eNews January 10, 2019
In the News
January 10, 2019
Late payments are a problem around the world, yet businesses continue to supply goods, materials, services, etc. to other businesses and government entities, sometimes without hesitation. Late payers are found throughout the supply chain, and they often are larger companies taking advantage of smaller businesses. The United Kingdom is searching for an answer to not only stop this from happening but also give smaller businesses a way to identify the problem of late payments before they even happen.
U.K. Small Business Commissioner Paul Uppal will recommend a “traffic light warning system” this week to help small businesses identify late-paying large businesses. The government and other organizations have called for stricter legislation following the collapse of Carillion one year ago. Yet, the crackdown on large businesses began even before the construction giant’s demise when large businesses were required to publish their payment practices in spring 2017. New data released this week by the Small Business Commissioner’s office in partnership with Lloyds Bank Commercial Banking reviewed those payment practices from more than 7,000 companies.
“Our initial findings indicate that almost two-thirds of payments are likely to be owed to smaller businesses at any time,” said Uppal in a release. “This is money that could be used to grow smaller businesses and generate tangible economic activity. Instead it is stuck on the ledgers of large businesses doing nothing.”
According to the data, a fifth of large businesses have an average bill payment time of at least 50 days, and only 14% of businesses of the more than 7,000 pay in 19 days or less. The overall average time to pay a bill is 37 days, but this varies from region to region. London companies pay in 34 days, while Yorkshire and Humber companies pay the slowest at 43 days on average. Overall, 65% of large businesses take at least 30 days to pay their bills.
“Our ambition is to help small businesses make more informed choices when deciding which larger businesses they are going to trade with. A traffic light system would be a simple and effective visual way of highlighting which larger businesses are paying promptly and are working in partnership with their supply chain,” noted Uppal.
Much of this stems from Carillion, which owed roughly seven billion pounds at the time of its liquidation, much of that owed to small subcontractors. “FSB has long highlighted that some larger companies exploit the imbalance of power with small suppliers to impose unacceptable terms, exceedingly long payment periods and late payments,” said Federation of Small Businesses National Chairman Mike Cherry in a release last month on small business productivity.—Michael Miller, managing editor
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Blockchain has riled up the conversations of credit managers, with credit professionals exchanging new information about innovations for payments and upgrades to supply chain management. Several big businesses have begun to practice the use of blockchain and machine learning throughout different departments—so much so the MIT Technology Review called 2019 the year blockchain will “start to become mundane.” But with all this hype and the expectations for new technology, many credit managers have been anticipating a blockchain revolution—but it will not be this year.
Much of the blockchain hysteria comes from the constant advancements in technology and the budgets developed for blockchain research. While it’s important for credit managers to be aware of changes in their field, the adoption of blockchain in payments won’t be initiated in 2019, said Luis Noriega, ICCE, senior vice president of Wells Fargo Bank.
“We’re nowhere close to being able to apply blockchain technology to the world’s payments; just the volumes of these transactions is too much,” Noriega said. “A lot of participants in the payment systems need to innovate, but what you’re seeing today is more pilots and just learning and being involved. My read is that you just don’t have a commercially viable concept yet.”
Several companies have been incorporating blockchain into their pilot programs over the past few years. According to a report on blockchain in manufacturing by Zion Market Research, the subset for blockchain valued at $5 million in 2017 is set to reach $307 million by 2024. The compound annual growth rate will reach 76% in over just seven years.
Noriega said Wells Fargo has been experimenting with blockchain in the supply chain, for example, tracking the departure of goods from Texas to Hong Kong and charging the customer once the goods made it to territorial waters. While this experiment proved the physical movement of goods and the payment behind them can be affected, Wells Fargo will not be launching a program like that any time soon. With a lack of government regulation and security concerns, blockchain still needs time to develop.
“Through regulation and trust between parties, I think that as far as payments go, banks need to be careful with this disruption of technology,” Noriega said. “In a world where you can’t tell the difference between a black hat and a white hat computer, this allows, without dispute, a record to exist. Some of the playing around is outside of regulation for that very reason; the parties don’t trust each other or preserve a record of value.”
Blockchain also faces the roadblock of the Amazon effect, meaning the data shared through a blockchain system acts as a form of currency. When information is transported through blockchain, a company’s data and any subsequent analysis on said company is transported as well, which can be problematic should a data leak or breach ever occur. “Your bot is learning from you and directing you to make decisions,” Noriega said.
A deeper understanding of the technology can remedy some of the problems surrounding blockchain and machine-learning advancements. While blockchain will not directly reach the credit department quickly, understanding blockchain is still essential.
“We all owe it to ourselves to at least understand that technological disruption is a fact, and data are key to an enterprise,” Noriega said. “Credit managers need to read about these technologies and enterprises need to explore these various technologies and test these concepts and pilots because if you don’t, you’re dead.”—Christie Citranglo, editorial associate
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Hearing a customer or a bank say they are working toward “faster payments” will most definitely ignite excitement in credit managers whose jobs often require patience while waiting for payment. As credit departments adapt to meet customer needs, faster payments become part of their transformation, whether it’s in the form of real-time payment (RTP), tokenized or Same Day ACH payments, or a shift from checks to electronic payment.
Interest in faster payments is noticeable in today’s business climate and extends beyond larger players to the lesser known entities; however, the future of business-to-business credit payment styles isn’t solely focused on the “faster is better” approach, according to the Bank of New York Mellon Corporation (BNY Mellon). While faster payment was a hot topic in the BNY Mellon Treasury Services’ survey, The Future of Payments—A Corporate Perspective, more than 10 of the responding industries also took a step back to address some of the long-term considerations of speeding up payments, notably its reliability and security.
