In November 2023, a court ruled that a business needed to have had the right to terminate its contract with its customer after a first late payment, to be able to terminate after the second late payment. This wasn’t the case because although a first payment had been late it was paid within the agreed grace period. The High Court Judge said the company had therefore been wrong to terminate the contract after the second late payment. I’m not arguing with that as I didn’t see the contract.
It’s the second part of the judgement that got me worked up. The judge said that they had “a battery of weapons available to them to protect their cashflow position. Those weapons include a right to suspend the works, the payment of statutory interest, and the right to refer disputes to adjudication.”
They appealed. The Court of Appeal found in their favour. The Judge in the Appeal Court said: “While they (the battery of weapons) may ameliorate the position to some extent, none provides a satisfactory and immediate solution to the typical case of late payment: each involves a measure of delay and, in the case of suspension or resorting to adjudication, additional cost and uncertainty for the contractor in pursuing them.”
I prefer to call them tools rather than weapons, but the point is the same. Any delay in payment, additional cost and uncertainty can be existential to a small business. Preventing overdue invoices in the first place is preferable. We’ve explored that in past articles. If we have to wait for payments and employ our tools, we’re at the mercy of delays and uncertainty.
Suspending work
Rather than terminating the contract could get results. One party would say ‘pay up and we’ll restart’. The other could say ‘restart and we’ll pay’ so there’s a negotiate to be had. One small business owner told me she’d suspended work but, but that led to an impasse and they had to go to adjudication. She got paid following the adjudication decision and she also managed to negotiate better payment terms for the rest of the work. The job is finished and she’s got all her money but trust has gone and she’ll never work for that client again.
Adjudication
This takes time and money. Unless there’s a set process within a particular sector it can take time to find the right adjudicator, get suitable dates for everyone and it costs everyone time as well as money. Most business owners we’ve talked to have pulled out as they can’t afford either or both. In some cases we’ve heard of the party that didn’t get the outcome they wanted, refusing to pay. That was good money after bad. Small businesses may not be able to carry on operating while waiting for a decision, or for a payment after a decision. Time is of the essence when a small business isn’t getting paid.
Charging statutory interest
Charing statutory interest and compensation is often a useful tool. You can charge interest for every day that an invoice is overdue beyond the agreed date, plus a set amount of compensation. Few people know about this. One business owner told me that he threatened to charge interest and his customer paid the original invoice immediately, about 4 months late. The small business owner in this case refused to do any more work for that client. That’s not an option for many small business owners because they need that future work. Many don’t invoice for interest owed because they’re fearful the client will go elsewhere.
For some businesses it will be possible to borrow to cover the gap, use invoice financing, take non-payers to court. The smaller the business the less likely any of these are likely to be as viable options. It may be hard to find a lender willing to lend and the rates may be prohibitive, pushing you further into debt. It may be difficult and costly to get invoice financing. You may want to keep your working relationship with your client and so not want to take any action that could damage it. Court is the last resort, costly, time consuming and can be stressful.
All of these tools might prove effective for bigger businesses with deeper pockets and people on the team to do the work involved. When it’s your business and you are the person trying to carry on business as usual as well as tackle something as daunting as chasing up payments, it’s a different ball game. Bigger businesses need to support the businesses in their supply chains. If those small firms aren’t there or won’t work with you next time you need their talent and expertise, you could find your customers deserting you. We all need each other in this business world if we want a strong sustainable, resilient economy. Come and talk to us before using any of the tools in your toolkit.
