Contractual guarantees

Since the change in the economic scenario, price the way of doing business, guaranteeing payment and fulfilment of obligations have also changed.

During the time of the economic boom, the usual and most common way of guaranteeing payment was through credit insurance, normally with “Crédito y Caución” and CESCE although there are other insurance companies that also offer this product, however the system has drastically changed in these times of crisis.

Small and medium-sized Catalan companies have been completely disorientated for more than a year, because the rules of the game have changed overnight but nobody has given them an instruction manual where these new rules are explained clearly and in detail.

Among the rules that have changed, one of the most important ones is that you can no longer rely on the fact that the whole of your debt is covered by a credit insurance company. Those who were used to working with 80% of their debt being covered and which also boasted and flaunted this policy now, against their wishes and business strategy, find that they can no longer work in this way. The problem is that they do not know how to work any differently and see nothing but a gaping abyss before them that they are extremely afraid of.

It should be noted that apart from this change of rules, these unfortunate owners of SMEs find they are faced with a rise in payment defaults, a decrease in sales and the fact that the banks have cut back on their credit with no justification.

Faced with this terrifying situation, which does not let them sleep or live, the business owners consider their options and realise there are only two: (1) to close their companies down because they do not know how to play this game and they will end up losing everything, just like someone playing a game of poker for the first time with professionals betting all their capital and health, or (2) to ask modern gurus (economists and lawyers) what they should do.

Some business owners have opted for the first alternative, with regard to these people we have nothing further to say. The others, those who have paid a visit to a guru, are discovering a new world that they did not even know existed that lights up the gaping abyss they were previously faced with and at least gives them the confidence to go a little further; i.e. the legal world of contractual guarantees.

In times of crisis imagination is power and obsolete or generally limited alternatives are now having a ripple effect and everybody is becoming somewhat of an expert, restructuring the legal game rules for commercial agreements.

In this respect, we can see that for a business owner to be able to buy chickens — chickens or these could be iron, machinery or wood — from another business owner at a tiered price (at 60-90-120 days), he must provide guarantees that he will pay, and promissory notes or bills of exchange are just not good enough.

These guarantees are of the most varied types, we can now find that people take out mortgages for business transactions for the maximum amount on their own or the company’s properties; personal guarantees and bonds are becoming commonplace and everybody knows the meaning of “at first demand or request,” “joint and several” and “with no benefit to order, division and excussion.”

We are starting to dust off the chattel mortgage registry, the registry for pledges without possession and the hire purchase registry; which up until quite recently were a great unknown for most business owners. Reserves of title are used for everything and termination conditions and conditions precedent are included in all types of agreements.

Throughout all of this great expansion of contractual guarantees, it is strange that there is one that has followed the opposite trend; I am referring to bank guarantees that many business owners consider no longer exist.

The positive side of all this, if we want to look for one, is that practising law is becoming more creative and interesting and perhaps, when the economic situation stabilises, business owners will have found out about another world that they know how to combine with credit insurance policies, when they are generally available again.

Jordi Bellvehí