We asked our expert, Ian Carson, Commercial Dispute lawyer at Harper James, about what to do when clients are leaving invoices unpaid and the options businesses have to enforce contracts.
Ian trained and worked in the City of London for many years before moving to the Midlands. He has acted for a diverse range of clients including large multinationals, private and owner-managed companies, partnerships, and high net worth individuals. Ian has dealt with contractual, joint venture and shareholder disputes, professional negligence claims, fraud, financial services and insolvency related disputes and has extensive experience of mediation as an alternative to court action.
Many businesses have been feeling the pinch from the covid-19 pandemic, cost of living crisis and inflation which have added pressure and complexity to usually simple, guaranteed transactions.
A study by Nucleus Commercial Finance found that 72% of business owners are concerned that the cost of living crisis is going to impact their business, whilst 23% went as far as to predict that their company won’t survive the financial year if prices continue to soar.
In this article we lean on the professional advice of a lawyer to help navigate tricky contracts.
Getting Paid and Enforcing Contracts
The current cost of living crisis in the UK has left businesses across the country increasingly running into cash-flow problems. Xero’s report from July 2022 revealed that 23% of SMEs experience an annual cash-flow crunch in excess of 6 months, leading to a mounting pile of unpaid invoices.
Understandably, customers may be using the crisis to suggest increasing payment terms beyond that of the standard 30 days. But that means that suppliers have a very tricky line to walk, deciding whether the need to maintain their own cashflow outweighs that of maintaining a good customer relationship.
To what extent do you risk losing your customer by resorting to formal legal enforcement to recover unpaid debts? As the economy slows, it’s inevitable that business owners will have to ask themselves more and more questions like this in order to come to a solution that keeps them afloat.
Options for Chasing Unpaid Invoices and Debts
If you choose to pursue debt recovery, there are several options available to you.
Debt Recovery from Individuals or Sole Traders
You can send an Acknowledgement of Debt Reply Form if the debt you’re seeking to recover is owed by individuals or by sole traders. This, along with details of their liabilities, means that the debtor has the details necessary to acknowledge the debt they owe and follow up with an outline of their proposed payment plan.
The Pre-Action Protocol for Debt Claims details the process and documentation you will need to follow and includes templates for use in correspondence. It’s important to comply with this process and use it to your advantage to speed up the recovery of debt.
For a more detailed look at the process and documentation you’ll need we’ve recently put together a guide on the Debt Protocol from start to finish: https://hjsolicitors.co.uk/article/pre-action-protocol-for-debt-claims/
Statutory Demand
If you’re a business creditor, you may want to consider using statutory demand to recover debt from individuals, sole traders, or businesses. This gives the debtor 21 days to pay the outstanding amount. If they are unable to pay the debt, the creditor can then apply to make individual debtor’s bankrupt or in the case of a business, apply for the company to be wound up.
It is likely that the threat of bankruptcy or winding up will hopefully mean that the debtor is more open to settling with a payment plan so that you can recover your debt. If so, any arrangement should be clearly documented.
Small Debt Recovery under £10,000
Alternatively, you could issue proceedings in the County or High Court. For debts under £10,000, this can be done relatively straightforwardly in the Small Claims Court. The Money Claims Online service also enables businesses to issue proceedings quickly.
Whatever route you decide to take, employing professional advice is vital to help you carve a clear path for the next steps that your business should take to recover debts, improve your cash-flow, and avoid pitfalls that could become expensive and time-consuming.
Contractual Obligations: What are Your Options?
Where one of the parties is looking to avoid having to perform future obligations, before resorting to legal action it’s worth exploring all your options carefully, starting primarily with the contract itself. Are there any clauses that could help you?
Could a Force Majeure Contract Clause Help?
A force majeure clause refers to unforeseen external events that impact a party’s ability to carry out a contractual obligation but only applies where the relevant wording is in the contract This often applies to natural disasters (for example, earthquakes) outside the control of any of the parties involved.
Even if your contract features a force majeure clause, clarity is vital. If the definition of a force majeure event is not clear or it fails to mention outbreak of disease specifically, there is still a chance that it may not apply to your current circumstances resulting from the pandemic.
Even in the event where a force majeure event does apply, there are several more hoops to jump through. It is not sufficient solely for the event to occur. The non-performing party must also prove that the event prevented them from carrying out their contractual obligation.
If this is proven, the effect of the force majeure clause is likely to be that the liability of the non-preforming party is removed (without liability to the other party), at least for as long as the force majeure event continues.
Could a Contractual Frustration Help?
If your contract does not feature a force majeure clause, could the doctrine of contractual frustration help?
A contract is frustrated if an event occurs (after the contract was formed) that is so fundamental that it makes it impossible for the parties to perform their obligations, makes it illegal or completely transforms the obligation. It is not enough for the obligations to have become more difficult or more expensive to carry out. So, again, this can be very difficult to rely on.
The concepts of contractual frustration and force majeure are rarely straightforward. They both rely on a detailed analysis of your contract and will be interpreted on a case-by-case basis by the courts, determining whether the obligations of the parties will be suspended, so seeking legal advice before taking any action is important to avoid potentially being in breach of contract. It will help you understand exactly where you stand and give you a clearer view of the expected outcome of taking legal action before proceeding.
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