In these challenging economic times, the last thing any business needs is late or non-payers. Below are various common legal issues which can make it harder for you to get paid, and simple legal steps you can take to reduce that risk.
Scope of work not clearly agreed
Lack of clear, written definition of exactly what the contract is about, in a single document, is a major cause of contractual disputes. This can arise where the contract is negotiated by a long email chain, often with phone calls and meetings in between. Each party thinks what has been agreed is clear, but their views are different.
Take the time to record everything in a single document before you start work/supply the goods. Make sure an early negotiation email states that no binding legal agreement comes into existence until it is recorded in a formal document and signed by both parties. Then, before you sign it, read it from the perspective of someone who doesn’t know the parties, their business or what the contract is about. If that person would ask: “what happens if X”, answer that question in the contract.
Variations not clearly agreed in writing
Variations to an existing contract are often agreed on a handshake or in a call. In these cases customers sometimes deny anything was agreed, or dispute the extent of it, when it comes time to pay the extra amount.
Treat a variation like you would treat negotiating a new contract from scratch. Make sure it is recorded in a clear, comprehensive, signed a document before you do the additional work or supply the extra/different goods.
No (or weak) liability limitation clause
Sometimes customers make the excuse for non-payment that your business supplied defective goods or services. They withhold some or all of the price as a result. Your standard Ts and Cs should place monetary limits on the amount of certain kinds of liability that you could incur under the contract, and exclude other kinds of liability altogether. It should require customers to raise disputes within a short time frame, otherwise they lose their rights.
If your contract says, for example, that if you do happen to supply defective goods or services, the customer cannot claim any loss of profits it might suffer as a result, or that the maximum damages the customer can claim is 20% of the purchase price, that will substantially reduce their ability to refuse to pay the invoice in such a dispute.
Delivering goods before payment
Since the introduction of the Personal Property Securities Act (PPSA) in 2012, businesses that part with goods before payment are no longer protected by a clause in the contract that states: “title to goods passes only on payment”. (Before that Act, in many cases an unpaid supplier could retake possession of the goods if the contract was worded correctly in that way.)
Now, if the supplier parts with goods before payment and the client becomes insolvent, the client’s liquidator may sell the goods. The supplier will only get the same, small “cents in the dollar” payment as the client’s other creditors.
The only way to avoid this is to register a security over the goods on the Personal Property Securities Register (PPSR). You can only do this, in turn, if your supply terms say that you are entitled to do so. Registering a security on the PPSR is a relatively straightforward and inexpensive process.
Credit checks
If you are having significant payment defaults, or you want to reduce payment risk on larger contracts, you could find out whether it is economic for you to become a member of a credit reporting service, such as Experion, and get credit reports on your customers before you do business with them. In this case your Ts and Cs will need to include a clause allowing you to get these reports.
“Battle of the forms”
Some customers, often bigger companies, order goods on the basis that their standard terms apply. Those standard terms will favour them not you. If you do not agree with their standard terms then, if you have the bargaining power to reject their terms, then don’t accept them. Make it clear in writing that you’re prepared to supply the goods or services only on the basis that your terms apply, not theirs. Wait for a written confirmation from the customer that it agrees to that before you supply the goods or services.
Follow-up actively and persistently
Find a good, cost-effective debt collector and have a system for promptly referring all debts beyond a certain age to them for follow-up. Suppliers who are persistent get paid first.
Conclusion
Many of the above issues can be addressed by having proper sale terms and conditions. At Fortuna Legal we can prepare these for you, or review your existing Ts and Cs.