CONTRACTS AND RISK Making sure both work for your business

1. CONTRACTS AND RISKMaking sure both work for your business Ishita Sethi - Solicitor 30 July 2008 Welcome � Ishita Sethi � practice primarily in front end commercial transactional work and I am here to talk to you today about Contracts and Risk and how to make sure they both work for your business. Welcome � Ishita Sethi � practice primarily in front end commercial transactional work and I am here to talk to you today about Contracts and Risk and how to make sure they both work for your business.

2. 2 Contracts � are a part of everyday living and everyday business The prime purposes ensuring certainty of outcome, and minimization of risk exposure CONTRACTS AND RISKMaking sure both work for your business I think that it is fair to say that contracts are a part of everyday life. I am sure that all of you have either drafted, entered into, administered or performed (or perhaps not performed) a contract in some shape or form at some point in time or another either in writing or verbally. The purpose of entering into an agreement which is held enforceable by a court of law is to ensure that a certain level of workable certainty can be achieved when dealing with people and/or businesses and to minimise the level of risk the contracting parties are exposed to as a result of dealing with one another. I think that it is fair to say that contracts are a part of everyday life. I am sure that all of you have either drafted, entered into, administered or performed (or perhaps not performed) a contract in some shape or form at some point in time or another either in writing or verbally. The purpose of entering into an agreement which is held enforceable by a court of law is to ensure that a certain level of workable certainty can be achieved when dealing with people and/or businesses and to minimise the level of risk the contracting parties are exposed to as a result of dealing with one another.

3. 3 Risk � commercial activity Contractual Risk Exists but can be managed and minimised So to increase certainty of outcome and therefore to preserve the bottom line We can describe Risk as exposing yourself to the consequences of uncertainty or you could think of it as the probability of a loss occurring. In any case, risk it is not a positive thing in itself. However, it forms part of what businesses face everyday. Risk is inherent when undertaking commercial activity but fortunately risk can be quantified to a certain extent and can therefore be managed and minimised. Contractual risk is of particular interest to us as it forms part of the broader risk management strategy of an business. Contractual Risk is risk that is associated with the failure of contracting parties to deliver devices or products to the agreed cost and specification or any other risk that entering into a contract may expose the contracting party to. The result of managing contractual risk is that it can add value to the company by increasing certainty of outcome when engaging in commercial activity and can therefore ultimately assist in the preservation of the bottom line of the business. We can describe Risk as exposing yourself to the consequences of uncertainty or you could think of it as the probability of a loss occurring. In any case, risk it is not a positive thing in itself. However, it forms part of what businesses face everyday. Risk is inherent when undertaking commercial activity but fortunately risk can be quantified to a certain extent and can therefore be managed and minimised. Contractual risk is of particular interest to us as it forms part of the broader risk management strategy of an business. Contractual Risk is risk that is associated with the failure of contracting parties to deliver devices or products to the agreed cost and specification or any other risk that entering into a contract may expose the contracting party to. The result of managing contractual risk is that it can add value to the company by increasing certainty of outcome when engaging in commercial activity and can therefore ultimately assist in the preservation of the bottom line of the business.

