Many small and medium sized enterprises (SMEs) are leaving themselves open to payment disputes because of ineffective terms and conditions (T&Cs). This significantly increases the likihood of a late payment becoming a bad debt. And with late payments and debt levels at an all time high SMEs cannot afford to ignore common pitfalls.
By Carole Hughes, Managing Director, Daniels Silverman
Last year Daniels Silverman dealt with thousands of debts that arose because of payment disputes where T&Cs were unclear or unfavourable to our clients. A huge amount of time is wasted by SMEs chasing late payments, particularly when simple changes to contract terms could have prevented the dispute in the first place or aided a speedy resolution.
Many businesses make the common mistake of believing that they are protected if they have their terms printed on the reverse of their invoices. This is not the case. Under Contract Law you can only enforce terms against your customers if they were aware of them at the time the contract was made and have accepted them either in writing, verbally or by implication. Publication on the reverse of invoices is normally considered too late in the transaction to be legally binding on your customer i.e. the contract was made when goods or services were ordered, not when the request for payment is made.
It is important to openly display your T&Cs on all marketing material such as websites, price lists, catalogues and prospecting literature. Ensure T&Cs are included with any pre-contractual quote or estimate. And get acceptance in writing, as this offers greater protection than implied or verbal acceptance of T&Cs.
In some cases, issues with late or non-payment can be resolved amicably, but we also see many cases of fraud or where customers have misled companies as to their ability to pay or simply changed their minds regarding a transaction.
It is important to include a clause covering how long your customers have to query the goods/services after the date of supply and how those queries should be sent to you i.e. in writing to a nominated place or person in your business.
Creditors often struggle to collect outstanding debts where the parties cannot agree which T&Cs apply – the supplier’s or the customer’s. Check any formal order documentation does not try to replace your terms with those of your customer which may be unfavourable. To be certain, send an acknowledgement of order form referring once again to your T&Cs.
Where the parties cannot agree which T&Cs apply the case may need to be referred to the courts. Such cases are often determined on “the battle of the forms” whereby a court has to decide which set of terms were produced last in the negotiations. While legal action is a last resort, T&Cs should stipulate the right to refer disputes to a specific County Court (nominate your local County Court so it is more convenient for you to attend to give evidence).
If the court cannot see that one set prevails, or if terms are ambiguous in meaning, or there are no terms of business at all, the Court must determine what terms should apply by considering what would be usual in that industry, or what a “reasonable person” would expect the terms to be.
To avoid the pitfalls of this kind of ambiguity, clarity at the outset is paramount. Make your payment terms clear and include the right to recover interest (and statutory collection charges if you are a business selling to another business under The Late Payment of Commercial Debts Act 1998) and all other incidental debt collection charges and legal fees incurred in securing payment.
Often businesses are unsuccessful when chasing damages for breach of contract, or payment of outstanding invoices, purely because they have not followed the correct procedure from the beginning, when the contract was made, or don’t have the benefit of comprehensive T&Cs to rely on. A solid set of T&Cs can help to protect businesses should disputes arise and makes it much easier to collect unpaid invoices.