Do your terms of business help you recover your debts?

With the recent demise of Carillion, we asked Sarah Canning of Franklins Solicitors for her opinion on how to best protect yourself when doing business on credit terms.

The last thing any company or sales team wants to consider when entering into a new relationship is what happens if it goes wrong. However, this is an important topic for any Managing or Commercial Director who will turn to specialist contract lawyers for advice on how to protect their interests.

There are some basics that should be incorporated within any contract:

  1. A claim for compensation under the late payment legislation
  2. A claim for other legal and administrative costs

Under the Late Payment of Commercial Debts (Interest) Act 1998 (the “Act”), it is possible to claim interest at 8% per annum over the base rate at the preceding 31st of December or 30th of June if:

  • you supply goods and services
  • your buyer bought for business purposes
  • the contract is not a consumer credit agreement.

In addition to the interest, you can also claim compensation for any unpaid invoices. 

The compensation you can claim is:

Up to £999.99 £40 per invoice
£1000-£9999.99 £70 per invoice
Over £10,000 £100 per invoice

Your entitlement to recover both the interest and the compensation arises as soon as the payment is overdue. It is therefore not necessary to start proceedings before these costs arise.

By adding a clause into your contracts reserving rights to claim interest, compensation and reasonable costs under the Act and also ensuring that this right continues after any judgement as well as before will continue to protect your interests.

Further, many companies are forced to write off outstanding invoices because it is not proportionate to recover those sums as they fall within the Small Claims Court regime and they are unable to recover their costs. By simply including the clause within your terms of business to cover collection costs, you can make a claim for these charges regardless of the sums sought. This becomes a contractual entitlement. 

Ensuring, therefore, that your clause covers legal fees, any commission payable to a debt collection agency and any internal administration costs are just some of the options available to you. 

The inclusion of clauses of this nature strengthen your position and also improve the likelihood of you recovering more of your costs particularly if the case were to go to Court. There is no guarantee that a Court would award costs on successful conclusion of your case or at least not all of them especially in small claims track cases without it. Costs are awarded at the discretion of the court and your terms of business are key to securing their recovery.

Litigation can be avoided altogether by the inclusion of an Alternative Dispute Resolution clause in your terms of business. This could force a party to explore other means of resolving a dispute, like mediation, before issuing court proceedings. This can be useful in contractual dispute cases and enable the parties to explore their position and find a solution without incurring court costs.

For more information on contracts please contact Christopher Buck on 01908 660966 or christopher.buck@franklins-sols.co.uk and for dispute resolution, litigation and mediation please contact Sarah Canning on 01604 828282 or sarah.canning@franklins-sols.co.uk.