Managing Risks on Credit Sales to Mexico

A Hot Tip about Trade Security in Mexico

Posted on: 7 Mar 2012

How to create a strategy to minimize commercial risks derived from credit sales to Mexico. Evaluate your prospect, document the sale properly, and create more options for legal action.

Managing Risks on Credit Sales into Mexico By Romelio Hernández, HMH Legal (March 10, 2008) DISCLAIMER: The information you obtain in this article is not, nor is it intended to be legal advice. Our Law Office [HMH Legal] will only provide legal advice after having entered into an attorney client relationship. It is imperative that any action you take be done on the advice of counsel, and not based solely upon this article. To sell or not to sell 4. Considering additional security by using guarantees, promissory notes and pledge agreements; and As competition grows, new markets in other countries become an option impossible to overlook. 5. Creating more options for litigation by using The challenge is not only selling to those markets, jurisdiction and arbitration clauses to your but selling on open account terms, as most advantage. competitors will be willing to do. Fear of selling to those markets is somehow justified because of the risks involved, especially the risk of not getting paid or the risk of failing to collect through court. Mexico 1. Doing your due diligence work is no exception and does present its challenges, but should you be worried to the extent of holding out To dig deep for accurate information on a prospect it and relinquishing that piece of the pie to your is wiser to conduct a thorough investigation through competitor? a local source, either an attorney, a credit reporting agency, or a private investigator. Remember that not Selling to Mexico on open account terms and getting even the strongest contract will save you if you run paid is possible and achievable. For this you will only into a company with a history of fraud or one that is need a proven plan to minimize risks effectively. So heavily undercapitalized. So investigate your the answer to the above question is that you prospect well, with due diligence. shouldn?t be worried about selling into Mexico. What you should worry about is selling with your eyes It is recommended to check the Public Registry of closed! Property & Commerce to know the prospect?s current legal status and see filings regarding owned property, liens, bankruptcy proceedings, claims, attachments, etc. A search for legal proceedings A Game Plan for exporters pertaining to your prospect should also be conducted at the local courts. The US Commercial Service Sun Tzu once said: ?Position yourself where you ( can also assist in obtaining an cannot lose? (The Art of War 4:3.22). To gain this International Company Profile. position, you have to start with strategy. Your usual credit and sales policy for domestic sales will just not If you plan to do it on your own, the Mexican Credit work because you?re venturing into another culture, Bureau ( can provide a different business setting, and a totally different your prospect with a credit report, so ask him to legal system. So you have to create a game plan provide one. These are very accurate. You can also that will give you a strategic advantage in court check the prospect?s good standing at the Mexican should litigation be required to collect. Enterprise Information System ( Registration is not required by law, but a company This game plan will essentially be to create a new not found there may lack registration with Mexico?s credit & sales policy for Mexico, and it must include taxing authorities or may have other problems. the following: 1. Proper due diligence work to accurately assess Be wary of several companies found operating at the the customers? capacity, capital and same premises, or the existence of other related character; companies (groups of companies). It is extremely hard to pierce the corporate veil in Mexico. Also 2. Use of a credit application that includes terms consider companies in specific industries that carry of sale that will create an advantage; more risk such as agriculture, construction, services, etc. If possible, ask for specific collateral as security. 3. Securing proper documents to support sales such as purchase orders and delivery receipts; 2. Using your credit application effectively Bear in mind that it is highly recommended to keep originally signed or authentic documents. All parties and individuals involved with such documents The credit application is not for showing off that you (issuance, acceptance, signing, etc.) should be have a ?system? in place. Besides helping you gather clearly identified and pointed out. important information about the prospect, the credit application is the perfect opportunity to create an enforceable sales contract. You do that by adding a page that includes terms and conditions of sale that 4. Adding security for open account sales will provide a strategic advantage in court. The credit application should be signed by the prospect?s legal There are three easy ways to add security to your representative, something you will be able to find out sale: 1) by asking for a personal or corporate through your due diligence work. The original signed guarantee from the owner, main shareholder or document should be requested, making sure that the controlling company of the prospect company, 2) by signature is genuine. creating a floating lien -through a pledge agreement- which applies to all future goods sold, and 3) by Terms of sale will depend on a