Before looking at payment possibilities 10 years into the future, BNY Mellon began by asking industry representatives about current areas of improvement, ranging from high to low levels. Respondents included U.S. domestic and multinational corporations in the manufacturing, services, technology, transportation and real estate sectors. Between 43% and 46% of respondents suggested a high level of improvement to payments was necessary via recipient satisfaction, internal costs to the company and overall execution; yet, the majority of respondents were concerned about reliable and secure payment practices, the former garnering the most at 54%.
Treasury Services’ Jeffrey Horowitz, managing director and head of North American sales and relationship management, and Director Carl Slabicki concluded industries’ confidence levels may experience turbulence with the integration of updated payment systems.
“While banks are generally perceived as providing acceptable levels of reliability around payments—and our respondents expressed that level of confidence—maintaining high levels of certainty around transactions remains a concern going forward as new technologies are introduced,” the authors said in their survey insight report. “Payments’ security and wealth of information tied as the second most important areas for improvement when thinking about new payment technologies in practitioners’ payments processes.”
Reliability and security will involve a timely process of trial and error to determine what payment solution works best. Some respondents took the first step by acknowledging their readiness to implement specific payment methods. Currently, 43% of respondents said they are now ready to shift vendor payments from check to electronic, with only 2% indicating it would take their company more than five years to do so. In regards to RTP, tokenized and Same Day ACH payments, many are unprepared: 11% ready for RTP, 17% ready for tokenized payment and 31% ready for Same Day ACH payment. Respondents appeared more confident their companies will be prepared for these payment methods within the next three years.
Despite the three-year timeline, respondents believe RTP, tokenized and Same Day ACH payments will have a high impact on their business within four or more years. Meanwhile, their timeline stretches to 10 years before they expect to see significantly reduced risk and increased liability.
“Companies want providers to say to them, ‘Because we understand your business, here is the customized payments solution you need. And here is how you need to move forward,’” the authors noted in the survey. “That’s how we create value for them in this evolving space.”—Andrew Michaels, editorial associate
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In this specific Canadian case, the Court of Appeal found that the obligation of Geyser and Axa to jointly and severally pay the amount claimed for the materials to be used in the construction arose at the point when Panfab characterized itself as a creditor by making its first disclosure. The Court of Appeal held that the surety bond contract did not require that the value of the contract for the supply of materials be disclosed. The mandatory information to be provided was the type of work, the nature of the contract and the name of the subcontractor.
Panfab disclosed its contract with RMDL, the subcontractor, within the 60 days allowed and thus complied with the time requirements. The obligation to pay Panfab arose at that point. Given that the surety bond contract did not require that the value of the contract be stated in the notice of disclosure, the Court was of the opinion that Panfab had demonstrated good faith and transparency in informing Geyser and Axa of the changes to the value of its contract with RMDL, by providing amended notices of disclosure. The claim could therefore not be limited on the ground that Panfab had stated the value of its contract in its notice of disclosure, when there was nothing that required it to do so.
The Court of Appeal therefore reiterated the principle that there is only one contract and thus only one notice of disclosure, notwithstanding the fact that Panfab sent the surety amended notices. An order for reimbursement for the full amount to be paid does not alter the terms of the surety bond contract. The Court therefore concluded that the trial judge had erred by holding that the amended notices of disclosure sent by Panfab were time-barred and were necessary in order for the total claim to be allowed.
The Court of Appeal took the opportunity to reiterate the scope of the duty to inform on the part of a materials supplier or subcontractor. Geyser submitted that Panfab had breached its duty to inform and that its breach was the reason for the shortfall in the amounts withheld for paying all of the subcontractors and suppliers. The Court did not accept that argument; it relied on Banque canadienne nationale v. Soucisse (1981), which set out the foundation for a creditor’s duty to inform, and on article 2345 C.C.Q., reiterating that a creditor is required to provide any useful information to the surety at the request of the surety. In this case, Geyser and Axa had never asked Panfab for additional information under that article.
To summarize, Panfab clarifies the already settled law regarding notices of disclosure to sureties, as stated in Fireman’s Fund (1989) and Tapis Ouellet inc. (1991), in particular: when a contract for the supply of materials is shown to exist between the parties and the materials have been incorporated into a construction project, the subcontractor may claim the amounts owed under the surety bond contract after sending a notice of disclosure that meets the requirements set out in that contract.
It must be kept in mind that any surety bond contract may contain specific clauses and that reference must be made to those clauses. That is why the Court in Panfab concluded that the information relating to the value of the contract was not mandatory in the notice to the surety, since, in that case, the surety bond contract did not require that the value of the contract be included in the notice of disclosure. Vigilance is therefore the order of the day when it comes to the terms of surety bond contracts.
Reprinted with permission. Part I of this article appeared in last week’s eNews.
François Bélanger is a partner in Lavery’s Litigation group. He acts as litigation counsel in the areas of commercial, real estate and construction law. Marc-André Bouchard is a member of the Litigation group. He represents clients in the Quebec courts in civil, family, estates, commercial and construction law cases. Solveig Ménard-Castonguay joined the Lavery team in the summer of 2018 as a student. She is currently completing her Bachelor of Law at Université de Montréal.
 Ibid. para. 22.
 National Bank of Canada v. Soucisse,  2 S.C.R. 339.
 Fireman’s Fund du Canada, cie d’assurances v. Frenette et frères Itée, 1989 CanLII 815 (QC CA).
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