As we discussed a few days ago, we always recommend you have an agreed upon and signed credit agreement. Sadly, there are many instances in the marketplace where far less formal agreements occur. Many companies may use a collection of emails and invoices as their “agreement.” Others may simply rely on word of mouth and a few hastily composed emails, letters or notes from a phone call. Regardless of the system used, not having a signed credit agreement can lead to problems in the event of a dispute later down the line.
What happens if a dispute arises?
While this can vary based on the type of dispute, the Uniform Commercial Code does provide some structure when an agreement is not in place. Specifically, it deals with what happens if the buyer stops paying or attempts to disagree with the previously agreed upon terms. Section 2-207 essentially states that the continued acceptance of the purchase orders serves as a continued acceptance of the deal. Meaning if Company A continues to buy from Company B, they are continually validating the deal that was agreed upon. The question then becomes what happens if they stop paying before the agreed upon amount was purchased. In this case, section 2-207 allows for Company B to collect interest payments on (in addition to the amount owed) for product that was accepted. Meaning, had company A accepted multiple shipments before attempting to end the agreement, they typically would be held liable for that cost plus interest. Company B, however, would not be able to collect attorney fees or any other fees that were not agreed upon in the contract.
Even this is not guaranteed, as a subsection of 2-207, allows for Company A to dispute these charges and drag out any legal proceedings. This means you will be paying a large amount in court fees, potentially negating any money you may collect. The moral of the story is that lacking a credit agreement will decrease the number of options you have. As always, if you think you may be in a similar situation or are curious to learn more, we recommend you contact a lawyer for a more personalized analysis of your situation.