Businesses rely on their customers paying invoices on time for cash flow and continued growth. The late or non-payment of invoices is a large-scale problem for SMEs. When a customer doesn't pay an invoice, the business not only doesn't get the money they're owed, they also have to spend more time and money recovering the outstanding debt.
Here, our business dispute solicitors discuss when a commercial debt dispute might arise, ways in which to prevent a dispute and how to deal with one.
How to prevent a commercial debt dispute
Commercial debt disputes can be highly problematic for businesses. Unpaid invoices can cause cash flow issues, stifle growth, tie up valuable resources, put strain on business relationships and force you to seek external finance to stay afloat. It is far better to avoid a dispute than to deal with one that has arisen.
The types of measures you can take to minimise the risk of a commercial debt dispute include the following:
- Ensure your agreements are clear and transparent: Robust written contracts that carefully spell out each party’s rights and obligations are key in ensuring your customers understand their contractual obligations and the likely consequences if they fail to fulfil them.
- Use effective invoicing strategies and ensure everything is properly documented: It is important to send clear, accurate invoices on time and to keep a clear paper trail so you can evidence what the sums claimed relate to, should you be called upon to do so. Error-riddled invoices not only damage your working relationships but also significantly increase the potential for disputes. Late invoicing sends a message to customers that you are relaxed about payment, so can encourage customers to adopt a similar approach. Many businesses use automated billing software that generates accurate invoices, sets up payment reminders and alerts you to any late or unpaid invoices.
- Communicate your contractual terms and working practices to customers: Communication is vital to reducing the likelihood of commercial debt disputes. Ensuring your customers are aware of their payment obligations, and the work they relate to, greatly reduces the risk that they will get a surprise down the line and refuse to pay your bill. For example, if you intend to charge fees for late payment, this should be clearly expressed in the Agreement and communicated to the customer.
Why do disputes over debts arise?
Disputes over debts occur all the time for a variety of reasons. In practice, the most common reasons why a business might dispute a debt include the following:
- The goods or services provided were faulty or substandard.
- The goods or services were not delivered on time.
- The goods or services delivered did not tally with what was agreed.
- The customer has been charged too much for the goods or services.
Initial steps when a commercial debt dispute arises
Commercial debt disputes can have severe consequences for your business, so they must be addressed with swift, decisive action.
The initial steps you should take when a commercial debt dispute arises include the following:
- Review the terms of the Agreement: The Agreement between the parties governs their relationship. Well-drafted, comprehensive agreements will detail the parties’ rights and obligations and set out the consequences of non-compliance. As such, the Agreement should always be the first port of call when a dispute arises.
- Gather and preserve evidence to support your position: The more evidence you have in support of your position, the stronger your case will be. Current evidence is crucial, so you must collect and preserve as much as you can. The types of evidence that might assist your case will depend on the circumstances but might include the following:
- The Agreement
- Any communication between you and the customer, examples include emails or letters where you explain the contractual terms.
- The disputed invoice.
- Delivery notes.
- Communication that relates to the goods or services in question, examples include the nature or condition of the goods, and the agreed delivery date.
- Photographs of the goods.
- Any communication that details the scope of the services to be provided.
- Communication relating to the dispute. If your interactions with the customer are in person or over the phone, you should follow them up in writing wherever possible, or at least make a note of what was said as soon as possible after the exchange.
- Your recollections of the matter. Our memories can fade over time, so writing down your understanding of the situation as it unfolds can be invaluable in jogging your memory and helping your legal team understand the facts of the dispute.
- Identifying the debtor’s financial position: There is little point in pursuing a customer with no means of repaying the debt, regardless of the strength of your claim. Ideally, you will have carried out due diligence on the customer’s financial situation before agreeing to do business with them, but a business’s finances can change rapidly, particularly in the current economic climate. Before taking action, you should satisfy yourself that the customer has enough assets to satisfy any Judgment made against them. The records held by Companies House are a good starting point, but business disputes solicitors, like ours, use various methods to create a comprehensive picture of a debtor’s financial position and assess the cost-effectiveness of pursuing the debt.
- Defining commercial objectives: Before you start any legal action, you must identify your commercial objectives. If you have previously enjoyed a long-standing, lucrative business relationship with the debtor, your main aim might be recovering the debt in a way that maintains your relationship. If the debt is large you may be more concerned with collecting the money owed as quickly as possible.