lot of factors such as requesting a promissory note (pagaré) from the industry, nature of product or service, competitors in prospect. the area, etc., so they should be specially crafted by a Mexican attorney with the assistance and/or The personal guarantee and the pledge can be approval of US counsel. These should always included in the credit application and will be effective consider and provide for governing law, jurisdiction, as long as the appropriate signatures appear in the choice for arbitration, timeframe for buyer to raise application. Keep in mind that this private pledge claims, payment terms (when, where, how), (one that is not signed with a Notary and not filed at tolerance in shipment, late interest fee, court costs, the registry) will only be effective for sales roughly security devices and guarantees, etc. under $85,000 USD. It will however allow for immediate repossession and sale of the collateral through a very fast and reliable special proceeding. 3. Securing proper documentation to prove your sale The promissory note will be signed separately but will have to be referred to in the credit application. Sad experiences in Mexican courts are due to one This document is highly recommended because it will reason only: lack of good and ?appropriate? evidence prove by itself that a debt exists, that it is valid, and to support a case. To win a collection case a seller that the debtor has not paid. It will also allow needs to prove the following: 1) that there was an collection through an executive proceeding which offer to buy or to sell goods, 2) that there was grants interim relief through an immediate order for acceptance to that offer, 3) the specific terms and the attachment of assets. This is also a fast, reliable, conditions applicable to that sale, and 4) that there less expensive type of proceeding. For was performance according to terms. A Mexican recommendations on the drafting of promissory court must consider that the plaintiff has ?fully? notes go to proved the merits of its case to grant judgment. The specific documents that help satisfy such a burden of Keep in mind that all of these security devices should proof and therefore should be well kept are as be drafted and implemented by a Mexican attorney follows (in order of importance): according to Mexican law. Other types of security agreements recommended for higher-amount 1. Credit application. Must include terms and transactions or above-level risk include the guaranty conditions of sale and all other trust (fideicomiso de garantía), mortgage (hipoteca), recommendations herein made. and conditional sale. These should also be consulted 2. Delivery receipts. Bills of lading from the with Mexican counsel. freight forwarding company, copies of the Mexican shipper imports (pedimento de importación), or signed delivery receipts. 5. Creating more options for legal action 3. Purchase orders. Faxed orders under prospect?s letterhead are better than just Besides the different options of suing in Mexico as ?emails?. afforded by the above mentioned strategies, there is also the possibility to sue in a court of your 4. Invoices. Authentic invoices will support the jurisdiction and have the resulting judgment later fact under the seller?s accounting books, the enforced upon your debtor through a Mexican court. sale was made. This can be achieved by including a neutral or non- Conclusions exclusive jurisdiction clause in your credit application. This would prove useful in cases where it It is possible to sell in Mexico on open account terms is necessary to pierce the corporate veil, or when a and to do it successfully. To do this you have to particular Mexican jurisdiction is considered to be create and implement a new credit and sales policy ?unfriendly? towards novelty or complex issues in law that will effectively address and mitigate the risks such as those presented by an international sale of associated with such international sales. Such policy goods. An option for arbitration should also be should always include the following: 1) conducting included in your credit application, for the same proper due diligence work to check on the prospect, reasons explained, and to be used alternatively 2) the use of a credit application that includes terms based on strategy. to your advantage, 3) obtaining and keeping appropriate documents to support your case, 4) A number of factors will ultimately decide whether adding promissory notes, guarantees, pledge you should opt for arbitration or begin legal agreements or other security devices as needed, and proceedings in a Mexican court or in your own 5) creating options for litigating abroad or pursuing jurisdiction. This will usually be a decision that will arbitration. have to be made between your Mexican and US counsel. You will however have already provided a Provided that you?re able to implement a plan of this number of weapons to your collection lawyer for sort with the help of a good US and Mexican counsel even more chances of success. who have experience in this area, you will be able to successfully not only enter the Mexican market, but to stay there and stay there on top. This material has been provided as free educational message by HMH Legal. We invite you to send us your comments or to call us for a free consultation. If you have any questions please call us at +1 (619) 819-5197, 819- 8518. You can also email us at If you would like further information about our firm, please visit us at
Posted: 07 March 2012

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