When a client disputes a debt, it can leave you in a difficult position, caught between preserving your business relationships and protecting your financial interests. Disagreements over payments can have serious implications for cash flow and ongoing operations, but understanding your legal rights is key to finding a resolution.
This guide walks you through the steps you can take when faced with a commercial debt dispute and highlights when it's time to call in our expert commercial debt recovery solicitors to help you navigate the process and recover what's owed to you.
Contents:
- How do commercial debt disputes occur?
- How to prevent a commercial debt dispute?
- What steps should you take if a customer disputes a commercial debt?
- Can I stop work for a customer if an invoice is disputed?
- Cross-border debt recovery challenges
- How long can you chase a commercial debt for?
- Insurance
- Summary
How do commercial debt disputes occur?
A commercial debt dispute occurs when a customer challenges the full amount or certain charges in an invoice. There are many reasons they might seek to do this, but broadly, most disputes fall into one of these categories:
- Charged the wrong amount
- Dispute over the payment terms
- Customer claims they haven’t received the invoice
- Disagreement over the scope of work or the quality of the work carried out
- Goods haven’t been received or are damaged
- Goods are faulty
- Late delivery of goods
- The customer may be trying to delay payment because they have cash flow problems
How to prevent a commercial debt dispute?
A clear and well drafted contract sets out what is expected of both parties and the consequences of failing to comply with agreed terms. Clauses you might consider include the use of stage payments (requiring payments at specific milestones before work continues), a right to suspend work (stopping work if payments aren’t made) and clearly defined payment terms (due dates, late payment penalties and acceptable payment methods). You might also seek a deposit upfront and require credit checks for new customers.
Keeping detailed records of agreed orders and checking that orders and invoices are error-free is important too. Prompt invoicing sends a message that payment is to be expected in a timely manner, and you could consider setting up billing software to generate accurate invoices and send out payment reminders. Such software can quickly alert you to any late and unpaid invoices too.
Maintaining good communication, so customers understand their obligations, what the invoice covers and aren’t surprised by any charges, will also help to reduce the risk that they will refuse to pay an invoice.
What steps should you take if a customer disputes a commercial debt?
Upon learning about a disputed invoice, it’s important to remain calm and professional, and you should focus on carrying out a thorough investigation before choosing how or whether to escalate matters.
Contract review and evidence gathering
Consider the complaint and review your contract. Consider any supporting evidence too, such as emails, letters, photographs, delivery notes and notes of phone calls.
Is this a genuine dispute, a stalling tactic or an error on your part? Does your customer need you to explain what the invoice covers and any queried charges? Correct any inaccuracies (the wrong amount charged) and send out a new invoice with an apology. If the wrong goods have been sent or are damaged. Take the time to understand why your customer is unhappy with the goods or services and seek to rectify the issue. If your goods were damaged in transit or delivery was late, pursue the matter with your delivery company and reassure your customer that you have taken steps to ensure that this doesn’t happen again. For long-standing and valued customers whom you wish to continue trading with, consider offering longer payment terms or reducing the value of the invoice. Weigh up the cost of offering any discount against the cost of escalating the dispute. In some cases, a full refund may be necessary to resolve the issue. This may also be necessary to stop your customer from making a claim against you too.
Customer’s finances
At this stage, it is also worth understanding your customer’s financial situation, as there is little point in pursuing a claim if your customer will be unable to pay a judgment. Companies House is a good starting point, and you can quickly gain an understanding of a company’s finances and whether any insolvency proceedings have been issued. Other methods to build up a picture of a customer’s finances include credit reports, news reports, and market and industry research. Not only will this information help you to decide whether to initiate legal action, it may prove to be useful during negotiations with the customer more generally (both pre-action and during the litigation process itself), as a customer may wish to avoid any negative press if they are trying to conclude, for example, a merger.
If your customer is unwilling to resolve the dispute or decides to take legal action against you for failing to deliver the goods or services you promised, this is the time when (if you haven’t done so before) you should consider reaching out to a commercial debt recovery solicitor. To get the most out of your first meeting, come prepared with a summary of the dispute and all the evidence you have gathered. You may have to pursue a claim through the courts, but in any event, the process starts by sending a letter before action.
Letter before action
This is a letter setting out the issue and seeking a resolution without further action. You may wish to draft this yourself, but engaging the services of a solicitor will ensure that all aspects of the dispute are addressed, that you have complied with all the pre-action protocols, and nothing is missed. A solicitor can also assess the merits of pursuing a claim and the likelihood of overcoming any defence or counterclaim too. Is the customer solvent and do they have sufficient funds to settle any judgment against them? What is the value of the unpaid invoice? How important is this relationship in terms of ongoing sales? How will pursuing or not pursuing payment affect your reputation? How much will issuing a claim and court action cost, and how much are you likely to recover? All this needs to be discussed and weighed up. You do have to send a letter before action before taking legal action, but sometimes these letters will result in payment being made or a compromise being reached without further costs or court action.
