Good account management
As any accountant will tell you, keeping a close eye on your receipts is essential. Establish a system so that customers are reminded when payments are overdue: a polite letter should be a standard procedure.
If you still do not get paid, make contact on the phone and by post or email – and keep up the pressure. To achieve this with relative ease, prepare some standard forms of letter and get them into your system.
As well as taking steps to recover the debt, there are other contractual remedies to consider and these are set out below
When your customer is a business and fails to pay, you have a legal right to claim interest whether or not you spell this out in your contract terms. The Late Payment of Commercial Debts (Interest) Act 1998 allows a business to claim interest on overdue payments at around 8 per cent above base rate.
This interest can be claimed on all business to business transactions and some debt recovery costs as well as interest are recoverable. The regulations have made the process quite simple by fixing the interest rate every six months. There is an excellent website that can give you the details of what you can claim: http://www.payontime.co.uk/ . Although not necessary, it can be useful to refer to your statutory right to interest in your contract terms, as this may act as a deterrent against late payment.
If you are buying rather than selling, you may want to reduce the risk of a high 8% rate by having a clause in your contract on the following lines:
“If any amount properly due is not paid within 7 days of the date fixed for payment, the supplier shall be entitled to claim interest on the overdue amount at 2 per cent per annum above the base rate of Barclays Bank calculated on a daily basis from the due date until the date that the payment is made.”
In other words, give yourself a margin and reduce the risk of interest actually being claimed: a low rate of interest does not often justify the effort for a supplier to make a claim.
If you are not getting paid, you may decide it is a good idea to stop work. The problem is that unless you have the right to do this, your action could trigger a claim by the customer. So be wary of taking this step.
If, however, you are working in the construction industry, the law allows you to suspend work (except when working on private houses) for non-payment. Under the Housing Grants, Construction & Regeneration Act 1996, unless the client has given a formal notice that he intends to withhold money, if a contractor has not been paid in full by the due date, he has the right to suspend performance of his obligations after giving the client at least seven days’ notice of his intention together with the reasons. The right to suspend performance ceases when the client makes payment in full of the amount due.
If you are not in the building industry, consider inserting a clause in your contract that gives you the right to suspend work if any payment is overdue. This is a less drastic remedy to termination and may be just what is needed to bring the customer to his senses. A sample clause could read:
“If the customer fails to pay any amount properly due under the contract by the due date, the supplier, without prejudice to his other rights, may, after giving three days’ notice to the customer, suspend performance of the services until payment is made in full. Any dates or periods for performance in the contract shall be extended to take account of any period of suspension.”
Terminate the contract
Non-payment should be a specific ground enabling a supplier to give notice to terminate a contract. If you do not have any termination clause in your contract, you do not have an automatic contractual right to bring it to an end. But no client is likely to complain if you have such a provision in your terms of business – though they may want a grace period before you can terminate.
Termination clauses will be dealt with in a later article
Giles Dixon is a solicitor and managing director of ContractStore – www.contractstore.com a company selling legal documents for business.