Protecting your Profits

Thank you for the kind introduction it’s a pleasure to be here today.

• One of the hardest things in business is to step back and take a critical look at whether there are adequate systems in place to protect your hard work.
• Your business may have a good turn over and appear profitable, but as time passes new laws are made, client expectations change along with the types of clients and it’s only a question of ‘when’, not will a bad debt walk through the door.
• Having worked in my own business as a shipwright for the best part of 20 years I understand the difficulties of the marine industry from an economic angle and now through the legal lens of a lawyer.
• The question is, ‘How will I make the law work for me?

The following course that I have charted does not go into the depths of law that only lawyers find bizarrely interesting, but plots a practical journey that can be directly applied to help your business, specifically a marine repairer or builder.

The Course to consider

1. Consider the business’s legal requirements.
2. Reviewing business contracts
3. Consider the practical pitfalls
4. ACT- see your lawyer
5. Implement changes and
6. Monitor – to secure your profits

1. Consider the business’s legal requirements when reviewing your contracts.

• A gentleman’s hand shake is unfortunately not the best form of evidence, its unreliable and potentially expensive and while it could be argued a well drafted contract from a lawyer is not cheap, it’s cheaper than proving a verbal contract in a court.
• Claimable cost, in respect to bad debts, are often overlooked in contracts and the following important pieces of law should be considered:
  • The Australian Consumer Law (ACL) whether your contracts need tailoring
  • Personal Property Security Act (PPSA) to secure payment
  • A deed of charge or contractual terms to register your interest and
  • The law of Liens

To highlight this importance my firm recently worked on a matter where my client installed a new engine, reconfiguring the whole engine bay.

The main issue was that there was no written contract claiming holding costs, debt recovery cost or interest.

Therefore, potentially significant costs could have been borne by my client even before any recovery would commence.  

So does your contract claim:

• interest being charged at the point the debt falls due
• all cost for debt recovery, from letter of demand to statement of claim
• all other costs to hold the vessel including hard stand services, mooring services

The take home message

‘Not all legal costs in respect to recovery of the bad debts will be claimable, so you need to maximise those claimable costs as early as possible’.

• The recovery process takes you away from your business and
• becomes a continual form of stress,
• so make it worth it.

The following questions will assist in this early preparation and go some way to lowering your stress:

2. Reviewing your business

1. Does your business have a written contract? If your answer is NO, well it should.
2. If yes, do you need to consider the ACL?

• The ACL presumes all consumer contracts are standard form contracts.
• ‘Standard form’ means a contract without negotiation and could be considered unfair.
• If your concerned about being caught, by the legislation, the following suggestions may assist your business:

Either:

• Be certain that there is no requirement (practically) to tailor your agreement
• Keep good records of all discussions
• Get signatures from clients
• Keep all emails and correspondences

Or:

• Allow terms to be varied where possible and
• Allow flexibility in contracts and
• Tailor contracts to suit the customers individual characteristics such as income and ability to pay and
• Allow the boat owner to negotiate terms.

So when will a contract be deemed unfair?

• Potentially, If your contract is in standard form.
• There is a three-limbed test for unfairness.

A term will be unfair where it:

a)    would cause a significant imbalance in the parties’ rights and obligations arising under the contract.

Therefore, the customers circumstances such as income, financial and other relevant matters should be considered.

A term will be unfair where it:

b)    is not necessary for the business.

Put simply are each of the terms in the contract absolutely necessary.

A term will be unfair where it:

c)    would cause detriment, financial or otherwise.

This question here considers circumstances such as delay or distress.

• Further matters can also be considered such as:
  • the extent to which the terms are transparent; and
  • looking at the contract as a whole.

So When are terms Transparent?

If it is expressed in plain language, legible and is readily available.

What is meant by the contract as a whole?

Emphasises the importance of context such as; when, where and how the contract was entered into, hence the importance of keeping good records.

• In essence while a term may be seen unfair in one particular contract, this does not mean it is unfair in another as it depends on the particular circumstances.

