With no end in sight to the economic downturn, payment terms are increasingly important to many businesses. Contractual terms agreed in the past regarding payment may now appear somewhat outdated: buyers might be looking to pay over longer periods while suppliers will be seeking payment at the earliest opportunity, or may well be worried about getting paid at all.
Therefore, for a number of reasons, businesses may be looking at the issue of payment terms and considering whether those terms are still suitable and if not, what options are available to change them. Consider the following:
Check carefully the terms of any contract to see if there is a contractual provision permitting a change to payment terms in the circumstances that exist, for example late payment or a concern about the creditworthiness of a customer. If there is, notice will usually need to be given in the form and manner prescribed by the contract. Any changes can generally only take effect after the expiry of the period of time stipulated in the agreement. In some circumstances however, late payment might permit termination of the contract. It is worthwhile checking the termination provisions in a contract as they might allow a business to terminate, leaving it to re-negotiate shorter payment terms on a new contract. Part 1 of our litigation survival guide sets out some points to consider when terminating a contract.
Consider making time of the essence if payment is late so that a subsequent failure to pay can be relied upon to justify termination. Time for payment is not automatically of the essence of the contract unless any agreed supply terms make it so (check any relevant terms and conditions). If they do, then non-payment may justify termination (leading then to the potential to re-negotiate). However, even if the terms and conditions do not make time of the essence, if payment is late against agreed terms then, under English law, a notice can be served making time of the essence and demanding payment within a further "reasonable" period. What amounts to a reasonable period is a question of fact. If a business has been regularly chasing debts, 48 hours notice may be sufficient. However, if a late payment pattern has emerged, a longer period needs to be given – in a bad case perhaps a month. Once that additional period of time has expired, if payment is still not forthcoming, then a business can consider terminating the contract for the non-paying party's repudiatory breach. Service of such notices in themselves can be useful as part of a debt collection strategy as it raises the stakes for non-paying customers.
Remember, termination is a complicated area. It is important to seek legal advice before terminating any contractual relationship as terminating a contract can itself bring risk. There must be a justifiable reason for terminating otherwise a business could be in repudiatory breach of the contract itself and liable to pay the other side damages.
Depending on the circumstances, persistent non-payment (as opposed to late payment) can amount to a material breach of contract (if a contract entitles termination for material breach) or a repudiatory breach of contract giving rise to a right to terminate the contract. Again, legal advice should be sought prior to terminating any contractual relationship on this basis. Be aware that a single non-payment in itself is unlikely to justify any claim for repudiatory breach.
Where a contract relates to the international sale of goods and a law other than English law applies, consider whether the United Nations Convention on Contracts for the International Sale of Goods (Vienna Convention) applies as it does for example in Italy, France and Germany. The UK has not ratified the Vienna Convention.
If the Vienna Convention applies and a party is in financial trouble, the other party may be entitled to suspend (after giving notice) the performance of its obligations under the contract if it becomes apparent that the other party will not perform a substantial part of its obligations as a result of:
- a serious deficiency in its ability to perform or in its creditworthiness, or
- its conduct in preparing to perform or in performing the contract
The relevance of the Vienna Convention will depend upon the circumstances surrounding a particular contract. However it may be that a business can suspend supplies to a customer if it is worried that the customer may go bump before it gets paid. Again, consider seeking specific legal advice as to its applicability and effect.
Remember, in English law, non-payment by a customer is not usually a good legal reason for suspending or withholding supplies. Commercially a business may choose to do so but it may well be in breach of contract if it does and would need to think through the potential consequences and therefore cost/benefit of such an action.
For new customers, ensure that financial due diligence is conducted in advance to ensure they can meet the payment terms in place. Spending a small sum now on a credit check may save considerable sums in the future. If in doubt, consider asking for guarantees or a bond.
Formalise any existing ad-hoc arrangements, especially where there is no written contract in place. Use this opportunity to enter into a written contract that includes provisions relating to payment terms. If possible, make time of the essence as to payment.
Ensure any invoices are accurate and promptly raised, specifying where and to whom they must be directed. Payment is often specified "due" within x days of an invoice, but if a business sits on its invoices time cannot start to run until they are sent out. No action can be taken on an invoice if the payment it refers to is not due. It may be that payment terms don't need changing but the administrative procedure for invoicing is delaying matters or the mechanics need to be changed to speed things up.
Remember, if all else fails, to claim interest on any late payments. A claim for interest may arise under the terms of a contract or as a result of a statutory right (usually at a rate of 8% if you sue or if it is a claim under the Late Payment of Commercial Debts (Interest) Act 1998, 8% over the base rate of the Bank of England as well as a set charge per late invoice).
Finally, keep in mind that a business can threaten to wind up a corporate debtor by simple letter, giving 48 hours notice (there is no need to serve a statutory demand) on any undisputed payment that is due. This can be an effective debt collection technique. Part 4 of our litigation survival guide provides some points to consider when faced with a corporate debtor refusing to settle its debts.