4. 4 Contracts management should be part of the overall risk management strategy of a business Contracts can be stringently enforced by the courts � risk for finding of unenforceability of key provisions and interpretation risks can arise Can impact on the preservation of the BOTTOM LINE Contracts management is an area of concern to a growing number of businesses as it forms an integral part of the overall risk management strategy of any business. This is why there is a momentum towards businesses negotiating more and more heavily and drafting more and more precisely the terms of a contract that they plan on entering into. Being able to identify areas of risk and allocate them effectively and consistently in contractual dealings is integral to the enduring success of any business. It is not enough to have risk management strategies in place, these must be backed up by precise drafting of the contract to prevent a finding of unenforceability or voidability of key contractual provisions. Basically, you do not want a court to later read a provision in your contract and interpret it as having a different meaning to what you or the author intended � this is known as �interpretation risk� and is significant enough that it can impact on the businesses bottom line. Businesses entering into contractual relations all wish to seek out those terms in a contract which will favourably determine their obligations and rights. So you can see that entering into a contract without proper consideration can lead to exposing your business to unnecessary risk and therefore ultimately costs. Infact, doing so can undermine the whole purpose of entering into a contract in the first place. For example, if you are an importer - you don�t want to find yourself in the situation where you expose yourself to the risk that that product might cause harm to an end user here Australia. So you would ensure, for example, that the contract for supply included a provision which placed the responsibility of any damages caused by the product to end users in Australia back onto the original supplier. You would negotiate the insertion of a tailor drafted indemnity clause. Contracts management is an area of concern to a growing number of businesses as it forms an integral part of the overall risk management strategy of any business. This is why there is a momentum towards businesses negotiating more and more heavily and drafting more and more precisely the terms of a contract that they plan on entering into. Being able to identify areas of risk and allocate them effectively and consistently in contractual dealings is integral to the enduring success of any business. It is not enough to have risk management strategies in place, these must be backed up by precise drafting of the contract to prevent a finding of unenforceability or voidability of key contractual provisions. Basically, you do not want a court to later read a provision in your contract and interpret it as having a different meaning to what you or the author intended � this is known as �interpretation risk� and is significant enough that it can impact on the businesses bottom line. Businesses entering into contractual relations all wish to seek out those terms in a contract which will favourably determine their obligations and rights. So you can see that entering into a contract without proper consideration can lead to exposing your business to unnecessary risk and therefore ultimately costs. Infact, doing so can undermine the whole purpose of entering into a contract in the first place. For example, if you are an importer - you don�t want to find yourself in the situation where you expose yourself to the risk that that product might cause harm to an end user here Australia. So you would ensure, for example, that the contract for supply included a provision which placed the responsibility of any damages caused by the product to end users in Australia back onto the original supplier. You would negotiate the insertion of a tailor drafted indemnity clause.

5. 5 CONTRACTS AND RISKMaking sure both work for your business 

6. 6 Preliminary Issues Understand the context in which the contract will be used and how the contract is to be performed Understanding the law and the principles of interpretation to be able to reduce interpretation risk CONTRACTS AND RISKMaking sure both work for your business  Critical preliminary issues to consider when entering into contracts include having a proper understanding of what you seek to obtain from entering into the contract in the first place, of what risks you may be exposed to by entering into the contract, how to go about protecting yourself from those risks or at the least minimising your exposure to those risks, how to best negotiate the contract with the other side to ensure you are able to obtain what you need from the contract. Whilst lawyers can help with this process, it is the business people who have more knowledge about the product or service that will be able to best identify the risks. Also - It is also important to have a clear understanding of the relevant law and of the principles utilised by the courts to construct and interpret meaning of a contract. Critical preliminary issues to consider when entering into contracts include having a proper understanding of what you seek to obtain from entering into the contract in the first place, of what risks you may be exposed to by entering into the contract, how to go about protecting yourself from those risks or at the least minimising your exposure to those risks, how to best negotiate the contract with the other side to ensure you are able to obtain what you need from the contract. Whilst lawyers can help with this process, it is the business people who have more knowledge about the product or service that will be able to best identify the risks. Also - It is also important to have a clear understanding of the relevant law and of the principles utilised by the courts to construct and interpret meaning of a contract.

7. 7 Understanding the law and principles of construction Courts will give effect to the intention of the parties as expressed in the Contract or otherwise � Codelfa Construction Pty Ltd v State Rail Authority (1982) 149 CLR 337 Prima facie, contractual meaning is derived on an OBJECTIVE BASIS CONTRACTS AND RISKMaking sure both work for your business  The Court�s role is to give effect to the parties� agreement and that is derived from the specific terms of the contract. This was decided upon in a leading case on the area � Codelfa Construction Pty Ltd v State Rail Authority. To begin with, the court applies an objective test to determine the meaning of the contract by looking to the precise wording set down by parties. This makes it all the more necessary to pay careful attention to the preparation of and review of the specific words and terms of the contract. The Court�s role is to give effect to the parties� agreement and that is derived from the specific terms of the contract. This was decided upon in a leading case on the area � Codelfa Construction Pty Ltd v State Rail Authority. To begin with, the court applies an objective test to determine the meaning of the contract by looking to the precise wording set down by parties. This makes it all the more necessary to pay careful attention to the preparation of and review of the specific words and terms of the contract.

