Going formal on a gentleman’s agreement

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Q. I have two suppliers in Spain with whom I have excellent relations. They have given me exclusive distributorship rights in the UK and the US. However, I have no formal agreement with either and wonder if this is necessary as I should have automatic rights having traded now for more than a year with each under these conditions. It would also be “embarrassing” to bring up the subject of agreements with such a friendly, open relationship.

Leonard Honey, by e-mail

A. Although it may give rise to some embarrassment we recommend that concise agreements, which could even be in letter form, should be concluded.

The open relationships with no formal agreements may work while things go well, but they are likely to cause difficulties if problems subsequently arise and they could lead to a lack of certainty in the interim. The difficulties that formal agreements, presumably separately with each supplier, would address include

1. Whether Spanish law or English law will govern the rights and obligations of the parties. Without such a choice of law, the relationship will be governed by the law of the country with which it is most closely connected. This is unclear on the facts given, though Spanish or English law seems the most likely choices.

2. The forum in which any disputes would fall to be resolved. At present, claims by the distributor may well have to be pursued in Spain and claims against it defended in Spain, and vice versa, whereas, arbitration preceded by mediation, may be more fair and convenient.

3. When the agreement can be terminated in the normal course and when it can be terminated early and the consequences of termination. Without an agreement, if English law applies, then in the absence of any default the relationship could be terminated at any time by either party on reasonable notice. Reasonableness would be ascertained by reference to such factors as the duration of the relationship between the parties and the level of investment made by the distributor. Similar principles apply in Spain. In neither case, would there be a right to compensation, if appropriate notice is given.

4. The terms of trade that apply between the parties.

5. The extent of any exclusivity in favour of the distributor and the territory to which it relates.

6. The extent of the suppliers’ ability to revise their prices and to change sales targets and the like.

Apart from embarrassment, the only potential difficulty that may arise is that one or both of the suppliers will seek to drive a hard bargain, for instance by imposing minimum purchase obligations, one-sided rights to terminate and a series of onerous obligations. But at least then the distributor will know where he stands.

Whether or not a formal agreement is concluded, the distributor should obtain advice as to whether or not the arrangements comply with UK, Spanish, European and US competition law.

Jeremy Sivyer (London) and Carlos Santaolalla (Madrid), partners at legal firm Simmons & Simmons

Q. Two years ago I created an internet-based translation business, with £10,000 of capital. The business, with more than 800 translators worldwide, has grown rapidly and now turns over £1m a year. However, I am aware that many potential customers with high volumes of business-critical translation work do not look on the internet for suppliers. What would be the most effective way for a web business like mine to reach such people? Peter Bennett, London Translations


A. The answer lies in knowing the market.

For Mr Bennett, the key questions are: who are these non-internet buyers? How much do they spend? Where do they go to in search of their suppliers?

I suspect the who may be well known to him, but the answers to the other questions are core to his non-internet sales success. One huge benefit of the internet is that it is a low-cost means of advertising and reaching multiple customers.

Traditional marketing methods may not be so cost effective.

It is critical to quantify the size of the prize since Mr Bennett does not want to spend huge amounts unless he can be assured of a respectable return. Internet engine designed businesses quite often need re-engineering to meet the needs of non-internet based customers.

If we assume that all these questions are answered in a satisfactory fashion, let’s return to Mr Bennett’s key dilemma – what would be the most effective way to reach such prospects?

The glib response is people. Harness the power of the internet to use existing customers to recommend friends, colleagues, even competitors, who they know to require translation services and then contact them directly.

This is a traditional sales push model – how do I get to potential clients? Talk to them.

Intermediaries are also a useful way but what we are moving towards is very much a people-based sales model with a requirement for telesales or even account based sales people.

Mr Bennett’s challenge is to do all this cost effectively.

Steve Durbin, middle market services sales and marketing director at consultancy Ernst & Young

Readers’ questions: January 7 2006

Q. One of our suppliers is late with a payment for £500. I understand that we can claim interest on this amount and debt recovery costs under the current late payment legislation. How do we ensure the supplier pays this sum? Also I would like to know how much in total can we claim in this case and what evidence do we have to provide?

Name withheld

A. If he won’t pay, then it’s only fair to ask why not. Often a failure to pay is just one sign of a deal that hasn’t worked. The fact that it’s a supplier who owes cash rather than a customer suggests that something unusual has happened. Suppliers are usually owed money. There might be many reasons. Have you returned goods and are looking for a refund? Are you looking for some other form of compensation? In all these types of cases, your right to a refund might well be governed by the terms of your original deal – so a close examination of the purchase documentation is the place to start.

Ultimately you can take the matter to the courts. But such an action should be absolutely the last resort – certainly for an amount as small as £500. Besides, the supplier might be a valuable one. Are there any genuine alternatives? How much power does the supplier have over you? How much are you prepared to damage the relationship between you? A court case is unlikely to make you friends. These are issues that need assessing before deciding whether to proceed to court. Clearing up the misunderstanding that has caused the late payment in the first place will trigger a more effective long term cure than any court claim.

Of course, if your claim for payment is valid and he won’t pay just because he won’t, then the court might seem more attractive. Some business relationships aren’t worth preserving and you might not be bothered if a court case damages this one. But again, though you might well win your case, and costs might be surprisingly light, victory will come at a significant cost in time and fuss – both of which are better invested in healthy business relationships.

If the supplier won’t pay because he can’t pay, then you haven’t much hope.

If the business is bust you will be fighting for the scraps along with everyone else – and should anticipate others with greater security ranking higher up the pecking order than you.

Either way, assuming you are a business and not an individual, you might well be legally entitled to add interest and costs on top of the £500. As always with legislation, the rules are complicated. Essentially, in the absence of reasonable provisions for interest in the contract, The Late Payments of Commercial Debts (Interest) Act 1998 grandly talks about 8 per cent above base rate interest rates that may be added once the debt is deemed late (ie usually after 30 days). The interest accumulates “simply” and is not compound. In addition there is “compensation for late payment” of £40 for amounts up to £1,000. The compensation rates are higher for larger amounts – £100 for debts of £10,000 or more.

But again, practicality will often have greater clout than statutory right. If you’re already arguing about £500, making the amount larger isn’t going to bring resolution closer. If your supplier does eventually give in and pay you back your £500, is it really in your interests to take him through the courts for the unpaid interest and the charges? If he can’t pay £500, he won’t be able to pay the additional charges either.

Which all begs the question as to whether the late payments legislation is worth the paper it’s printed on. That depends on your understanding of its objectives. A climate of late payment is bad for business – particularly small business.

Big businesses have more financial fat than small businesses. That fat turns to muscle in lean times, ensuring that a big business can often withstand periods of late payment much better than small businesses.

What matters more than testing the practical application of the letter of the law in court is the general attitude to payment terms that prevails, and the legislation has an important role in changing attitudes.

Used as a threat or deterrent, interest and charges can be effective.

All this noble talk might not help when you need the cash. The best securities against bad payers remain the oldest: ensure the terms of the deal are carefully thought through and documented; have thorough credit control procedures, with debts that are chased promptly; and always think carefully about who you do business with.

Rupert Merson, partner at BDO Stoy Hayward

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