Session 2: Contract

Issues in
Transactions
LAW4024: CREDIT AND COLLECTIONS
Methods to reduce risk in Credit
Transactions
 Creditors should employ good credit policies and procedures.
 Involves steps such as having debtors fill out credit applications and checking
debtors’ credit references.
 The easiest way to minimize the risk of default is not to lend money to people
who will not pay it back.
 Although this is a relatively easy and inexpensive strategy, it is often overlooked.
Methods to reduce risks in Credit
Transactions
 Creditors may be able to change the structure of a transaction so that it is not a
credit arrangement at all.
 For example, a supplier of equipment may choose to lease the equipment rather
than sell it, so that the supplier retains ownership of the equipment.
 In the event of default, the lessor can usually repossess the equipment.
Methods to reduce risks in Credit T
Transactions
 Creditors may insist on security, or collateral, to back up the borrower’s promise
to pay.
 If a creditor is able to seize property of the debtor and sell it to pay down the debt,
the risk to the creditor is reduced.
Methods to reduce risks in Credit
Transactions
 Creditors may ask for assurances from other people that the debt will be repaid.
 If a creditor is able to obtain a guarantee of the debt from another creditworthy
person, then the risk is lessened.
Methods to reduce risks in Credit
Transactions
 Creditors often include terms in credit agreements, called covenants, which
require debtors to carry on business in accordance with specific requirements.
 For example, a credit agreement may require the debtor to refrain from making
significant capital expenditures or allowing certain financial ratios to fall below
defined limits.
 It is important for businesspeople to think of themselves as creditors any time they
are extending credit.
 In many cases, suppliers will extend credit to customers but fail to take any
measures to reduce the risk of not being paid.
Infants Act s. 19 – s. 21

 The age of majority is the age at which a person is recognized as an adult for legal
purposes.
 Those under the age of majority (minors or infants) are in a very different position
concerning their ability to enter contracts than are those who have attained the age
of majority.
 To protect minors from the enforcement of contracts that may not be in their best
interests, the general rule is that minors are not obligated by the contracts they
make.
 However, since the goal of the law in this area is to protect the underaged, minors
have the option to fulfill their contractual commitments and can enforce a contract
against the other party should that party be in breach. In this way, contracts with a
minor are usually voidable, at the option of the minor alone.
Infants Act s. 19 – s. 21

 In British Columbia, a different set of rules applies, as set out in the Infants Act.
 This legislation provides even more protection for the infant than is present at
common law, since generally, even contracts for necessities and beneficial
contracts of service are unenforceable at the election of the minor pursuant to this
Act.
 However, a court has a number of powers under the legislation and can order, for
example, that compensation be paid by or to any of the parties to the contract.