THE RECOVERY OF TRADE RECEIVABLES ABROAD

Marcello Mantelli
Avvocato in Torino e Milano

 Preface

In the case of sales of goods/products abroad, it is advisable to set up the necessary safeguards in the contract with the buyer to manage the possible risk of non-payment, a risk that is inherent in every business transaction.

The purpose is to protect the commercial health of one’s company.

For this purpose, both order confirmations and general terms and conditions of sale are very useful tools in standard foreign sales transactions to the extent that they contain seller protection and safeguard clauses signed between the parties, including those on applicable law and those on how disputes are to be resolved (usually through recourse to state jurisdiction and then to the court or through private arbitration and then to the arbitrator, if so agreed in the contract).

However, in our experience, many traders do not use any of these contractual means of protection and sell their products abroad by simply delivering the goods following receipt of a purchase order from the buyer. Although very often payment is required in advance, especially from new customers, it is also true that there are many cases in which a relationship of trust is established between the seller and the customer over time, with a tendency to grant a certain amount of credit, resulting in the risk, if the customer’s financial situation deteriorates, of non-payment when the goods delivered are due.  

In this article, we will examine from the perspective of the seller based in Italy, what steps should be taken to recover a trade debt in the European Union and outside the European Union, following the sending of various reminders by the seller that remained unsuccessful or subject to formal or substantive disputes.

In the presence of these situations, it is usually considered appropriate to proceed to recover the debt through a so-called “debt collection company” or lawyer or sometimes to “abandon” the debt but the conditions from the tax point of view must be met in order to make a tax-adjusted loss based on a legal assessment.

Choice between debt collection company and lawyer-costs – estimate


In case the seller decides to recover the debt, the first step is to choose whether to use a debt collection company or a registered lawyer. Other parties are to be excluded (for example, one’s accountant, a general counsel not registered as a lawyer). The choice between one and the other, to be effective and reasonably lead to a useful result, depends essentially on weighing two factors: professionalism and cost.

 The debt collection company


The debt collection company can act only in the extrajudicial phase, so, in the only preliminary phase of debt recovery prior to recourse to the judge, judicial activity (and therefore before the competent judge) being reserved, by law, only to qualified lawyers duly registered in the professional register in Italy or abroad (if one turns to a lawyer based abroad).

It is necessary to select the company to be charged with the recovery with great care, verifying very carefully the contractual conditions envisaged for the service, the recovery activity that will be carried out in concrete terms (how many letters, how many phone calls) and the fee charged as a whole, including any closing costs and the cost to be faced in case one has to deal with judicial recovery of the debt and the competence of the contracted lawyer in matters of cases abroad (is it a traditional lawyer, a lawyer experienced in international litigation or a lawyer abroad ? ). In fact, an experienced lawyer is needed for each area of law as well as in the medical field.

In fact, operating in the extrajudicial sphere, for debt collection companies, requires a simple public safety permit, and the public supervision regulations applicable to them are particularly meager (director requirements, minimum share capital, supervision).

It follows that the check on the professionalism and seriousness of the operator should be done very carefully before entrusting the assignment and should be extended carefully to the contractual conditions applicable to the specific case.

The entrusted debt collection company usually formulates a written request for payment to the foreign debtor based on a statement of account applying default interest (to be checked if the amount is within the legal limits) and case management fees. It then follows up this request with one or more phone calls from its own employees or external associates, of which it is not known how to approach the debtor.

A wrong approach with the client, depending on the “style” of the appointee, could in fact jeopardize forever any future business relationship, which may be useful to maintain when the non-payment depends, for example, on a debtor’s temporary predicament or on a legally founded dispute of the claim.

Another preliminary check before the assignment is to verify that the company can provide a copy of the letters of demands for payment to the debtor together with proof of receipt or at least the postcard attesting the failure to collect/deliver the registered letter (the pec is an Italian-only instrument and therefore usable are in Italy).

Often the debtor is directly offered by the debt collection company a payment in full or an installment payment, which is not certain that it will then be honored in full unless backed by collateral.

It is therefore a question of whether such payment arrangements are appropriate in light of the debtor’s economic situation. If no payment is obtained, the debt collection company will in fact propose the use of a contracted attorney, resulting in additional costs to be incurred.

A preliminary, rough estimate of the costs of the contracted attorney would be advisable so that a complete picture can also be obtained from the point of view of economic outlay.