 3. Are costs considered when enforcing your Lien?

A contact and invoice should stipulate the repairer holds a ‘Repairer’s Lien’ over the vessel until payment is made.

This Lien is not enforceable if the vessel in question is no longer in the repairer’s possession.

In the same matter the repairer had lost the power of the Lien by allowing the owner access to the vessel before the invoice had been paid. The owner had changed locks on the vessel and readied the vessel to be removed and even though the repairer attempted to regain control by moving and chaining the vessel to his work mooring, it was gone the next day.

The lessons were numerous,

• the repairer had initially engaged a debt collector who knew nothing of the client’s rights under a Lien and failed to inform the repairer of the importance of not releasing the vessel.
• Due to the owner having access to the vessel he was able to change locks and ultimately limit our client’s access to the vessel.
• And significantly our client was unable to secure the vessel properly on the hardstand and
• even if this occurred they may not have been able to claim all these costs as there was no storage cost clause.
• The repairer was left with the stark reality of either soaking up the slipping and hardstand costs or leaving the vessel in the water where armed with a pair of bolt cutters the owner, could release the vessel and take it from the clutches of the repairer.

4. Does your contract catch ALL recovery cost?

5. Does your contract consider interest on debt?

If you do not have this type of clause you lose the bargaining power that comes with such a clause and more importantly you cannot claim any interest on the outstanding debt from when the invoice becomes overdue up to commencing legal action.

6. What is a Personal Property Security Interest?

A security interest is an interest in property that secures payment of money or performance of an obligation.

We are all comfortable with the idea of a mortgage over real-estate. Taking out a mortgage grants your bank or lender security over your property, allowing them to seize and sell your home if you are unable to discharge your debt. The same principles can be applied to personal property.

• Personal property includes cars, boats, furniture and equipment as well as intangible property such as trademarks and patents.
• When personal property is used as collateral, the grantor is said to have provided the secured party with a personal property security interest, that can be registered and enforced under the PPSA.

 In other words the boat owner allows you to secure your interest, such as an unpaid invoice.

Importance of Registration

• Under the PPSA, the old mantra that possession is nine-tenths of the law still rings true.
• The PPSA does away with the idea that owning legal title, guarantees a right over property and introduces the concepts of attachment and perfection to determine whose interest in the property takes priority.
• Registration is the key and priority is granted based on a first come basis.
• Failure to register could see you lose your right over the property.

3. Consider the pitfalls – some practical considerations

1. Does your business keep notes of meetings?
2. Does your business send confirmation emails to clients?
3. Does your business ask specific questions to tailor contracts?
4. Do invoices stipulate payment procedures?
5. Do you have a written process for debt recovery?

Or put simply, ‘no cash no splash’

• The terms of payment should be clearly defined, for example:

‘All invoices and accounts to be paid before your vessel is launched or released.’

• Payment should be received in advance for parts, especially large items.
  The importance of an advanced payment  can’t be overestimated as this payment ensures supply lines stay open to the business even  when accounts are not paid.

• If there are verbal variations to work make sure they are followed with written confirmation.

The terms should define how a vessel will be dealt with if payment is not made in a certain period of time

In one particular case a boat was dropped at a repairer the work completed but when it came to paying the invoice the person who delivered the boat claimed, as he did not own it and was not liable for the account. The repairer was then faced with several problems, who owned the vessel? Was the person who dropped of the vessel acting as an agent or as a bailor/bailee?. Ultimately, it tuned out the person who delivered the vessel was liable but then it also became apparent this person had no money or assets to make a claim against. The vessel remained at the repairer’s work for numerous months with the delivery persons vanishing. This bizarre set of circumstances ultimately left the repairer to deal with the vessel in accordance with the Uncollected Goods Act.

The issue was ownership a difficult question to broach with your client without possibly offending them.

• One suggestion is when taking initial instructions ownership is proved by a Bill of Sale or through checking the Personal Property Security Register and this may be explained to the owner as being for the purpose of insurance.

4. ACT- Contact your lawyer to draft documents

as self-drafted or internet documents are not good enough and will end up costing your business.

5. Implement changes

6. Monitor services-secure your profits