Non-Payment and Extending Credit: Ten Considerations

Non-Payment and Extending Credit: Ten Considerations for Contractors and Suppliers

Your company is not a bank. You are not in the business of lending money over extended periods of time.

Just because the general contractor has not been paid does not mean that you should not be paid (see item #1).

Remember that you have other remedies besides a construction lien. Delivering a written notice of lien can be an effective way to stop the flow of funds on a project. Likewise, a breach of trust claim can be a powerful tool.

Agree upon credit terms in advance. Be consistent, clear and concise. Obtain information about your customer by way of a credit application, including the correct legal name of the business, and current banking information.

Do the Due! Conduct appropriate due diligence including: (a) credit searches; (b) reference checks; (c) property and corporate searches; (d) writ searches.

Identify problems early. Warning signs to watch for include: (a) slow or non-payment; (b) N.S.F. cheques or post-dated cheques; (c) cheques coming from someone other than the customer; (d) re-structuring or presence of outside people such as an accountant or “consultant”.

Get something in return. In exchange for revised credit terms, seek an acknowledgement and agreement on the amount of the outstanding debt, or additional security if necessary.

Lawsuits are inevitable. Good procedures and record keeping reduce the cost of lawsuits and increase the likelihood of recovery in collections. Consider whether your company has a clear mechanism for acknowledgement of receipt or pick-up of product.

Know when to cut your losses. $100 today is worth more than the possibility of $125 two years from now. Don’t be afraid to cut deals!

As hard as it is to believe, general contractors and customers do occasionally lie about the cheque having been mailed out!

Frequently Asked Questions

How do partnerships work and how are they setup?

My friend and I have an idea for a business and we are considering forming a partnership. How does a partnership work and how should one be setup?

Whether or not a partnership exists is a fundamentally a legal question. Ontario’s Partnerships Act says that a relationship between “persons carrying on a business in common with a view to profit” is a partnership within the meaning of the Act. This is important because it means that whether or not you declare yourself to be a partnership, legally speaking, you might be a partnership anyways, whether you intended to or not.

A partnership can exist between you and your friend personally, or even as between two corporations controlled by each of you. Unlike a corporation, however, a partnership has no separate legal existence from the partners themselves and each partner has the power to bind the partnership and each partner is jointly liable for any obligations incurred on behalf of the firm. This is why, when deciding to form a partnership, a partnership agreement can be very practical.

A partnership agreement sets out the rights and obligations for partners in the partnership and provides for what should happen in circumstances of partnership incapacity, retirement or death. Without one, the Partnerships Act will provide for what happens to the partnership in these circumstances, often with unintended results. A partnership agreement can also provide mechanisms for the distribution of partnership income and a process for bringing additional persons into the partnership. Creating a partnership agreement that meets your goals with the help of a commercial Lawyer ensures that your partnership will continue in a manner of your design.

Do I really need to have annual minutes?

I have a corporation the shares of which are held only by me and members of my immediate family. Do I really need to have annual minutes?

‍If your corporation is audited by the CRA and matters, such as the declaration of dividends, have not been formally documented by a written resolution of the directors or in annual minutes, the consequence can be severe. There are other risks that may be avoided by having minutes prepared annually. This is analogous to your dentist who encourages you to have good dental hygiene and periodic check-ups so that small problems do not become big problems. Practicing good corporate hygiene just makes good sense.

The minimum legal obligation of a corporation is to hold an annual meeting of shareholders to consider the financial statements, elect directors and to appoint (or dispense with the appointment of) the auditor. In practice, and as permitted by statute, narrowly held corporations often dispense with an annual meeting in favor of signed resolution of all of the shareholders. The failure to hold annual resolutions, or obtain written resolutions in lieu, can lead to legal action from disgruntled shareholders.

The practice of holding annual meetings (or resolutions in lieu) also tends to ensure that corporate matters requiring attention are addressed, such as share transfers, changes to directors, and address changes, which if left unaddressed could become significant problems.

An effective method of ensuring good “corporate hygiene” is for the corporation to instruct its accounting advisors to provide legal counsel with an annual letter of instructions to document applicable financial matters.

It is not uncommon that a new client brings us a minute book that has not been properly organized, or that has not been updated for many years. It is not a cause for embarrassment. We strongly encourage that the minute books be updated before an issue arises, such as a CRA audit.

Should a lawyer review your small business contracts?

I run a small business and I have several small contracts that I am currently in the process of negotiating. Are these worth bringing to a Lawyer for review?

‍Depending on the type of contract, there are a number of areas a Lawyer’s expertise can provide guidance, including contracts relating to employment or contractor relationships, borrowing and secured transactions, equipment leases, and other commercial agreements. Simply because a document is short, this does not mean there aren’t important clauses or terms that require careful consideration.

Contracts often contain important clauses relating to the limitation of liability, indemnification, and the waiver of important legal rights. Such clauses can have legal and financial implications for you or your business down the road. Understanding these implications is crucial and one of the services a Lawyer can provide.

A Lawyer can meet with you for a short consultation in order to review your contractual document and answer any questions you might have. By communicating to the Lawyer your expectations of the proposed contract, a Lawyer can work with you to achieve your goals as well as highlight and help you understand risks and liabilities that you or your business may be taking on as part of the contract.

If you have some questions about a contract and feel you may benefit from meeting with a Lawyer call and ask to set up a meeting.