Finally, it should be asked what steps will be taken next if the debtor does not respond or fails to pay, or even if the debtor disputes the claim.

The lawyer


Unlike the debt collection company, which operates in a standardized manner, the lawyer, if experienced and knowledgeable in international commercial disputes, first analyzes the commercial relationship, the applicable law and the court or arbitrator that may have jurisdiction, the place to sue, what the average time frame is for the extrajudicial phase and the judicial phase in Italy and, if applicable, in the debtor’s country (in case of non-payment in the extrajudicial phase), and whether or not any objections that the debtor might possibly raise are legally well-founded, all in the light of the documents preliminarily analyzed and the law applicable to the commercial relationship.

It may indeed be the case that an apparent debt collection contains potential risks for counterclaims (counterclaims) by the debtor of a far greater amount than the open claim.

A lawyer in order to operate is then required to pass a rigorous state examination and must comply with the professional Code of Ethics (Official Gazette N. 241, October 16th, 2014) in effect since December 16th, 2014, in the conduct of his or her professional activities, under penalty of sanctions ranging from censure, suspension, and up to disbarment.

This, however, does not exempt the company that intends to entrust the recovery of the debt from conducting a preliminary check on the professionalism of the lawyer, expressly asking him or her whether he or she is an expert in international trade law, whether he or she has constant and continuous experience in recovering commercial debts abroad and in commercial disputes with foreign counterparties in court and arbitration, and what the costs are for the different stages of recovery in extrajudicial and possibly, in principle, judicial proceedings (For example, for a European injunction under EC Regulation 1896/2006). Indeed, the lawyer has a deontological duty to notify the client when he or she is not competent in a certain matter. 

On the other hand, even the use of the lawyer entails intervention costs for the study of the case and the sending of the notice to comply, costs for which one is entitled to receive from the lawyer a preliminary written estimate, compulsory under Italian law, of which the clauses and the amount of the fee requested must obviously be analyzed in relation to the activities to be carried out and to the forensic reference fee schedule ex Dm Ministry of Justice n.55/2014 currently in force (rates that are not compulsory, but which constitute useful reference of the prices of the legal market).

Therefore, the fundamental difference that can determine the choice between the lawyer and the debt collection company consists mainly in the possibility of receiving from the lawyer experienced in the international matter a legal analysis of the case and the related oral opinion from the beginning of the assignment, activities that usually consist of the analysis:

i-of the framing/qualification of the business relationship entered with the debtor in light of the contract, if any, the factual course of the relationship and the documents relevant to the case; 

ii-of the debtor’s possible grounds for dispute and on the consequent advisability or otherwise of assessing whether or not to proceed with a settlement agreement (e.g., damage to the packaging that renders the goods largely unusable has been challenged to the seller in a timely manner) and under what economic conditions in light also of the costs to be incurred;

iii-on the law applicable to the particular case;

iv-on the choice of the competent court to decide a possible dispute;

v-on the time required to obtain an enforceable title in Italy or in the debtor’s country.

The lawyer should then advise the use of up-to-date business information on the debtor’s solvency situation and on whether the debtor is subject to insolvency proceedings (for example, composition or bankruptcy).

Documents to be delivered as a result of the assignment


In order to receive advice from the lawyer and proceed to send a letter of default to the debtor, we need:

(i) buyer’s purchase order

(ii) any order confirmation from the seller (or other contractual documents)

(iii) proof of delivery of the goods to the buyer (ddt, accompanying invoice)

(iv) CMR signed by the carrier upon collection in case of Exworks/Fca sale (international waybill)

(v) Invoice of sale

(vi) Open account statement

(vii) Correspondence between the parties (of particular relevance are emails or letters in which the buyer acknowledges himself as debtor and agrees to pay by a certain due date, including the one prior to the sale).

Choice of competent court made in the contract between the parties


From the analysis of the documentation, the appointed attorney will be able to determine whether or not the exclusive jurisdiction of a particular judge was validly agreed upon, such as that of the judge of the seller’s or buyer’s place of business or an arbitrator.

Choice of court not made in the contract between the parties


If the jurisdiction in question has not been validly agreed upon, it will be necessary to refer, within the European Union and therefore for claims against customers based in the European Union, to the general rule of jurisdiction on which Regulation EU/1512/2012 is based, which identifies the general forum in the domicile of the defendant; in essence, whenever an Italian economic operator intends to sue a counterparty based abroad, he will have to do so, as a general rule, before the courts of the foreign country where the counterparty has its registered office.