8. 8 Bargaining Tactics Potentially Disadvantageous Approaches �Take it or leave it� � one party (usually the one with greater bargaining power) asks the other party to accept the contract in the form acceptable to it otherwise it will not enter into contract at all. �Take it all� � one party asks the other party to accept a contract containing highly risk averse standard terms. �Boilerplate� � one party (usually the one with greater bargaining power) asks the other party to accept a standard form of contract. CONTRACTS AND RISKMaking sure both work for your business  Our discussion so far reflects the point that management of risk exposure by a contracting party is an area of increasing concern and requires careful attention. Often we find that the management of contractual terms and negotiations can become compromised as parties constrained by limits on resources are tempted to adopt a �take it or leave it�, �boilerplate� or worse still �take it all� approach. Use slide to describe briefly the approaches that can occur. These approaches are no good because they do not allow for the consideration of the specific requirements of contracting parties and therefore can often lead the increased possibility of things going wrong. For example, by taking a �Take it all� approach, although a party is seeking to have the most risk averse terms included in the contract, they may forget to have the terms tailored to a very specific requirement of the business, this will ironically, make the approach self-defeating and is likely to lead to an increase in risk exposure. Our discussion so far reflects the point that management of risk exposure by a contracting party is an area of increasing concern and requires careful attention. Often we find that the management of contractual terms and negotiations can become compromised as parties constrained by limits on resources are tempted to adopt a �take it or leave it�, �boilerplate� or worse still �take it all� approach. Use slide to describe briefly the approaches that can occur. These approaches are no good because they do not allow for the consideration of the specific requirements of contracting parties and therefore can often lead the increased possibility of things going wrong. For example, by taking a �Take it all� approach, although a party is seeking to have the most risk averse terms included in the contract, they may forget to have the terms tailored to a very specific requirement of the business, this will ironically, make the approach self-defeating and is likely to lead to an increase in risk exposure.

9. 9 Limiting Liability A party�s liability can be limited by way of inclusion of a carefully drafted Limitation, Exclusion, Exemption or Exception clause. The prime purpose is to limit the loss or damage in the event of a breach. They can: provide a defence to a claim limit the damages recoverable once a breach has been established. For example, liability may be excluded for: any loss or damage resulting from breach, loss or damage resulting from a specific type of breach, loss or damage of a specific kind, loss or damage for up to a certain period of time after the breach, for loss or damage up to a certain dollar value consequential losses. CONTRACTS AND RISKMaking sure both work for your business  That�s one way � but what if there is not appropriate cover available in the insurance market? Then, contracting parties should look to alternative contractual strategies to defray the risks. An understanding of how to limit liability is such a useful alternative strategy. A party�s liability can be limited by way of inclusion of a carefully drafted limitation, exclusion, exemption or exception clause into the contract. For example, if you are the supplier of ��������???????????????? The prime purpose being to limit the damage resulting from the breach. Such clauses will operate generally to either provide a defence to a claim or to limit the damages recoverable once a breach has been established. Liability may be excluded for any loss or damage resulting from breach, loss or damage resulting from a specific type of breach, loss or damage of a specific kind, loss or damage for up to a certain period of time after the breach, for loss or damage up to a certain dollar value. For example, take the scenario of�������..in this instance, it might be most suitable to negotiate the addition of a limitation clause which serves to�����. Thereby removing the contracting party�s risk of becoming liable for ����. At some point in the future. That�s one way � but what if there is not appropriate cover available in the insurance market? Then, contracting parties should look to alternative contractual strategies to defray the risks. An understanding of how to limit liability is such a useful alternative strategy. A party�s liability can be limited by way of inclusion of a carefully drafted limitation, exclusion, exemption or exception clause into the contract. For example, if you are the supplier of ��������???????????????? The prime purpose being to limit the damage resulting from the breach. Such clauses will operate generally to either provide a defence to a claim or to limit the damages recoverable once a breach has been established. Liability may be excluded for any loss or damage resulting from breach, loss or damage resulting from a specific type of breach, loss or damage of a specific kind, loss or damage for up to a certain period of time after the breach, for loss or damage up to a certain dollar value. For example, take the scenario of�������..in this instance, it might be most suitable to negotiate the addition of a limitation clause which serves to�����. Thereby removing the contracting party�s risk of becoming liable for ����. At some point in the future.

