The Boot Camp section of the Update will give a brief overview of a different subject in each issue. The subjects will be relevant to restructurings or corporate insolvencies. It is intended to provide a non-technical overview of some of the practical issues clients might have to consider sufficient to explain the basic law and what it might mean for you in practice.
In this month's update Andrew Weston and John Crowley of the Construction and Engineering team describe some ways in which it is possible to protect a business against late payment of debts due to it.
As the country slides towards a "triple dip" recession and businesses struggle with cash flow difficulties, the issue of dealing with late payments for goods and services is a problem for all. The few practical tips mentioned within this article, however, may help manage this risk to give your business an advantage.
Firstly, know who you are contracting with and how that business is performing; a simple 'Companies House' website or credit check can reveal potential weaknesses before you sign the contract.
Secondly, is there a written contract in place and are the payment terms fair? Do you have a contractual right of set off – see December's Boot Camp article which gives an overview of this subject.
If your contract is a construction contract caught by the Housing Grants Construction and Regeneration Act 1996, you will benefit from rights and remedies designed to encourage prompt, regular and reasonable interim payments.
Bespoke provisions within your contract can also provide some protection:
- You may be able to minimise exposure by agreeing an advance payment or a payment deposit for a fixed proportion of the overall fee;
- Where goods are supplied, a retention of title clause preventing title passing until the goods have been paid for in full may be appropriate;
- Both parties can benefit from agreeing a payment schedule/process at the outset. Simple, regular and uniform invoicing issued to the appropriate person can minimise administrative delays. The payment schedule can be weighted in your favour, or set at short payment intervals, to avoid cash flow pressure points; and /or
- Additional services outside the original scope of work or services should be identified and pre-agreed with the client;
Thirdly, the threat of interest being applied due to late payments can incentivise the client to pay more quickly. The default position is that interest of 8% over the Base Rate per annum (as per the Late Payments of Commercial Debts (Interest) Act 1998) applies to fees unpaid after the final date for payment. Express reference to the applicable rate of interest or the 1998 Act can serve as a useful reminder of this right. Watch out also for late payment provisions with low rates of interest (e.g. 1 - 3% over the Base Rate) far below the statutory default.
Finally, being aware of your rights under the contract is often the most effective tool in recovering fees. For example, for those contracts covered by the 1996 Act, late payment gives rise to a right to suspend performance until the overdue payment has been made. The threat or reminder of this potential step and its consequences can serve to quicken the payment of outstanding fees.
The extent to which these tips are applicable will of course be dependent on the commercial context and nature of the particular relationship. However, it is key to plan ahead, put in place appropriate contractual provisions and to understand your rights and obligations under your contract.
The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.
