Partner in UAE law firm advises SMEs on avoiding cashflow problems
By Andrew Morris, Partner at Banks Legal
Cashflow is the cause behind 82% of small businesses failing. Debt collection – arguably the key component of cashflow management – continues to be a challenge for companies operating in the UAE, which ranks as one of the most difficult countries for collecting debt, just behind Saudi Arabia, in a recent poll conducted by international credit insurance company Euler Hermes.
Small to medium-sized enterprises (SMEs) comprise 955 of the total enterprise population in the UAE. While securing timely payment from clients and customers is critical for businesses of all sizes, non-payment or late payment can be especially challenging for SMEs who may lack the free cash flow or finance facilities larger companies can draw upon to manage short-term cash flow issues. Formal pursuit of debts in local court and arbitration forums can also be time-consuming and costly, with the prospects of successful enforcement far from guaranteed. The consequences of non-payment or late payment for an SME can, and often does, make its ability to continue a growing concern.
Andrew Morris, Partner at Banks Legal, a UAE-based legal consulting firm, urges SMEs to continually review the different elements involved in contracting and credit control, from a legal perspective, to ensure they are putting themselves in the best position to mitigate exposure to bad debts.
There are three distinct stages in which a business can take effective steps to mitigate its exposure to bad debts:
1-Pre-contract/ contract formation
Here is a summary of the key points to consider during each of these stages:
Pre-contract/ contract formation:
Assessing the creditworthiness of a client or customer, pre-contract, can be invaluable in anticipating potential payment issues, even before a contract is signed. Similarly, understanding whether the client or customer has a track record of late payment can be helpful in mitigating this issue, whether in terms of controlling the credit extended or in terms of the protections that need to be built into your contract. Key considerations include:
1-Assessing creditworthiness through credit checks, background searches, and industry feedback. For instance, overseas companies may be harder to recover from than those domiciled in the UAE. You also need to consider whether the entity you are contracting with has assets. If not, your ability to recover judgment monies may be limited.
2-Factoring anticipated late payment into credit terms offered if any.
3-Ensuring the elements of a binding contract and due execution are present.
4-Ensuring the description of the parties’ obligations in the contract is an accurate statement of what will, in fact, be performed.
5-Provisions should be included that clearly address variations or extensions to the scope of work, including penalty and interest provisions applicable in the event of late payment.
6-Ensuring the dispute resolution clause gives recourse to a suitable forum that will make it commercially viable to pursue claims formally. It is often not commercially viable to pursue small debts in the local courts – recourse to small claims forums can assist here.
7-Where possible, terms and conditions should be future-proofed for changes in the law. An example of this might be a DIFC Small Claims Tribunal clause which specifies a claim threshold of Dh1,000,000 ‘or such higher threshold as the law may permit from time to time’.
8-Standard terms and conditions should be periodically reviewed by a lawyer to ensure they reflect changes in the law. Also, they should address specific issues encountered by SMEs in the course of their business and be ‘fit for purpose’.
9-In some cases, SMEs will have little control over the terms of the contract they enter into, i.e. the terms may be presented on a ‘take it or leave it’ basis. It may also be possible to mitigate risk through extended insurance cover in these cases.
10-SMEs should, where possible, seek advanced payments under their payment terms and security for payment, such as post-dated cheques (PDCs).
It is often the case that contracts, once signed, are filed away in the bottom drawer and only referred to when things go wrong. Active contract management can go a long way to reducing the risk of a dispute arising and to limiting exposure to late payment and non-payment. Examples of good contract management include:
1-Being clear on the contractual terms and conditions regarding delivery of goods and services, timing and method of payment and planning for these accordingly.
2-Identifying variations to the contract early.
3-Maintaining full and accurate records of all correspondence and documentation generated during the performance of the contract, including safe filing of original documents.
4-If you do end up in a late payment situation where the counterparty is pressuring you to continue to deliver goods and services, ensure that you obtain written acceptance of the outstanding payments before carrying out further work or delivering further supplies.
Should you find yourself in a dispute over payment, or dealing with a debtor who is not responding, there are a number of practical considerations when managing the dispute process:
1-At the outset, it is advisable to have your lawyer carry out a litigation risk assessment and provide you with advice on the various options, including time and cost associated with each option, for seeking payment of the debt.
2-In almost all cases, an amicable settlement is preferable to going to court or arbitration. If you do reach an agreement, whether that be a payment plan or final settlement, ensure the terms of that agreement are robust.
3-A key consideration will be the available forums for bringing a claim and enforcing a judgment or order.
4-Your counterparty will also likely have considered what your options are and will affect how it approaches the dispute.
Finally, obtaining advice need not be expensive. For example, Banks Legal offers a monthly retainer service called LexFlex™ which is particularly suited to SMEs who may not be in a position to justify the expense of in-house legal support, but who require on-demand legal support for their legal matters. A simple ‘red flag’ review can often be the difference between entering into a good contract or a bad contract, or efficiently managing a dispute, or not.