Aged debt is a structural risk for any business that extends credit on its commercial invoices. Outstanding invoices represent work already completed and costs already incurred, and the longer they remain outstanding the more they constrain a business’ working capital position.
While debt recovery action is available when invoices are not paid, the more effective intervention is early consideration in the terms on which credit is extended in the first place. Here, we set out the legal and contractual mechanisms by which robust terms and conditions can reduce aged debtor risk for businesses.
Statutory and contractual interest on late payment
The Late Payment of Commercial Debts (Interest) Act 1998 entitles a supplier to recover statutory interest on commercial debts not paid within the agreed payment period, together with a fixed compensation sum and reasonable costs of recovery. The statutory rate is set by reference to the Bank of England base rate, and applies in the absence of a substantial contractual remedy.
Contractual interest provisions can be drafted at a higher rate, provided the rate is not a penalty. A clearly drafted contractual interest clause both deters late payment and increases the recoverable position if litigation becomes necessary.
Retention of title
Where a supplier provides goods on credit, a retention of title clause allows ownership of the goods to remain with the supplier until payment is received in full. In the event of non-payment or insolvency, the supplier can recover the goods themselves rather than ranking as an unsecured creditor.
Retention of title clauses require careful drafting. The clause must be incorporated into the contract on the supplier’s terms rather than the customer’s, must address mixed and processed goods where relevant, and must allow for practical recovery if the customer becomes insolvent. A clause that is not properly drafted or not properly incorporated will not be effective.
Credit assessment and credit limits
The contractual position is only one element of credit management. Setting a credit limit before terms are extended, and reassessing that limit if it is exceeded, gives the supplier the contractual basis to refuse further credit when a debtor’s position deteriorates. Terms and conditions can authorise the supplier to suspend or withdraw credit, to require payment on account, or to require a personal guarantee from the customer’s principals as a condition of continued credit.
A personal guarantee, properly drafted and properly witnessed, gives the supplier a separate cause of action against the guarantor in addition to the principal debtor. Guarantees are particularly relevant where the customer is a small private company with limited recoverable assets.
The battle of the forms
A frequent point of failure in commercial contracting is the question of whose terms apply to a transaction. Where the supplier issues a quotation on its terms and the customer responds with an order on its own terms, the contract may be formed on the customer’s terms unless the supplier expressly objects. The supplier’s terms and conditions should include a clear statement that they apply to all transactions and that no contrary terms are accepted unless expressly agreed in writing. Acceptance of customer orders should be made conditional on the supplier’s terms governing the contract.
Dispute resolution and jurisdiction
Terms and conditions should set out the procedure for raising and resolving disputes, including the period within which a dispute must be notified and the basis on which it will be assessed. A short, clearly defined dispute notification period prevents customers from raising late or speculative disputes as a delaying tactic.
Provisions on governing law and jurisdiction remove uncertainty if the matter proceeds to litigation, and are particularly important where the customer is based outside England and Wales.
Speak to Ai Law
Ai Law are experts in debt recovery, acting for businesses in drafting and reviewing terms and conditions, recovering unpaid commercial debts, and addressing wider commercial disputes. Robust terms and conditions reduce the volume of outstanding invoices that require formal recovery and strengthen the supplier’s position where recovery becomes necessary. To discuss the terms on which your business extends credit, please contact a member of our team.