Reducing Risks on Credit Sales into Mexico - 1

Originally published: Dec-27-2006

Part 1: How to turn your credit application into a valuable legal document that can protect you in cases of buyer default

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by Romelio Hernandez, HMH Legal

When considering a credit sale to a Mexican buyer, it isn’t enough to run a credit report and check trade references to ensure he is creditworthy. It is imperative that every credit sale into Mexico be treated as if it may end up in litigation. The prudent exporter will develop a game plan – and maintain appropriate documentation – that will guarantee the best chance of a favorable outcome should legal action be required for collection.

Exporters can go a long way toward protecting their rights by designing a credit application that is more than a simple repository of information as to the creditworthiness of the buyer. If crafted as suggested below, the credit application can be used as the main contract for the sale.

Crafting a Credit Application for Mexican Buyers

The first page of the credit application for Mexican buyers should solicit all of the standard information you require in order to determine whether or not to extend credit. For instance, company name, corporate address, legal status, registration #s, names of officers, banking details, trade references, etc.

An additional piece of information, essential when selling into Mexico is the name of any parent and/or sister companies. It is not uncommon in Mexico for a buyer to request credit in the name of an undercapitalized subsidiary company in order to protect assets from legal claims. An example is the maquiladora company, which is usually an off-shore subsidiary that has no ownership over the primary corporate assets.

Another important consideration when developing a credit application for Mexican buyers is language. Ideally, the document would be entirely in Spanish or in both your language (English, for instance) and Spanish. If you can’t accommodate an entirely Spanish version application, then at least ensure that the main terms and conditions, including the pledge agreement, personal guarantee or promissory note, as well as the final statement, are provided in Spanish.

In addition to the traditional corporate information – financials and bank and trade references – consider adding the following clauses and provisions. These should be written as concisely as possible and added as page 2 (and 3, if necessary) of your credit application.

Terms & Conditions of Sale

Include language that commits the buyer to the terms specified upon signing the credit application. The following are essential issues that should be covered:

1. Governing law. This is a very delicate issue from a litigation standpoint. You should never include a governing law cause if you don’t know what your strategy is in regards to jurisdiction or arbitration. Many courts in Mexico will interpret a governing law clause as a jurisdiction clause. As a result, you can be denied legal action in Mexico if a foreign law was selected to govern your contract.

   If you are going to include a governing law clause, choose the law of the state where you are sure to file suit. Most attorneys include governing law of their State of practice simply because they are more familiar and comfortable with those laws. Your primary considerations should be: 1) which law gives you, the creditor, a strategic advantage; and 2) which laws will apply to the court jurisdiction that will actually be hearing your case.

   As a possible compromise providing common ground, you might specify that the Vienna Convention on Contracts for the International Sale of Goods govern the contract.

2. Venue, jurisdiction, and arbitration. The importance of choosing the ground for any litigation battle was mentioned above. The Mexican Commercial Code provides that, in order to choose a jurisdiction other than the venue assumed by Mexican law, that you must expressly renounce the venue given by Mexican law. You must also choose a venue based on either the place where any of the parties have their address, or the place where the obligations were to be discharged according to the contract.

   Avoid clauses that give the exclusive option of choosing venue and jurisdiction to one party (i.e. the seller). Such a clause will be considered null and voice by the Mexican Federal Code of Civil Procedure, and will make a judgment unenforceable in Mexico.

   If no jurisdiction clause is chosen, Mexican case law has established that Mexican courts will be considered to have proper jurisdiction to hear a case involving an international commercial dispute if the defendant (buyer) is located in Mexico.

   In the case of arbitration, note that the limitations on jurisdiction and the wording specifically renouncing the Mexican venue are not required.

3. Timeframe for buyer to raise claims. Provide certainty to your transaction by establishing a specific timeframe for the buyer to raise claims regarding a lack of conformity of the goods. If he does not give you notice of such a claim within that time, he will not be able to raise the issue in court.

   Note: The Vienna Convention provides that the buyer loses the right to rely on a lack of conformity of the goods if he does not give notice to the seller within a reasonable time. The Mexican Commercial Code gives the buyer just five days (after delivery) to raise claims regarding lack of quality or quantity.

4. Payment Terms (where, when and how). Your credit application should provide specifics regarding payment terms. The general rule should be that the buyer will pay within so many days after delivery and receipt of the goods. State explicitly that the payment must be made directly to the seller via wire transfer without any need of a formal demand of payment. In some instances, Mexican law provides that the seller must provide a formal payment demand. By expressly including this language in the credit application, the buyer effectively waives this requirement.

