• Marcel Vaarzon-Morel explains the steps for protecting your profits against bad debt.
    Marcel Vaarzon-Morel explains the steps for protecting your profits against bad debt.

Marcel Vaarzon-Morel explains the steps for protecting your profits against bad debt.

One of the hardest things to do 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.

The question for you to ask 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.

Consider the business’s legal requirements.

1. Reviewing business contracts
2. Consider the practical pitfalls
3. Consider the business’s legal requirements.

A gentleman’s hand shake unfortunately is not the best form of evidence to prove the terms of a contract not only is it unreliable but expensive to prove and while it could be argued a well drafted contract from a solicitor is not cheap, when this cost is spread across many sales and if drafted well will minimise the loses when that bad debt rears its head. For the purposes of cost minimising in respect to bad debts the contract should consider, amongst other things, the following:

  • 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.
  • The law of Liens.

To highlight the importance of these considerations my firm recently worked on a matter where my client provided services to install a new engine that required reconfiguring the whole engine bay including mounts. One of the main issues was that there was no written contract claiming holding costs, debt recovery cost or interest. Thus, 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 made claimable in contract.
  • All costs to hold the vessel including hard stand services, mooring services where a lien exists.

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

Reviewing your business

The ACL starts with the presumption that all consumer contracts are standard form contracts, so the range of contracts affected by this new law potentially is very wide.
The term “Standard form” is not defined however; it usually means that the same terms are offered to all without negotiation and could be considered unfair. If your business is concerned about being caught by the legislation the following suggestions may assist your business:

  • 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


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

When will a term be deemed to be unfair?

If your contract is found to be in a standard form then the next question is whether a term is unfair. While the court can rely on various factors there is a three-limbed test for unfairness and each limb must be proven on the balance of probabilities. Therefore, when a marine business is considering drafting new or reviewing old contracts the terms of those contracts should be considered.

When are terms Transparent?

A contract is considered to be transparent if it is expressed in reasonably plain language, it is legible and it is presented clearly and is readily available to any party who may be affected by the term.

The contract as a whole?

This emphasises the importance of when, where and how the contract was entered into, hence the importance of keeping good records. Whilst a term may be seen unfair in one particular contract, this does not automatically mean it is unfair to include it in another. “Context” is very difficult to define and the marine business will have to be prudent and consider each agreement and how it is entered carefully.

Does your contract catch costs incurred when enforcing your Lien?

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

This Lien is not however, 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. Further, due to the owner having access to the vessel, before paying the invoice, 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.

If your invoice is not paid on time, then depending on whom your client is and the nature of the work, you may choose to waive the interest payable clause. However, if you do not have this type of clause you lose the bargaining power and you cannot claim any interest on the outstanding debt when the invoice becomes overdue up to commencing legal action.

What is a Personal Property Security Interest?

Does your contract secure your hard work? 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 is any property that is not real-estate, and includes physical property (such as 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, which will now be able to be registered and enforced under the PPSA.

Under the PPSA, the old mantra that possession is nine-tenths of the law still rings true. If you are a business who does not have possession of your personal property (such as trading stock), there may be issues under the new scheme. 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 in the event of a dispute. Registration is the key to perfect an interest, and priority is granted based on the order in which interests are registered. Failure to register your interest in property means that in some instances, you could lose your right over the property.

Consider the pitfalls

1. Does your business keep notes of meetings?
2. Does your business send confirmation to clients such as emails as a paper trail saves cost?
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?

All invoices and accounts to be paid before your vessel is launched or released.
Additionally, payment should be received in advance for parts, especially large items such as engines, where there is long waiting periods for delivery of these parts. The importance of this advanced payment is evident where a simple service or repair can become complicated with estimate blowouts; this payment ensures supply lines stay open to the business despite the fact that your client’s running accounts may not have been paid in full. Further, if there are time variations make sure any verbal agreements are followed with written confirmation of the work required describing how and when progress payments will be made for these terms are often different to the invoice and contract terms.

By Marcel Vaarzon-Morel

comments powered by Disqus