Here, we set out our top tips to ensure that your commercial contract contains a framework to get your business paid on time and some guidance on what you can do if payment is late.
No matter what size your business is, getting paid is on most people’s priority list so your terms and conditions should reflect that. Don’t make the mistake of using an ‘off the shelf’ set of standard terms - make sure your terms are fit for purpose so you are in a strong position to deal with any disputes over payment.
Make sure your terms set out exactly when payment of the price will take place. If cash flow is an issue or you will have to pay considerable upfront costs before you can deliver the services, consider requiring a deposit at the time of ordering or link instalment payments to key milestones.
If you are providing services on an on going basis, think about adding in a right to suspend performance of the services until the customer has paid any overdue invoices.
Prompt Payment Code
If you are a small business, it’s worth checking whether the party you’re entering into a contract with is signed up to the Prompt Payment Code. Signatories to the Code undertake to pay suppliers on time and within the terms agreed at the outset. You can review a list of signatories here: http://www.promptpaymentcode.org.uk/
Late payment interest – statutory or contractual interest?
If you don’t already, consider adding contractual interest on any payments not made in accordance with your terms.
The benefit of using a contractual rate of interest is that interest will apply to all sums under the contract, whereas statutory interest will only apply to the price of the goods or services. Contractual interest also cannot be altered by an arbitrator or court, whereas statutory interest can be reduced to reflect the parties conduct.
Be aware that any interest rate charged needs to strike a fine balance between being high enough to be a deterrent but not so high that it could be considered a penalty clause, otherwise you may risk having your interest clause struck out under the Unfair Contract Terms Act. Low interest is always better than no interest!
Retention of title
If you sell goods on an order by order basis (i.e. on credit) you should definitely have a retention of title clause to ensure that legal title to the goods does not pass to the buyer until full payment of the price has been received. A strong retention of title clause will allow you to retake possession of the goods if the buyer fails to pay or becomes insolvent, although this is unlikely to benefit a seller who supplies goods which are perishable or have a low scrap value.
If you are using a retention of title clause, remember that risk doesn't have to pass with title. If your customer has physical possession of the goods, they should carry the risk of insuring.
Please get in touch with the Commercial team at BPE if you would like help updating your terms and conditions.
These notes have been prepared for the purpose of an article only. They should not be regarded as a substitute for taking legal advice.