5. Shipment tolerances. If you sell in bulk or large production units where it is not possible to send exact quantities ordered by the buyer, provide a percentage surplus or deficit that must be accepted by the buyer and for which he is obligated to make payment.

6. Interest. The Vienna Convention provides that interest should be paid upon default, but gives no specific percentages or rules for determining a percentage. The Mexican Commercial Code provides for a 6% (annual) late interest fee. If you do not indicate a specific percentage in your credit application (or contract), you will only be allowed to charge the 6%.

7. Reinforce use of fax and email. Specifically state that the buyer will be authorized to place orders via fax or email. This will reinforce the presumption before the Mexican court that these mediums are common practice and a general rule.

Personal Guarantee

Consider adding wording to the credit application establishing a personal guarantee by a main shareholder (the owner in reality), a parent company (or the appropriate subsidiary company that is capitalized), or a third party that will be responsible for payment.

Non-Possessory Pledge (Prenda)

In Mexico, it is possible to establish a generic lien over the debtor’s movable property without specifying exactly what assets are being encumbered. When the pledge is for transactions under USD 85,000, it is valid when executed in writing, even if it has not been executed by a Notary Public. This allows you to create such a pledge on your credit application. Note: a prenda is not applicable to sales of services, only goods. (Sample verbiage of a prenda)

Promissory Note (Pagaré)

When no collateral is granted as security, you should request your client furnish a pagaré payable on demand for an amount equal to the credit authorized. You may not always be able to get your Mexican buyer to sign the pagaré. However, in general, Mexican buyers are used to providing such security documents as medium and large Mexican companies secure 90% of their sales over USD 50,000, mainly with pagarés. (Sample verbiage of a pagaré)

To be valid, the pagaré must contain:

• the Spanish word “pagaré”;
• an unconditional promise to pay;
• name of the beneficiary (the seller);
• date and place of payment (the buyer’s location, for jurisdictional purposes);
• date and place of issuance (again, the buyer’s location);
• name and original signature of the issuer (the buyer).

It’s recommended that you have the signature verified by a Mexican Notary Public to ensure:

1. The corporation is allowed to sign pagarés, as provided under articles of incorporation.
2. The individual signing has authority to sign.
3. The individual’s signature is genuine, and he was properly identified.

The Importance of the Buyer’s Signature

The credit application is going to be the foundation for all your transactions with this buyer and you want it to have full legal weight. Therefore, take care to fulfill the following essentials:

1. Obtain the buyer’s original, handwritten signature. This provides irrefutable proof of his commitment and obligations in a Mexican court of law. You will want to double check that the signature is actually that of the individual who is supposed to be signing the application. One way is to have it confirmed by a Notary Public. Another option might be to get a copy of a photo ID with the individual’s signature stamped on it.
2. Be certain every page of the credit application is signed by the buyer.
3. Verify that the individual signing the application has the right and power to sign. The granting of authority or legal representation to act on behalf of a Mexican company requires a formal power of attorney through a Notary Public. The person must be an officer of the company according to the articles of incorporation (known as acta constitutive) or in a separate power of attorney. Note that lack of capacity of the individual signing the Arbitration clause is one of the very few reasons why a Mexican court will not grant enforcement of an Arbitration Award!

The Final Statement

Just above the applicant’s signature (at the end of the application) should be a statement certifying that the information provided in the application form is true and correct and that its purpose is to obtain credit. This statement paves the way for criminal responsibility should you be mislead into extending credit based on false financial information. The statement might read as follows:

Conclusion

The possibility of default is always present in a credit sale, whether domestic or international. The prudent exporter thinks strategically, utilizing every tool at his command to guarantee the most favorable scenario should legal action be required for collection. A well thought out and properly prepared credit application can be invaluable in this regard.

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None of the information or materials contained in this presentation may be considered legal advice. All suggestions contained herein should be carefully considered with the advice of competent legal counsel.

Romelio Hernández is president and director of litigation for HMH Legal. Based in Tijuana, Baja California, Romelio works extensively with foreign exporting companies and collection agencies, assisting with their out-of-court and legal collection efforts throughout Mexico. He provides guidance and general counsel to foreign companies in mitigating the various risks of selling internationally. Romelio is a member of the CLLA, the International Bar Association, the OtayMesa Chamber of Commerce, and Rotary. He is a graduate of Universidad Autonómade Baja California, and was admitted to practice law in Mexico in 1997.