10. 10 Consequential Losses What about risk associated with losses incurred as unnatural and distant consequence of a breach of contract? Despite Environmental Systems Pty Ltd v Peerless Holdings Pty Ltd [2008] VSCA 26, there is precise meaning at law of �consequential losses� and damages Party liable for consequential losses may increase internal costs (affecting the bottom line) or costs of products, services provided or both. CONTRACTS AND RISKMaking sure both work for your business  Contract Law provides that compensation is payable for losses and damages that are caused by the breach. The general position in Australia is that in an action for breach of contract, normal and consequential losses are recoverable against a defendant: The normal loss is the loss that every plaintiff in a like situation will suffer from the breach of contract whereas, the consequential loss is the loss of any thing beyond the normal measure, such a profits lost or expenses incurred through the breach of the contract. This position was provided for in Australia by the Victorian Court of Appeal case of Environmental Systems Pty Ltd v Peerless Holdings Pty Ltd [2008] VSCA 26, however, the precise meaning was not and is hard to precisely define. This leads to some doubt as to the extent of liability of a party when considering consequential losses and damages. Since there is no settled meaning at law of consequential losses or damages, it is difficult to determine precisely the risk involved with entering into a particular contract. Therefore, it becomes even more important for a contracting party to employ precise and creative techniques to minimise this sort of risk exposure and to make the contract work for its business. Contract Law provides that compensation is payable for losses and damages that are caused by the breach. The general position in Australia is that in an action for breach of contract, normal and consequential losses are recoverable against a defendant: The normal loss is the loss that every plaintiff in a like situation will suffer from the breach of contract whereas, the consequential loss is the loss of any thing beyond the normal measure, such a profits lost or expenses incurred through the breach of the contract. This position was provided for in Australia by the Victorian Court of Appeal case of Environmental Systems Pty Ltd v Peerless Holdings Pty Ltd [2008] VSCA 26, however, the precise meaning was not and is hard to precisely define. This leads to some doubt as to the extent of liability of a party when considering consequential losses and damages. Since there is no settled meaning at law of consequential losses or damages, it is difficult to determine precisely the risk involved with entering into a particular contract. Therefore, it becomes even more important for a contracting party to employ precise and creative techniques to minimise this sort of risk exposure and to make the contract work for its business.