Alternative dispute resolution
Check if your contract specifies the need to pursue an alternative dispute resolution method like mediation, arbitration or adjudication before any court action. With mediation, a mediator seeks to facilitate an agreement that is acceptable to both parties. With arbitration, an arbitrator reviews the case and reaches a decision. Adjudication is a more formal process whereby an adjudicator reviews the evidence and hears arguments before making a binding decision. Failure to comply with any alternative dispute resolution clause can leave you open to a breach of contract claim. Any claim that has already been started will be suspended until the clause has been complied with too.
Court action
If court action is required, a claim form and supporting statement must be filed with the appropriate court. These will set out your case and the unpaid sum, including the recovery of court fees and interest. Your contract may specify an interest amount. If not, you are entitled to statutory simple interest of 8% above the base rate.
After a claim has been issued, the court sets a timetable and various documents must be drafted, filed and exchanged before a final court date is set. Claims under £10,000 are handled by the Small Claims Court. Otherwise, the County Court is the likely forum, unless the debt is sizeable or the matter that is particularly complex, in which case High Court proceedings are more likely. If you have the time or inclination, it is possible to manage a claim in the Small Claims Court yourself. But claims in the County Court and High Court do generally benefit from the input of a solicitor.
You also have the option to apply for summary judgment. Summary judgment is an application seeking an early determination of your case. But for this to be granted, you need to demonstrate that your customer has no real prospect of succeeding on their defence.
Applying for judgment in default is also an option. This is where a customer fails to respond or fails to file a defence within a certain time, and you win your claim by default without a trial.
If your claim succeeds you will receive the invoice amount, interest, court fees and, on average, around two-thirds of your legal costs.
Faced with a judgment against them, a customer may choose to pay up. If not, you are looking at enforcement and there are several enforcement options to consider. These include third-party debt orders (against the customer’s bank), charging orders (against a property that a customer owns) and instructing bailiffs to seize and sell a customer’s assets. You could also consider insolvency proceedings at this stage.
Can I stop work for a customer if an invoice is disputed?
The starting point is your contract. Do you have the right to stop work and does this clause cover the circumstances of this unpaid invoice? Failure to comply with any conditions leaves you open to being sued for breach of contract and a claim for damages. If no such clause exists, do you have a contractual right to terminate for non-payment of an invoice? If no such clause exists, you do have a common law right to terminate a contract if the other party’s breach is sufficiently serious. A long delay in payment wouldn’t be serious enough. Nor would one unpaid invoice. But a series of unpaid invoices would be. More generally, though, stopping work is a big step and aside from having the legal right to do so and avoiding the risk of breaching the contract yourself, you need to weigh up whether taking such a step will cause more damage than it’s worth to any ongoing relationship you wish to have with a customer.
Cross-border debt recovery challenges
Cross border debt recovery disputes present additional challenges. Whilst you may still be able to pursue a claim in the English courts against a foreign customer (most commercial agreements set out which country’s law applies and which courts have jurisdiction) there are additional service out of jurisdiction rules that you may need to comply with, and there is the issue of having to enforce a judgment against a foreign customer too.
Whilst these challenges are not insurmountable, they do add an additional level of cost and complexity. If there is no jurisdiction and governing law clause in a contract, and you wish to pursue a claim in the English courts, you need to establish that the dispute is connected to England in some way. For example, the contract was made here.
How long can you chase a commercial debt for?
You have six years to bring a claim. This runs from the date on which a debt is due. Generally, this is the payment date stated in an invoice, but it might also be the date that goods or services were delivered.
Part payment of an invoice or the customer acknowledging the debt in writing restarts the six-year period. But after this expires, you can no longer bring a claim.
You do need to take your time to investigate any disputed invoice fully, but any unnecessary delay in pursuing a debt can prejudice your position and ultimately make recovering the debt far less likely.
Insurance
If you’ve had previous issues recovering commercial debts or if you’re a party to several high value contracts, the non-payment of which could seriously affect your cash flow and even your ability to continue trading, you may wish to consider insurance. You may already have a trade credit or before the event litigation expenses policy in place, and if you do, it’s important to check the terms of your policy for any exclusions.
- Trade credit insurance
This is a policy that will pay out if an invoice isn’t paid. - Legal expenses insurance
There are generally two types of policies. Policies which are taken out before legal action is taken and policies which are taken out after the event. The former will cover more of your costs (court fees, your legal fees and the other side’s costs), whereas the latter only covers the risk of having to pay the other side’s costs.
Summary
Commercial debt disputes can be devastating to your business. They affect customer relations, disrupt cash flow, use valuable resources and can lead to financial instability. Timely legal advice can make sure that a commercial debt dispute is addressed swiftly and effectively, and its impact on your commercial operations is minimised.
Our business disputes solicitors have vast experience in assisting clients to recover commercial debts. They will advise on the prospects of recovering the debt, having regard to the merits of your legal position, your commercial goals and the debtor’s financial situation. They will devise a strategy that gives you the best possible chance of recovering the sums due in the most cost-effective way, whether through negotiation, mediation or, where necessary, Court proceedings.