- Seek legal advice: Timely legal advice is crucial to the effective resolution of commercial debt disputes. Our business disputes solicitors will review your Agreement to understand its effects. They will advise on the relevant law and the merits of your legal position, before the develop a strategy that not only ensures the debt is recovered in full, but also considers your commercial objectives and the debtor’s financial position.
Options for commercial debt recovery where the debt is disputed
The options available for recovering a debt that is disputed are narrower than those applicable to undisputed invoices that a customer simply will not pay. Your options for recovering a disputed debt are as follows:
Sending a letter of claim to the customer
Letters of claim are an important part of the debt recovery process. The letter will be sent by your business disputes solicitor, and will include a summary of the case facts, a breakdown of the legal position and the action the debtor must take to avoid further legal action.
A letter of claim must be sent before Court proceedings are initiated, they often succeed in getting the payment from a client without the need for any further action. If you issue proceedings without first sending a letter of claim, you might be penalised by the Court.
Sometimes, a commercial debt dispute can be settled through negotiations between the parties’ legal advisors. Our business disputes solicitors are expert negotiators and skilled problem solvers, and regularly identify workable, practical solutions to commercial debt disputes. They might conduct their negotiations through correspondence, over the phone or in person at meetings, often after they have sent a letter of claim to the debtor detailing your position.
Mediation is a form of alternative dispute resolution. It is quicker, cheaper and less stressful than litigation, and can produce excellent results in commercial debt disputes. Since it is less confrontational than many other forms of dispute resolution, it is useful when the parties are keen to continue doing business with each other.
At a mediation, an impartial third party, known as the mediator, assists the parties in reaching a mutually acceptable settlement of their issues. This often results in a compromise on both sides but allows the parties to reach an agreement appropriate to their commercial reality.
In some cases, litigation is simply unavoidable. The matter might involve complicated legal principles and considerable sums of money, or the parties’ positions might be too deeply entrenched for a resolution to be likely through any other means.
If your debt does not exceed £10,000, your claim might be suitable for the Small Claims Court. Otherwise, the County Court is the likely forum, unless the debt is sizeable or the matter particularly complex, in which case High Court proceedings might be more appropriate. Our business disputes solicitors will advise on the most suitable Court in your case.
When you have obtained Judgment against the debtor, they have a specified time within which to pay the Judgment debt. If they fail to do so, you can enforce the Judgment by various means including sending bailiffs to collect goods to the value of the Judgment debt or taking a charge over the debtor’s property. You could also consider insolvency proceedings at that stage.
Cross-border debt recovery
Cross border disputes with debtors situated in different countries present unique issues. Whilst not insurmountable, these issues significantly complicate the dispute resolution process, making it more difficult to recover the outstanding sums.
Most commercial agreements contain a ‘Jurisdiction Clause’ stipulating which country’s Courts have jurisdiction over any disputes that arise under the Agreement. However, even where the Courts of England and Wales are stated to have jurisdiction, the process is far from straightforward. Additional steps are involved in serving the claim, and enforcing any Judgment obtained against a foreign debtor can be problematic.
If your agreement does not contain a jurisdiction clause, the first step our business disputes solicitors will take is to establish which country’s laws apply, and where you can take legal action. It will be more convenient for you to pursue the claim through the English and Welsh Courts, so our business disputes solicitors will seek to identify facts that enable you to do so. Various criteria must be fulfilled before the English and Welsh Courts will accept jurisdiction, which mainly relate to the dispute being in some way connected with this jurisdiction, for example because the contract was made here.
Jurisdiction is a particularly thorny issue, raising complex legal issues and practical challenges. Advice from business dispute resolution solicitors, like ours, is crucial in ensuring the correct procedures are followed, and giving you the best possible chance of recovering the disputed debt.
How long do you have to chase a commercial debt?
All legal claims are subject to strict time limits known as ‘limitation periods’. As a general rule, the limitation period for commercial debt disputes is six years from the date on which the debt fell due. This is often, but not always, the payment date stated in the invoice, and might be earlier, for example, when the services were delivered. if a debtor acknowledges the debt, or makes part payment towards it, the six-year limitation period restarts.
Any delay in pursuing a debt can significantly prejudice your position and make recovering the sums due far less likely. If you have not started legal action before the limitation period expires, the debtor has an absolute defence to the claim, and you will be unable to pursue them for the unpaid sums.
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 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.