Getting Paid And Enforcing Contracts
Restrictions imposed by the government due to the COVID-19 pandemic have left businesses across the UK increasingly running into cashflow problems. Even where businesses have been able to pivot as a result of closures, one major problem remains – 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.
What are your options when it comes to actively pursuing outstanding debts?
If you choose to pursue debt recovery, there are a number of options available to you.
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/
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’s worth noting at this point that, due to the pandemic, the government has introduced temporary measures to restrict aggressive debt recovery actions such as statutory demands and winding up petitions where the debtor’s inability to pay is due to Covid-19 related issues. This includes commercial debts as well as commercial rent arrears recovery as businesses struggle to keep up with rent. It is worth determining whether your claim is covered under these measures so as not to go down this route only to find that it will not yield the results you’re looking for.
If however, a statutory demand is feasible in your case, then 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.
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 cashflow, 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 of your options carefully, starting primarily with the contract itself. Are there any clauses that could help you?
Could the provision of force majeure 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.
What about contractual frustration?
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.
About our expert:
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.