Part of the natural rhythms of business life is that when times are good, business owners and managers tend to be more concerned with making deals than with protecting themselves, and vice versa when the going gets tougher. In a post(?) recession climate, owners and managers of businesses naturally look with a somewhat more critical eye at the basis on which they do business, very often in the light of actual or potential claims, or bad debts.
In this climate one of the first things that a business can do is to make sure that it gets paid, and paid reasonably on time, for its goods and services. This is partly down to the basic commercial issue of being careful who you do business with in the first place, but it may also be appropriate to check up and refine your terms of payment. Where a business supplies goods or services on credit terms (and particularly in the case of export sales), it may wish to protect itself by asking for payment of the price to be backed up by, for example, a letter of credit, and having this as an option in your standard terms of sale or supply is useful.
A retention of title clause will also help where there is a risk that the buyer may fold before the seller is paid, but this will only be of use where, for example, goods are stock-piled before being resold, and it is going to be practical to reclaim them.
One of the mechanisms supposedly available to encourage payment on time is, of course, a provision for interest. Since 2002 the Late Payment of Commercial Debts (Interest) Act 1998 has provided for statutory interest on late payment of all commercial debts after 30 days (or any fixed date for payment), with certain limited exceptions. The rate of interest in the UK is 8% above the Bank of England official dealing rate, which may in theory be a considerable spur to pay on time. The statutory rate can be replaced by an express contractual provision, provided it represents a “substantial remedy”. A recent court decision that a rate of 0.5% over base rate did not satisfy that test is interesting. At the same time, the decision made it clear that a rate would not fail the test just because it was materially lower than the statutory rate. There has been historically a “cultural” reluctance in some business areas to claim interest, but in tougher times it is likely to seem a more normal form of protection.
Another useful exercise that a business can and should carry out is to review the terms on which goods and services are supplied to the business, to see which of them represent value for money and, where appropriate, to change suppliers. It may even be appropriate for a business to have its own terms of purchase. This sort of exercise can result in significant savings, but at the same time care needs to be taken when changing suppliers, to avoid unnecessary “cancellation charges” or worse still, claims for damages. If you wish to terminate a contract, you need to comply strictly with any provisions for termination, and if you do not, you may face a claim for wrongful termination. Regrettably, many suppliers use terms and conditions which contain traps for the unwary, and while in theory there may be room for argument over a termination clause, the last thing a business wants to do is to have to go to court over it. The prudent course is to vet thoroughly all terms of supply before entering into a contract. Of course, a lawyer would say that, but it remains the case.
One further “wrinkle” to take care over when changing suppliers is to check whether the TUPE Regulations may have an impact. Since 2006, TUPE has applied to service supply changes, with the consequence that where there is a dedicated body of employees who perform a contract, on termination of the contract there is a risk that they will be transferred automatically to any new supplier or, where the supplier is transferred in-house, to the customer itself. In most cases the very last thing that a customer wants is to inherit a former supplier’s workforce, or to have to compensate them for redundancy, unfair dismissal and other claims, so care needs to be taken when appointing a supplier and, where appropriate, suitable provisions (such as an indemnity against employee claims) should be included in the contractual documentation.