A guide to the legal side of memo documents, and how to make sure they’re as solid as possible.
Credit memoranda are commonly used in the jewelry industry with good reason — they enhance inventory control and represent cost savings. But drafting missteps can invalidate the memo, putting substantial sums of money at risk. To be enforceable, credit memos must comport with the Uniform Commercial Code (UCC) — the law governing business transactions.
The key documents necessary for a successful credit memo are a written agreement — the memo itself — and a UCC-1 financing statement to let creditors know that the supplier has a security interest in the jewelry.
Five elements of an enforceable memo
Now that we’ve established the need for a written document, let’s make sure all the provisions are in place.
1. Names and addresses
First and foremost, all jewelry consignment memoranda must be in writing, must identify the parties correctly, and must be signed by the merchant. Without this signature, the memo will not be enforceable.
2. Payment terms
Payment terms must be set forth in exacting detail, including amount, form of payment, date payment is due, and interest terms, if any. The interest terms are commonly invoked if payment is late or is not a lump sum.
3. Description of the property
A detailed description of the property should appear on the face of the memo. Photograph the jewelry, if possible, and append it to the credit memo as an exhibit.
4. Losses and insurance
The memo should establish liability in the event of inventory getting lost, stolen, or damaged. In particular, it can stipulate whether the supplier or merchant bears the responsibility if any of those occurs in transit. To ensure the inventory is protected from these risks, both the supplier and merchant should have a jeweler’s block insurance policy. Always confirm that your counter-party has insurance!
5. Merchant bankruptcy
Suppliers should include a clause specifying that the jewelry shall remain the property of the supplier in the event that the merchant files for bankruptcy. Further, the clause should state that the supplier will file a UCC-1 financing statement.
In Short
Never take shortcuts when drafting a memo, even if you are doing business with a counter-party you know well. Always make sure that:
- Memos are in writing and signed by the merchant.
- They contain specific provisions for payment, loss, theft, damage (especially during transit), and bankruptcy.
- The supplier fi les a UCC-1 statement covering the inventory, thereby perfecting a security interest in the merchandise.
- Both parties have comprehensive insurance coverage and provide evidence of the same before the goods are transferred.
- You perform credit checks and background checks on parties with whom you have not previously done business.
When in doubt, consult an attorney with experience drafting credit memos.
UCC-1: Making a Statement
To document ownership of the jewelry once it’s in the merchant’s hands, the supplier must file a UCC-1 financing statement with the secretary of state in the jurisdiction where the merchant is incorporated and does business. This is known in legal parlance as “perfecting the security interest” — meaning that should the merchant go bankrupt while in possession of the jewelry, it will not be mislabeled as an asset of the merchant.
Further, the supplier’s right to the property will take precedence over the rights of other creditors. The one-page form requires the merchant’s name and mailing address and a description of the memo items the financing statement covers. Any changes to names and mailing addresses must be updated within four months.
The UCC-1 form is valid for five years, though the jewelry is unlikely to be in the merchant’s possession for that long.
Image: Shutterstock
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