. A spouse or elderly relative who has no real involvement in the business may later claim to have not understood what they signed, so consider recommending independent legal advice when a guarantor is not an owner.
Expect some customers to refuse. That is a business decision. You might extend a lower limit, require a deposit, or take cash on delivery. A refusal tells you something useful in itself.
Keeping a Claim on the Goods
An unsecured supplier generally stands behind the bank when a customer fails. A title retention clause, saying that goods remain your property until paid, can help, but under Ontario’s Personal Property Security Act (PPSA) such a clause is generally treated as a security interest, and it may not protect you against other creditors unless it is perfected, usually by registration.
The more powerful tool is the purchase-money security interest, or PMSI. It can give a supplier priority over a customer’s existing lender, including one with a general security agreement, for the goods supplied. The conditions are strict:
- For equipment and other non-inventory goods, the interest generally must be perfected before or within 15 days after the customer gets possession
- For inventory, it must be perfected before the customer gets possession, and you must notify earlier secured parties who have registered against that kind of collateral
The security agreement should be signed and should describe the collateral properly, and the registration must use the customer’s exact legal name, because errors can be fatal. This is not worth the trouble for a $500 order. It may be well worth it for an expensive machine, or for a distributor carrying a substantial amount of your stock. Your customer’s bank agreement may also limit additional security, and that is something for the customer to deal with.
Suppliers to construction projects should also look at lien rights under the Construction Act, which run on short deadlines. Our page on construction and general liens has an overview.
Internal Habits That Make Paper Work
The best form cannot help if nobody follows it. Assign one person to approve new accounts, and record their reasons. Prohibit shipments to any account lacking a signed application. Review credit limits periodically, and do not allow a sales rep to raise a limit on their own. Invoice quickly, and keep proof of delivery with each invoice, since a signed bill of lading tends to end arguments about receipt.
Watch for changes in behaviour: partial payments, post-dated cheques, new company names, unusually large orders from a slow payer, or a request to move from net 30 to net 60. Any of these might call for a review. If bankruptcy or a proposal is filed, get advice right away, since collection is generally stayed, and rights to recover recently delivered goods under federal insolvency law have strict deadlines.
Reviewing Your Forms
If your forms were downloaded a decade ago or borrowed from a competitor, a review is usually a contained job. A lawyer can prepare a short application, a guarantee, and a page of terms that fit your industry, and our contracts page explains this type of work. When you already have an overdue account, you can contact the firm with the application and the invoices, and find out where you stand.