Reducing Risks on Credit Sales into Mexico - 2

Originally published: Feb-15-2007

Part 2: Three documents that can make or break your case when litigating default payments

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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. Every credit sale into Mexico must be treated as if it may end up in litigation. The prudent exporter, therefore, 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.

What will always have to be proved in court?

In any jurisdiction, when a seller turns to the court system to compel a debtor to pay, three things must be proven:

1. There was a binding contract for the sale of goods or services – in other words, the buyer offered to buy something that you agreed to sell them;
2. Specific terms and conditions applied to this sale; and
3. The seller met its obligations (delivered the goods or rendered the services), while the debtor has not (made payment).

How are these facts proved in court?

These three facts can be proven in a number of ways including: testimony of witnesses, depositions of parties, inspections, and/or written (originals, copies, faxes, emails) documentation. The best game plan is to provide the court with the strongest and most persuasive evidence in your favor, while keeping legal costs as low as possible.

In Mexico, evidence that satisfies both of these goals is original documentation, signed by the buyer.

This is not to say that you will never be able to prove your case in Mexico without signed, original documentation. Recent amendments to the Mexican Commercial Code (in 2000 and 2003) specifically provide for electronic messages and electronic signatures as a valid means of creating a legal and binding contract. In addition, Mexico is a signatory to the Vienna Convention on Contracts for the International Sale of Goods (Vienna Convention), which provides that a contract of sale does not need to be concluded in writing.

While verbal or electronic documents are valid, due to Mexico’s rigid rules on evidentiary procedure, private documents (those not of public record or signed before a Notary Public) can only be legally recognized by the party who signed them. This means that only original documents, signed by the defendant/buyer can be recognized in court through deposition. Any other documents, including unsigned copies, faxes and emails, will simply not be considered by the court to be attributable to the defendant, if the defendant objects to them. Lacking originally signed documents, you will be required to provide at least two witnesses to prove each fact of the case.

The Three Key Documents When Selling into Mexico

Three common sales documents are critical to protecting your credit sales into Mexico and proving the three essential facts necessary in order to proceed with litigation: the credit application, purchase order, and delivery receipt.

#1. The Credit Application

A properly constructed credit application can serve as the foundation for all of your sales transactions. Part 1 of this series describes in detail how to turn your credit application into a valuable legal document that can protect you in cases of default by a Mexican buyer..

#2. The Purchase Order

A payment history from the debtor after a delivery of the goods, along with the invoices will not be sufficient evidence for a Mexican Court to rule against the debtor. Even if the creditor has an acknowledgement of the debt in writing, incredible as it may sound, there is still need to prove that the buyer actually offered to buy the specific goods at a fixed price and according to specific terms.

Therefore, it is essential that the seller require purchase orders from its Mexican customers every time they purchase, even if the order was placed directly by phone or through a sales representative. Purchase orders can be sent by fax. They must include the following information:

1. Full description of the goods. The customer needs to describe the merchandise in full detail. Code numbers will not prove anything to the court. Neither will abbreviations. If the purchase order does not include names and descriptions of the items ordered, and you have to fight for payment in court, you will have to provide documentation to clarify what the codes and abbreviations mean.
2. Price and terms. The price per unit and grand total should be listed on the purchase order. Payment terms (15 days, 30 days, etc.) should also be included – even if the terms appear on the credit application.
3. Place and time of delivery. The purchase order should include when and where the goods are to be delivered. INCOTERMS (international commercial terms) may be used.
4. Buyer information. Purchase orders should be on the buyer’s letterhead with name and address, as well as date and place of signature. Only a duly authorized buyer representative should sign the form. The full name of the individual signing should be typed clearly.
5. Seller’s address. The purchase order needs to be addressed to the seller and include the seller’s address.

Don’t accept a purchase order with errors. Make sure that each piece of information is accurate and that you agree and will be able to comply with the terms stated. If there is any error, request a corrected document.

#3 The Delivery Receipt

The delivery receipt completes the trio of documents required to protect your credit sales in Mexico as it proves the fulfillment of the seller’s obligations.

The receipt can take the form of a bill of lading, a signed packing slip, or a custom-made delivery receipt. We recommend the document include:

1. Full description of goods. Just as with the purchase order, don’t utilize codes or abbreviations, but fully describe the goods delivered.
2. Date, time and place of receipt.
3. Statement of receipt. Include a statement above the signature line to the effect that the signer acknowledges receipt of the goods and confirms that he has personally checked them and they are of the exact quality and quantity as those listed on the receipt.
4. Original, handwritten signature.
5. Full name of recipient. The signer should print his full name clearly and state his position with the company. More often that you might think, debtors deny ever receiving the shipped goods.

Additional Documents

Well constructed and appropriately signed credit applications, purchase orders and delivery receipts are essential to proving your claim in court. There are other documents, however, that can assist with the legal process and which we recommend you utilize and maintain.

• Invoice. The information on the invoice should match that on the purchase order. Include the date of issue, full description of the goods (no codes or abbreviations), price per unit and grand total, payment terms, accurate shipping and billing addresses.
• Order Confirmation. This document, along with the buyer’s purchase order, is essential if you want the Mexican court to allow compensation for goods in process or for lost sales based on a buyer order that is later canceled unfairly.
• Statement acknowledgement. Make it a policy to provide your customers with account statements on a regular basis, requesting their approval (signature) to the balance shown. This document reinforces other evidence and also has special significance in Mexican special proceedings, which will be discussed next month in Part 3.
• Shipper imports. This document, called pedimento de importaciôn, proves that the debtor actually imported the goods. It is a government document and can be confirmed through an official report, therefore, carrying great weight in the Mexican courts. Ask your customer to send you a copy or at least provide the import date and reference number from the form.

Next month we’ll discuss the various legal remedies available in Mexico for foreign creditors.

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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.