Hello: Does anyone know the answer to this scenario. I have company "A" currently in legal collection for unpaid product. A new customer, company "B" has ordered product to be shipped to company A. I don't know if the product is for company A or if it is in fact for company B's use through company A.
Can I refuse to ship it to company A even though I am not billing them? I don't think I can legally but thought it was worth a try.
You are not required by law to drop ship any product, it is simply a courtesy.
I have been in that situation before. I explained "we are not comfortable delivering to company A at this time, however we would be happy to ship it to you (company B) and you may send it to them."
If they try to inquire further, just say "I'm sorry, I'm not at liberty to discuss Company A with you"
I would also say that Company "A" is often, in these instances, trying to circumvent your credit policy. My rule of thumb is that the company purchasing it, regardless of where the product is being shipped, needs to demonstrate creditworthiness before any product goes to them. The transaction is being represented as going to Company "B", so they need to jump through the hoops you presumably required of Company "A". If they don't qualify for credit, treat them as COD, or CIA.
Another trick Company "A" might be trying is using its own subsidiary, or a company related by ownership. Check your business credit reports for any relationships between the two companies, paying particular attention to shared ownership.
I can't put my finger on anything specific, but it just seems that you could be dragged into some legal ownership battle if Company "A" is shown on any paperwork between you and Company "B" that forms any part of your sale. If Company "B" is not financially satisfied by Company "A", they could establish some flimsy basis for with-holding payment to you. At the very least, they could argue that you knew you were delivering freight to an unstable/insolvent company. Depending upon the Terms of Sale, another possibility would be for you to sell to Company "B" on an FOB your dock terms. That way, they take possession when it is tendered to a carrier at your dock and it wouldn't be necessary for them to physically take possession. They are free to arrange for a carrier to pick-up the material for shipping to a destination of their choice and on Collect Freight terms or 3rd party billing if they want to send PPD to Company "A".
On the other hand, if you are concerned about selling at all but being accused of some discriminatory practices, unless you have a firmly established selling price, there is no reason you cannot set a price that becomes extremely cost prohibitive. This would serve an additional purpose - - if Company "B" is still willing to buy the product, that would signal that they may have no intention of paying and have some loophole in mind.
Thanks, everyone. I appreciate your input
I respectfully disagree with some of the responses.
For your considerations: If company B is creditworthy, I cannot think of a good reason not to ship to Company A or to any drop ship location they specify on their purchase order. The question of of whether or not company B pays company A is irrelevant to whether you get paid by your customer.
Best regards
Michael Dennis
I’ve recently experience the same scenario. In my case Company A filed Bankruptcy – we took a financial loss. Company B is friends with Company A and Company B is credit worthy.
An order came in to drop ship the goods to Company A. I contacted Company B and confirmed that yes their purchase order is correct, they do want the items shipped to Company A. They voluntarily admitted they are helping a friend during a difficult time. They said they fully understand that they are responsible for payment of all orders regardless of where they are shipped to.
JC, I hope you have that in writing...
Christine - Yes I do! In my case, we process a lot of drop shipments and don't always scrutinize the address. Company A is located on a unique street name so an alert associate happened to catch it. I guess the fact that it was shipping to Company A caused some concerns. What it comes down to is we ship our products to retailers and other manufacturers - we can not stop them from reselling or shipping the product to credit challenged companies. My primary concern is we are paid for the shipments.
This post is in response to Christine's question. I believe that the buyer's purchase order is sufficient written confirmation that the buyer is responsible for paying the seller --- irrespective of whether the buyer receives payment for the shipment.
Does anyone disagree?
The buyer's purchase order should be sufficient to define responsibility for payment, but in that case the delivery address and any other identifying information needs to be available on that p.o. It's also a good idea to confirm that the relationship between companies A and B is arm's length; that is, that they have minimal or no common owners or interests.
In the case of my own industry, building materials, when those materials go to a job site, the best way to cut through the confusion is to pre-lien the job. Then, it doesn't matter who received or paid for the materials, since the owner of the property being improved holds final liability for seeing that you are paid.
My original post was looking at the outcome from the worst case scenario basis - - the invoice ends up unpaid and in litigation. My suggestion was to try and take what I consider to be a crucial ingredient out of the equation - - any relationship between Company A and Company B, whose existence was known by the supplier.
This avoids the shoulda, coulda, woulda defense. It is not unreasonable to me to envision listening to a judge in court chiding me for expecting payment from Company B when all signs indicated it was a transparency pointing to an actual transaction with Company A. I sold the same product, in the same amount, for delivery to a company I knew was in financial distress. I've driven my car into a tree causing damage. What possessed me to give my car to another driver headed into the same tree? (I know, my analogies leave something to be desired but what can you expect for free?) By eliminating any reference to Company A, you avoid the use of that defense.
Here's another wild thought: Suppose Company B didn't know Company A's credit situation was dire. They discovered that you knew this. They get upset when they don't get paid by Company A and blame you (even though you were not obligated to disclose this information). Legal or not, you as a likely unsecured debtor, must now deal with Company B. To put this to rest, to avoid long payment delays, collection efforts or court, do you discount at all?
Perhaps these scenarios are a long-shot, perhaps wholly implausible. But we have all heard of the Twinkie defense along with a myriad of equally outlandish defenses, many of which prevail. We are all caused grief and time-consuming work because there was a sliver of a hook on which a debtor hangs his hat.
If you have knowledge of something that makes you stop and take pause; why not design the sale with that knowledge in mind? Otherwise, you may be in the complete right legally but you can't always take that to the bank.
Well, I respectfully disagree. No one can guarantee that your buyer in this siutation will make payment, but I remain convinced that creditors need not do more than confirm that the purchase order is sufficiently clear about where the delivery is to be made and which entity is the buyer.
I view Will's suspicions and the ensuing question as thinking outside the box. Is there any way to protect his company in a gray area? I was suggesting that he attempt to modify the sale to protect his company while still generally satisfying the new customer. Or at the least, obtaining more information. If he can add a layer of comfort to the protection afforded by a clear purchase order, why not do so? I'm from that old school that is fond of saying that contracts, purchase orders and the like are not worth the paper they are written on (If someone wants to dispute them, they will).
Some comments suggest the answer is more black and white. Proper paperwork and documentation are sufficient justification (CYA) to proceed with a sale. This is true when you are dealing with reputable businesses who have the ability and willingness to pay. A credit professional must weigh any information he can gather, whether first-hand, second-hand, gospel-truth or tinged with rumor. Sometimes all this data leaves one with a "bad feeling" about a deal. You receive a large order from a customer but remember hearing that they were selling manufacturing equipment. An order hits your desk from an account while you are interviewing one of their laid-off employees. The orders are clean. Do you question them? Through experience you have synthesized the chaff and wheat and are uncomfortable with extending credit or moving forward. We all know that crossing your "t"s and dotting the "i"s still leaves you vulnerable.
Will's instincts are important and, to the extent possible, the concerns those instincts engender should be addressed by creative credit solutions. While there may be no nefarious basis for new customer Company "B"'s purchase order, and despite the straightforwardness of the P.O., Will is right to question it and minimize risk to his company. The odds are the purchase is fine. We can rely on the odds or shade them in our favor by pausing as Will has done. I would encourage the questioning trait in a credit professional who does not rely solely on the contents of a purchase order. The fact that he raised the question is as important as any of the responses.
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