11. 11 Indemnities Basic Structure � �A must indemnify and hold B harmless against [X] event�. Negotiating the inclusion of an indemnity clause can help reduce risk associated with a particular event taking place. Indemnity types: Third party indemnity is where A indemnifies and holds B harmless against any third party claim arising in connection with A�s breach of contract. Party-Party indemnity is where A indemnifies and holds B harmless against A�s breach of contract or negligence. Reverse indemnity is where A indemnifies and holds B harmless against B�s breach of contract or negligence CONTRACTS AND RISKMaking sure both work for your business  Another alternative strategy that a contracting party can employ to negotiate the insertion of an indemnity provision. An indemnity is a specific kind of obligation � almost like a promise to hold A harmless from loss. It is a technical beast and simply refering to a clause in a contract as an indemnity does not in itself give it the status of one. It is important to note that a right under an indemnity does not arise until the loss is paid for first. Then only an indemnity is invoked. So, for example, if a contracting party does not wish to have to empty their own pockets first in rectifying the loss and damages, then perhaps an indemnity is not the appropriate form of protection that they seek. On the other hand, an indemnity is not limited by the normal principles that apply to contract which limit the extent of loss and damage compensated for. By negotiating the inclusion of the right type of indemnity provision into the contract can assist a contracting party to avoid the burden of certain losses incurred. There are various types of indemnities that can be negotiated into a contract � and determination of the most appropriate type of indemnity that is to be provided by a party or asked for of a party is a complex task and requires careful consideration of the circumstances the indemnity is being made for. Read from slide � the types of Indemnities and their brief description. Obviously, negotiating the addition of an appropriate indemnity is a critical part of the process and those of you who have had the experience of negotiating terms of contracts will be quite aware, often requires arduous persuasion and explanation and potentially an appropriate adjustment in the contract price. Another alternative strategy that a contracting party can employ to negotiate the insertion of an indemnity provision. An indemnity is a specific kind of obligation � almost like a promise to hold A harmless from loss. It is a technical beast and simply refering to a clause in a contract as an indemnity does not in itself give it the status of one. It is important to note that a right under an indemnity does not arise until the loss is paid for first. Then only an indemnity is invoked. So, for example, if a contracting party does not wish to have to empty their own pockets first in rectifying the loss and damages, then perhaps an indemnity is not the appropriate form of protection that they seek. On the other hand, an indemnity is not limited by the normal principles that apply to contract which limit the extent of loss and damage compensated for. By negotiating the inclusion of the right type of indemnity provision into the contract can assist a contracting party to avoid the burden of certain losses incurred. There are various types of indemnities that can be negotiated into a contract � and determination of the most appropriate type of indemnity that is to be provided by a party or asked for of a party is a complex task and requires careful consideration of the circumstances the indemnity is being made for. Read from slide � the types of Indemnities and their brief description. Obviously, negotiating the addition of an appropriate indemnity is a critical part of the process and those of you who have had the experience of negotiating terms of contracts will be quite aware, often requires arduous persuasion and explanation and potentially an appropriate adjustment in the contract price.

12. 12 Insurance � a way to manage risk? Can be a form of risk management Can be seen as an allocation of contractual risk away from the contracting parties to an external third party Common misconceptions about insurance policies exist. CONTRACTS AND RISKMaking sure both work for your business  One way to deal with the risk associated with entering into a contract is to deflect it away from you, the contracting parties to an external third party. Insurance as we all know is a form of risk management primarily used to hedge against the risk of a contingent loss. It can be defined as the equitable transfer of the risk of a loss, from one entity to another in exchange for a premium. It is an age old simple concept but you will be surprised to learn that ��������???????�. Contracting parties are often surprised to learn that the insurance policy which they understood was in place to cover their liability does not in fact provide indemnity when a claim is made against them. It is common misconception that being named as an �insured� in an insurance policy guarantees that the limit of indemnity under the policy will be available to respond to any claim. It is for this reason that care must be taken by contracting parties to property identify the risks associated with the particular work involved, determine the appropriate type of cover which will respond to these risks, investigate whether such cover is available in the insurance market, ensure that the amount of cover is sufficient and to put in place appropriate contractual strategies One way to deal with the risk associated with entering into a contract is to deflect it away from you, the contracting parties to an external third party. Insurance as we all know is a form of risk management primarily used to hedge against the risk of a contingent loss. It can be defined as the equitable transfer of the risk of a loss, from one entity to another in exchange for a premium. It is an age old simple concept but you will be surprised to learn that ��������???????�. Contracting parties are often surprised to learn that the insurance policy which they understood was in place to cover their liability does not in fact provide indemnity when a claim is made against them. It is common misconception that being named as an �insured� in an insurance policy guarantees that the limit of indemnity under the policy will be available to respond to any claim. It is for this reason that care must be taken by contracting parties to property identify the risks associated with the particular work involved, determine the appropriate type of cover which will respond to these risks, investigate whether such cover is available in the insurance market, ensure that the amount of cover is sufficient and to put in place appropriate contractual strategies

