5 pre-litigation tips
- Have a clear set of terms, whether by way of standard terms and conditions or a bespoke agreement, and ensure that payment terms are spelt out clearly and are acceptable to you. Where possible, have consistent terms, such as asking customers to pay your invoices within a certain number of days from the date of each invoice.
- Make sure your terms and conditions or a bespoke agreement are legally binding on the debtor in question (normally a customer) by having a consistent process and keeping records of their agreement, preferably in writing, such as via email, or by ticking an acceptance box on your website.
- Review your payment terms in terms and conditions, contracts and agreements to make sure that they work for your business, including any pre-payment terms, % and administrative fees for late payment of your invoices, your ability to suspend or cancel your provision of goods/services, or collect delivered or installed items in case of late payment or non-payment.
- Consider collecting payment in full or part prior to delivering your goods and/or providing services to customers, with the last installment, where applicable and possible, to be collected before completion of your part of the deal.
- Take a look at your dispute resolution/ choice of law provisions in contracts. In some cases businesses prefer to have an escalation/ negotiation clause prior to any formal debt collection procedures. In other cases, a quick debt recovery procedure may be a better choice.
How to handle a late payment
- Have processes and keep records of communications with the debtor, including any chasing telephone calls, emails and letter.
- Act consistently and without any delays in relation to any debt collection. In the absence of clear terms your previous conduct may be taken into account. In addition, there are limitation periods for starting legal proceedings where you may not be able to bring a claim after a certain period of time, the relevant records may be lost or deleted and witnesses may leave the business. Each of these considerations makes it more difficult to argue your case.
- Prior to starting formal litigation proceedings, you will need to make sure that you took sufficient measures to collect the debt and mitigate your losses, including chasing phone calls and correspondence and, where a dispute is not a straightforward debt collection matter, negotiations. Otherwise your business may be found to be liable to pay all or part of the other party’s legal and related costs.
- Train your staff on the processes and tell them not to accept any settlement figures unless appropriate internal authority has been given.
- Where a settlement has been achieved, have a professionally drafted settlement agreement in place to confirm the figure and make sure the settlement is final and legally binding on both parties.
- Bear in mind that starting litigation proceedings, a winding-up process or similar, or threatening to do so, may impact your relationship with important customers, so negotiations and alternative dispute resolution procedures (ADR) may be more appropriate, especially if it is not a straightforward debt collection case. ADR processes include negotiation, mediation, conciliation, adjudication, arbitration and some others.
- Prior to starting formal legal proceedings always send a formal “letter before action” setting out a clear summary of the facts on which your debt collection claim is based, any relevant documents and references to previous communications (and meetings) and giving the debtor an opportunity to pay in order to prevent further fees and expenses that they may be liable to if they do not pay on time and you start formal legal proceedings against the debtor. There may be a pre-action protocol that will need to be followed.
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