Alternatively, recourse may be had to the so-called contractual forum, governed by Art. 7(b), Reg. EU/1512/2012, relating to both the buying and selling of goods and the provision of services.

Under Article 7 no. 1(a) of Reg. EU/1215/2012, in fact, a person domiciled in the territory of a member state may be sued in another member state:

“…before the courts for the place where the obligation in question has been or is to be performed.” According to (b), in particular, this place coincides, “in the case of the sale of goods,” with the place “where the goods were delivered or should have been delivered under the contract.”

Said criterion for identifying the place of performance of the obligation, which coincides with the place of delivery of the goods, encompasses any dispute arising from the contract of sale and purchase, including both the non-payment of the price of goods and the case of several obligations deduced in the same claim.

It follows from this, from a practical point of view, that a seller who intends to sue the buyer to obtain payment of the price of the goods sold before the courts of his or her place of business will have to prove that the goods were delivered at his or her place of business and not at the buyer’s place of business (See Judgments Car Trim GmbH v. KeySafety Systems Srl, Court of Justice, Feb. 25, 2010, C-381/08 and Electrosteel Europe SA v. Edil Centro Spa, Court of Justice, June 9, 2011, C-87/10).

It is therefore necessary in these cases a ‘careful analysis of the contractual clauses by verifying, in the absence of choice of court jurisdiction in the contract between the parties, whether, for example, Incoterms clauses have been validly agreed upon, from which the place where the performance of the seller’s obligation to deliver the goods took place can be inferred, resulting in the jurisdiction of the court of that place to hear the dispute (as an alternative to the forum of the debtor’s seat).

For commercial claims by the seller against customers based outside the European Union, in addition to the possibility of taking action to recover the debt in the country where the debtor is based, reference will instead be made to Article 3(2) of Law No. 218/1995, which provides that, in the absence of a choice in the contract, jurisdiction in commercial matters is to be determined in accordance with Sections 2, 3 and 4 of the 1968 Brussels Convention on Jurisdiction and the Enforcement of Judgments in Civil and Commercial Matters, as amended.

In summary, given that there are interpretative uncertainties on the point whether these subsequent amendments also include EU Reg.1215/2012 seen above, a choice will have to be considered between acting before the Italian court as the forum of payment (the place where the payment was to be executed) on the basis of the 1968 Brussels Convention or at the place of delivery of the goods in application of EU Reg.1215/2012 seen above (cf. Cass.21 /10/2009 no.22239, Giacometti Group Srl v.David & Cie in which the court considers valid the choice of the place of payment on the basis of the Brussels Conv.).

Finally, it should be borne in mind that another important element of the initial counsel’s opinion to the creditor is to indicate whether the eventual judicial (or arbitral) decision is recognizable in the other party’s country, in what timeframe and at what conditions and costs in principle.

For the European Union, no problem arises, since a judgment rendered in one EU country will be recognized in the other EU countries without the need for the use of any specific procedure except translation and service in the language of the addressee of the document. In fact, if it is recognized as enforceable in the country of origin, it will also be enforceable in the other EU countries without the need for any declaration of enforceability.

For the area outside the European Union, as bilateral conventions on the recognition of judgments between Italy and non-EU countries are rare avis, in most of the cases action will have to be taken in the courts of the debtor’s seat, unless otherwise chosen in the contract.

Finally, it should be noted that the choice between the domestic forum and the foreign forum is not a foregone conclusion in favor of the Italian forum, as the costs and benefits of the different options must be carefully evaluated beforehand, in addition to the possibility of quickly obtaining an enforceable title in the country that has the most efficient judicial system, again following an assessment of the costs to be faced. 

CONCLUSIONS

In order to decide whether or not to proceed with a debt recovery against one’s foreign client, it is essential to have a preliminary assessment of the case carried out by a competent person, a person who should be chosen according to experience and professionalism, based on the comprehensive documentation indicated above.

The assessment by the expert includes not only the legal analysis of the case and the potential solvency of the debtor in the light of up-to-date commercial information but also the costs to be incurred in both the extrajudicial and judicial phases to proceed with the recovery of the debt, the average time required to reach judgment, and the time required to proceed to enforcement and thus essentially to recover the debt in the debtor’s country.

It is therefore a comprehensive legal and economic analysis on the basis of which the seller will be able to make his own economic evaluations based on an informed decision.

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