Revoking a trade credit line to an insolvent customer: what the contract needs

In brief: if there is no specific agreement binding your company to grant a fixed payment period, you are free to set the payment terms for each new order — including requiring advance payment instead of the previously granted credit period. If instead there is a framework agreement that sets a recurring credit line, reducing or revoking it requires solid grounds and, ideally, a contractual clause providing for it explicitly.

Two different situations, not one single rule

The freedom to change payment terms depends on what you have actually agreed with the customer:

• No framework agreement: each order is, in principle, a transaction in its own right — you can propose different payment terms (advance payment, a shorter credit period) for new orders, without having to "revoke" anything formally granted before.
• Framework agreement with a recurring credit line: if you have signed general terms of sale or a framework contract that sets a recurring credit line for a certain period, reducing it before the agreed expiry requires respecting what the contract itself provides — and, absent a specific clause, the general principles of good faith in the performance of the contract (art. 1375 of the Italian Civil Code, c.c.).

What is needed for a revocation (or reduction) on solid, non-arbitrary grounds

Even when you are contractually free to do so, acting on the basis of verifiable signals — not a feeling — reduces both the risk of a challenge by the customer and, simply, the risk of getting the decision wrong. Useful elements to have before communicating a reduction or revocation of the credit line:

• An objective and recent deterioration in the customer's situation — balance sheet, protests, insolvency proceedings, payment behaviour towards other suppliers.
• The date and source of each signal, not a generic impression.
• An explicit comparison with the situation at the time the credit line was originally granted — what has changed, not just "the customer no longer convinces me".

A useful concept for orientation, drawn from banking practice on revoking a credit facility for good cause (art. 1845 c.c. — an institution legally distinct from trade credit between businesses, but with a broadly comparable logic): good cause is typically a deterioration in the debtor's financial position such as to reasonably endanger recovery of the credit, not a subjective preference of the creditor.

What to include in a framework agreement, so you do not have to improvise afterwards

If you are structuring a framework agreement with a customer providing for a recurring credit line, an explicit clause for periodic review (e.g. annual, or on reasoned request by either party) and a clause that explicitly lists the events that justify an immediate reduction (protests, insolvency proceedings, repeated delays beyond a defined threshold) remove ambiguity when, if necessary, they need to be applied.