13. 13 Some suggested examples of Insurance Advanced Consequential Loss Insurance All Risks or Special Risks Insurance Business Interruption Insurance Contingency Insurance Combined Liability Insurance Credit Insurance Directors and Officers Liability Insurance Employment Practices Liability Insurance Errors and Omissions Insurance CONTRACTS AND RISKMaking sure both work for your business Some examples of the types of insurance available are: 1) Advanced Consequential Loss Insurance which usually indemnifies a contract for financial losses which arise from delay of the insured and can extend to include cover for loss of gross profit (for example loss of sales, rental income), holding costs (for example interest expenses, wages) and some specific fixed costs of development. 2) All Risks or Special Risks Insurance which is usually effected in respect of a specific item of property (for example, jewllery) to provide cover in respect of accidental loss or damage resulting from certain events. 3) Business Interruption or Consequential Loss Insurance is where the insurer agrees to indemnify the insured for economic loss resulting from the disruption of the insured�s business following damage cause by the insured�s own fault. 4) Contingency Insurance is where the risk associated with the cancellation of events, prize indemnities, player bonuses, weather risks, non-appearance/performance, death and or disgrace. 5) Combined Liability Insurance usually provides public and product liability cover and possibly other liability cover, eg, professional indemnity. 6) Credit Insurance is usually an insurance taken out by creditors to protect them against the possibility of a debtor failing to pay his debt or against the possibility of a surety failing to pay a principal debt when called upon to do so under a contract of guarantee. Also this type of insurance can be effected by a borrower against the risk of unemployment or death (you might know this as loan insurance)/ 7) Directors and Officers Liability Insurance covers directors and officers for their liability to third parties for breach of their director�s duties or duties as officers. Will often include legal expenses cove for the defence of litigation. Such a policy is often divided into two sections, the first covering the director or officer directly and the second providing company reimbursement, where the company has indemnified the director or officer in a separate contract. This type of insurance policy will usually exclude (with some exceptions) liability to the company itself. 8) Employment Practices Liability Insurance indemnifies the insured in respect of liabilities arising associated with employees and their employment, including unfair dismissal, workplace harassment, breach of employment contract and discrimination. Fines and penalties are generally excluded from cover though. 9) Errors and Omissions Insurance usually covers liability for errors or omissions whether or not the insured has been negligent. Some examples of the types of insurance available are: 1) Advanced Consequential Loss Insurance which usually indemnifies a contract for financial losses which arise from delay of the insured and can extend to include cover for loss of gross profit (for example loss of sales, rental income), holding costs (for example interest expenses, wages) and some specific fixed costs of development. 2) All Risks or Special Risks Insurance which is usually effected in respect of a specific item of property (for example, jewllery) to provide cover in respect of accidental loss or damage resulting from certain events. 3) Business Interruption or Consequential Loss Insurance is where the insurer agrees to indemnify the insured for economic loss resulting from the disruption of the insured�s business following damage cause by the insured�s own fault. 4) Contingency Insurance is where the risk associated with the cancellation of events, prize indemnities, player bonuses, weather risks, non-appearance/performance, death and or disgrace. 5) Combined Liability Insurance usually provides public and product liability cover and possibly other liability cover, eg, professional indemnity. 6) Credit Insurance is usually an insurance taken out by creditors to protect them against the possibility of a debtor failing to pay his debt or against the possibility of a surety failing to pay a principal debt when called upon to do so under a contract of guarantee. Also this type of insurance can be effected by a borrower against the risk of unemployment or death (you might know this as loan insurance)/ 7) Directors and Officers Liability Insurance covers directors and officers for their liability to third parties for breach of their director�s duties or duties as officers. Will often include legal expenses cove for the defence of litigation. Such a policy is often divided into two sections, the first covering the director or officer directly and the second providing company reimbursement, where the company has indemnified the director or officer in a separate contract. This type of insurance policy will usually exclude (with some exceptions) liability to the company itself. 8) Employment Practices Liability Insurance indemnifies the insured in respect of liabilities arising associated with employees and their employment, including unfair dismissal, workplace harassment, breach of employment contract and discrimination. Fines and penalties are generally excluded from cover though. 9) Errors and Omissions Insurance usually covers liability for errors or omissions whether or not the insured has been negligent.

