Chapter 4 in the Contract for Beginners series: legal action for non-payment

Chapter 4 of the ‘Contract for beginners’ series looks at the Coronavirus issue facing Microsoft Partners with COVID 19 and legal action for non-payment from the customer but also looks at payment issues you should always consider in your supplier contracts.

The harsh and cold economic reality of COVID-19 is that businesses are truly struggling. Mass layoffs or COVID-19 furloughed employees, as well as restricted spending, means that the new reality of failing to pay is extremely likely. This section looks at how to deal with failure to pay and what contractual remedies you can enforce or apply in new contracts going forwards.

 Q: What if the customer does not pay? 

 A: There are several mechanisms which a payee could employ to encourage prompt payment. Three of these are discussed in the next sections.

• Payment protection: Interest

Most agreements will need to provide that, if payment is not made on the due date, the defaulting party must pay interest on the amount outstanding. The rate of interest must not be excessive as it may otherwise be held invalid as a penalty. At the same time, the interest rate must be sufficiently “substantial.” Usually, an interest rate of between 2% and 4% above one of the major banks’ base lending rate is normal in commercial contracts.

• Payment protection: Suspension of Services or Termination Events

Another way in which the Supplier can protect its position with regard to payment is to ensure they have a right to suspend the services for a certain period of time until payment has been issued or even be allowed to terminate if it so chooses. This is to avoid the Supplier from having the contractual obligation to keep providing the services despite not being paid for them. It is important to make a direct correlation between the supply of services and the continuation of payment. Therefore, discussing the Supplier’s rights to pause a service if not paid will avoid the Supplier from being in breach of the contract.

• Payment protection: Retention of Title if selling goods

You can ensure you don’t give up ownership of any goods until full payment has been made. You can build in rights to ensure that you have the right to come to your customer’s premises and remove the goods should you need to in the event of a failure to pay.

Helpful Checklist to build into your payment terms:

• What is the currency?
• If different currencies, have you dealt with changes in exchange rates
• Is the time of payment “of the essence”
• What happens if the payer does not pay? Think about including a right to terminate or suspend the services.
• Always include interest on late payment.
• Should you seek a third-party guarantee?
• Are there any VAT or withholding tax issues.

This is the fourth blog in the series, contracts for beginners, please look at the others available.

• Chapter 1 in the ‘Contract for Beginners’ series: Time is of the Essence
• Chapter 2 in The ‘Contract for Beginners’ series: how to manage project delays
• Chapter 3 in the ‘Contract for Beginners’ series: Employment contract termination
• Chapter 5 in the ‘Contract for Beginners’ series: Force Majeure clause during a pandemic

At Law 365 we have created an eBook addressing the critical Coronavirus issues impacting our clients right now – These include:

1. Force Majeure.
2. Employment Issues.
3. Business Contingency Plans.
4. Insurance queries as well as project delays caused by COVID-19.
5. Payment issues.
6. GDPR and termination rights.

If you found this excerpt interesting, you’ll love our free eBook, download it now.

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