Recovering debt: How good contract terms can make all the difference

Good contacts for dept recovery

The process of recovering debt can be frustrating, time-consuming and stressful. It’s a situation every business finds itself in from time to time, and one that is impossible to avoid completely.

However, there are steps you can take when drawing up contracts that help make the process of debt recovery run more smoothly should you need it, and increase your chance of success.

Make sure you know who you have contracted with

It sounds obvious, but it’s surprising how many times we see people get this wrong. Your customer may be a sole trader, partnership, limited company, limited liability partnership and have a different trading name. If you haven’t invoiced the right one, it can mean the business that owes you has a complete defence because it can say it wasn’t the contracting party.

So – ensure due diligence is carried out at the outset to ensure the correct details are obtained and confirmed, and that these are recorded accurately on your invoicing system.

Use the Late Payment Act

The Late Payment Act is a powerful tool that is woefully underused by businesses. There is a full guide here. It’s a piece of legislation that allows businesses to claim interest, compensation and debt recovery costs if another business is late paying for goods or a service.

Including terms that are in line with the Act in your contracts, and being clear that you are prepared to enforce them, can help encourage businesses to settle amounts owed on time, in the knowledge that they face a larger bill later on if they delay payment.

Say you’ll take steps to recover goods not paid for

When you sell goods, the “title” –ownership – of those goods only transfers to the buyer once they have paid. This means that in law, the goods remain yours until they are paid for, and you are entitled to recover them. This can be an option if your efforts to secure payment fail.

A clause in your contracts can underline this to purchasers and signal your intention to recover any goods not paid for in full by the date agreed.

However, if the buyer doesn’t agree to hand them back, you cannot just go and seize them without a right of entry – so tread carefully and be sure not to trespass and make sure your contract has robust terms to get the best opportunity to recover your goods if needs be.

Of course, it is only practical to recover goods in this way if they are non-perishables, and it’s of no asistance if you are owed for services rather than goods.

Set out that you will recover professional charges

As we have seen, the Late Payment Act entitles you to recover interest on late payments together with compensation and some of the costs of any professional advisors – such as lawyers – that you have to pay in the process of recovering the debt.

A lawyer can help draft these terms on an indemnity basis, which can help you recover a higher percentage of costs if your dispute ends up with court proceedings.

Be clear about the steps you’ll take to recover debt

There are several options available to recover outstanding debt, from Alternative Dispute Resolution methods right up to litigation.

As a business you may have your own preferences about whether you prefer to sue for unpaid invoices, or take any disputes to mediation or arbitration. Often this can depend on the norms in your industry – for example in construction, it is standard for disputes to go to arbitration, with the courts only getting involved in cases that cannot be resolved in this way.

You are under no obligation to outline the steps your business would take in the event of an unpaid invoice, but it can be helpful to set expectations and show that you are serious about being paid on time if your contracts include an indication of steps you are likely to take. Having terms that clearly set out an escalation and then resolution procedure for any complaint or quality issue can also help avoid disputed charges cost effectively.

Use bespoke terms

No two businesses, or business deals, are the same – so it’s important that every contract is developed with the unique circumstances in mind.. Always take specialist advice from a contracts expert, to ensure every contract is fit for purpose. 

The Thrings Commercial team supports businesses or all sizes in protecting their employees, reputation and finances – services include the drafting and reviewing of contracts, and debt recovery. For more information, see here. 


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