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
Www.hmhlegal.com (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
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
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
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
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
(www.export.gov) 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 (www.burodecredito.com.mx) 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 (www.siem.gob.mx).
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.
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
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
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 www.hmhlegal.com/simplesteps.htm.
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
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 email@example.com. If you would like further information about our firm, please
visit us at www.hmhlegal.com.