14. 14 Some typical problems which create risk There is no written contract at all The contract does not capture all elements Things have changed and the contract has not been updated The contract has expired and the arrangement has continued with no new contract in place The contract automatically rolls over every year without anyone realising CONTRACTS AND RISKMaking sure both work for your business  Read from slide Read from slide

15. 15 Here are some practical strategies Internal systems can help manage obligations: To do searches To capture and record dates To create summary reports Database can help Internal controls Can seek legal team approvals Can regulate who signs off on the contract by having a delegated authority policy in place Visibility across the whole business is essential So that key stakeholders can be aware of a contract if it has been entered into Consider consolidating contracts responsibility within the business Manage the relationship with the other party Be upfront and explore all your commitments before signing up Be proactive and meet often and provide feedback Raise any issues promptly in writing and confirm CONTRACTS AND RISKMaking sure both work for your business  Read from slide Read from slide

16. 16 In summary: 1. Why enter into a �risky� situation? To make sure you take full advantage of a good business opportunity 2. Why should you enter into a formal contract at all? To ensure certainty of outcome of commercial dealing To minimise exposure to risk 3. How can we make contracts and risk work for you? Contracts can help us to identify, manage and minimise any risk that might be inherent in productive commercial dealing. CONTRACTS AND RISKMaking sure both work for your business  Read from slide Read from slide

17. Debt Management A Climate of Change Irena Reiss � Associate 30 July 2008

18. 18 Surviving the Economic Downturn �The cheapest source of funding � is your own� Debt Management A Climate of Change

19. 19 How to Weather the Storm? Debt Management and debt recovery go hand in hand A well managed credit department can drive profitability Focus on more profitable long term customer relationships. Debt Management A Climate of Change

20. 20 How to Prevent Late Payment? The main strategies for minimizing credit risk include: Make sure your customers credit application and terms of trade maximize your recovery rights. Use credit checking. Use credit rating. Ensuring timely payment helps to improve relationships between you and your customers. Debt Management A Climate of Change

21. 21 Getting Your Terms and Conditions Right Terms and conditions should cover: Costs. Delivery arrangements. Payment terms. Credit limits. Credit periods. Interest on late payments Compensation for debt recovery costs. Terms and conditions could also cover: Retention of title. Time limits for raising a dispute. Circumstances in which the contract might be breached or come to an end. Offset deals against payables Debt Management A Climate of Change

22. 22 The Credit Application: Identification of your business and the customer. Personal guarantees protect against companies strategically loaded with debt. Privacy law obligations relating to credit checks. Limiting your exposure/liability. Right to reclaim goods. Debt Management A Climate of Change

23. 23 Red Flags Other things that could indicate a credit problem: Unusual price-cutting or discounting strategies Trade credit relationships with other companies Seasonal industry General economic climate Debt Management A Climate of Change

24. 24 Setting levels of credit Review as potential sales levels & circumstances change Risk codes: (Low risk) - customers with the best credit references and payment records. (Average) (High risk) � those who your credit checks reveal have had, for example, court judgments made against them and are therefore most likely to be slow payers (New) � customers you have traded with for less than 6 months. Debt Management A Climate of Change

25. 25 Reducing the Risk of Late or Non-Payment Training and awareness of employees Make credit terms and conditions clear State an intention to impose your rights and do so when warranted Quickly issue invoices Computerised credit management system Have a collection strategy Set monthly targets Electronic payment system Debt Management A Climate of Change

26. 26 For peace of mind you could take out: Credit insurance. Debt financing/factoring. Debt Management A Climate of Change

27. 27 Recovering Late Payments When does a payment become late? Charging interest on late payments. Taking non-court action to collect debts May depend on who the debtor is, the size of the debt and how late the payment is. Debt Management A Climate of Change

28. 28 Recovering Debt through Court Letter of demand � �often the threat is enough�. Local Court Small Claims � under $10,000 General Division � up to $60,000 District Court � up to $750,000 Supreme Court � over $750,000 Debt Management A Climate of Change

29. 29 Enforcement Options Writ of Execution Examination Notice Garnishee Order Bankruptcy Winding Up Debt Management A Climate of Change

30. 30 Recovering your Judgment Debt Winding up and bankruptcy Debt must not be in dispute Problems with documents in support of debt become evident here When does a wind up apply? Judgment must be more than $2,000 Defendant is a Company When does a bankruptcy occur? Judgment must be more than $2,000 Defendant is an individual Debt Management A Climate of Change

31. 31 Conclusion Be document intensive Be pro-active and vigilant Know your customers Debt Management A Climate of Change