Contract Terms To Help Your Business Get Paid

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In order to survive in business, it is vital to get your customers to pay you, and this is even more critical during a recession. In this blog, we outline some of the key terms that ought to be within your terms and conditions, to ensure that you get paid.

Before entering into a contract, it can be worth doing your homework and researching your prospective partners or customers. In the digital age, there’s plenty of information available about your customers and if they have a habit of paying suppliers late, this can be useful to know (or avoid altogether!)

Have a written contract is essential. Without a contract, there is no legal obligation for a client to pay you for all of your hard work. Put it in writing and you have evidence of your agreement and a document to rely on in the event that payment is late or never made.

The contract should be discussed and agreed upon with both parties prior to the launch of a project or provision of goods or services. It’s important to quote correctly and clearly. That way everyone knows exactly what’s being provided and more importantly, at what price.

You should also agree the scope of work being provided, how you’re going to be paid, any completion date, the amount of any advance payments required, and what happens if the either party wishes to terminate the agreement. It can also be useful to know the contact details of any individual in charge of billing, so that you can contact them if there’s an invoicing concern.

So always have a set of terms and conditions in place, and make sure that the following provisions are included.

1. Clear Pricing and Payment Terms

The price (or way of calculating this) must be clear and unambiguous so that this is not open to misinterpretation. So, a straightforward payment clause would say something along the lines of:

The Customer shall pay each invoice within 7 or 14 or 30 days of the date of the invoice. The shorter the period between delivery of the goods/services and payment, the better, as it decreases the risk of non-payment. The more time the buyer has to pay, the more opportunity it has to spend the money on other things. As a supplier, it is important to state the date for payment as being from the ‘date of invoice’ instead of ‘receipt of invoice’ as this makes the period for payment clearer and avoids arguments about when the invoice was received. Any payment terms should also state that payment is required in full and in cleared funds (so without any deduction or set-off) and you should provide clear bank account details to which payment should be made.

You can build certain payment structures into a contract such as advance payment (where you can offer early payment incentives or discounts to entice customers to pay quickly), or payment by instalments when certain milestones have been reached. However, with this method, you should ensure that the drafting is clear over whether the milestone has been achieved (and subsequently, whether payment is due). In particular, you should make sure that achievement of the milestone is objectively assessed and fully within the supplier’s control.

There are other payment mechanisms you can put into contracts such as Letters of credit (which are often used by sellers exporting goods) or in certain circumstances (for example, where a significant amount of credit is being extended) then you might want to have a charge or other security put into place such as a guarantee, which could be given by a parent or holding company.

2. Interest on late payments

You should make it clear that if payment is not made on time, then interest will become payable. This should incentivise your customers to pay on time, because otherwise, they will have to pay more money.

It is common to set an interest rate of around 4% above the base rate of the Bank of England or your business’ bank. Alternatively, in business to business contracts, the Late Payments of Commercial Debts (Interest) Act 1998 applies (currently at 8% above base). This is an implied term and includes interest, a fixed sum and costs for the supply of goods and services.

Once interest begins to run under the Act, the supplier is also entitled to a fixed sum in addition to the interest on the debt, and this sum ranges from £40 to £100 depending on the size of the debt. If a fixed sum is payable, the creditor also has an implied right to be paid the reasonable costs of recovering the debt, less the fixed sum. That could include instructing a lawyer or employing a debt collection agency.

3. Retention of title

A contract for goods should include a Retention of title or ROT clause. This allows you to retain title or ownership of any goods until you are paid in full.

It is common to include clauses obliging the customer to (a) store the goods separately from all other goods held by the customer so that they remain readily identifiable as the Supplier’s property; and b) maintain the goods in satisfactory condition and keep them insured against all risks for their full price from the date of delivery, until the goods are sold or returned.

Ideally, there should also be a clause to ensure the customer cooperates and gives the supplier certain information relating to the goods; and possibly even report on the ongoing financial position of the customer.

4. ADR / Mediation

You may wish to include provisions to deal with disputed payments or invoices. This may avoid the relationship breaking down completely over a single invoice, especially if the parties do generally wish to continue working together. Mediation or having an independent third party provide guidance on resolving any dispute can be helpful.

5. Non-payment – recovery of costs of enforcement

Rather than rely on the implied term of the Act already mentioned, it can be useful to have an indemnity to be able to recover the costs of enforcing a breach of the payment terms. As you are incurring additional unnecessary cost in pursuing them, as a direct result of the customer breaching the terms, it is reasonable to ask them to cover the costs of that. It is easier to recover costs if this is set out in the contract.

6. Right to terminate

It may seem obvious, but you should include a right for the supplier to suspend or terminate the contract with immediate effect, usually by giving written notice to the Customer if the Customer commits a material breach of the payment terms. It is common to provide a remedy period first and a subsequent right to terminate.

You may want to refuse new orders from clients who have overdue accounts or in future, you could implement advance payment policies for chronically late payers if you still wish to do business with them.

Whatever terms you set out in respect of payment, do make sure that these are clear And in writing to avoid arguments and get paid quicker.

Longmores’ Commercial team are highly experienced. To discuss how we can help, please get in touch with our Company Commercial team.

Please note the contents of this blog are given for information only and must not be relied upon. Legal advice should always be sought in relation to specific circumstances.