How can I take steps to avoid contractual disputes and claims made against the firm?

August 2014

How can I take steps to avoid contractual disputes and claims made against the firm?

When entering into a contract to supply goods or services, it is always worth taking the time over the Terms and Conditions which will govern the business relationship. Much clarity and precision at the outset can save lots of time in the event of a dispute further down the line, and assist in recovering quickly any unpaid or late invoices. Certain points in relation to this are worthy of closer examination.

Legal costs

A dispute resulting in litigation is sometimes necessary, despite best endeavours, and in the case of a supplier who has handed over goods or services, he is now out of pocket and will want to recover the cost arising from the failure to pay as soon as he can. Often there may not be a large amount of money at stake, but any such sum, if outstanding for too long, can result in cash flow problems for the supplier business.

The Small Claims Court - in reality part of the county court - is designed for just such an eventuality. It is supposed to be quick and easy to bring a claim for an amount owed, and because the procedure is not overly-legalistic, lawyers are not necessary.

That being so, most businesses will prefer to leave such matters in the hands of lawyers, so that they can get on with running their business and supplying other customers. The problem then arises that in small claims courts, the general rule of 'the loser pays' does not apply, so users of the court must bear their own costs, whatever the outcome. Given the amounts involved, this may mean a claim is not worth pursuing, resulting in an irrecoverable loss, and will not send the right message out.

The issue is of further significance as the current limit in the small claims court is £10,000. Undoubtedly, £10,000 represents a lot of money to any type of claimant, individual or business.
However, there are cases in which the court have allowed businesses to recover their legal costs in the small claims court, and this is in situations where the terms of business clearly spell out that any legal costs involved in enforcing contractual obligations - of which the obligation to pay is clearly one - will be borne by the defaulting party. On this basis, it is clearly imperative that Terms of Business make reference to that recoverability, especially with the imminent increase in cases to go through the Small Claims Court.    

Late payment interest

Since the Late Payment of Commercial Debts Interest Act 1998, it has been permissible for a business to charge interest on an overdue amount, together with a fee - compensation - for work involved in having to chase an outstanding payment. This is currently set at between £40 and £100, depending on the size of the debt.  

The legislation applies to certain types of contracts, such as those for the supply of goods and services. Broadly speaking it means that a statutory interest rate, currently set at 8.5%, can be applied to the outstanding balance following the latest of either 30 days from delivery/supply of goods or service, or 30 days from demand for payment, provided no other date is specified in the contract.
The ethos behind this legislation was not to punish late payers, but to highlight the importance and necessity of paying on time, and to positively encourage such behaviour. It is not necessary to include the provisions within the Terms of Business in order to evoke them - they apply as a matter of law - but once again, clarity at the outset often assists should reliance on such terms become necessary.


The use of contractual liens can be a useful addition to any strategy to recover unpaid accounts. Broadly, a lien allows goods to be detained which are owned by a debtor who has a debt arising out of a current invoice. Usually there will be some connection between the goods and the debt, although the clause may be drafted in such a way as to cover old and new invoices in the context of an ongoing contractual relationship. Lien clauses should also consider whether incidental costs, such as storage, should be included in the scope of the lien, as they will be not be inferred in the absence of specific mention. Of course, being left with goods and having to sell them in order to reduce loss, is not the most desirable option compared to getting paid, but it is an option that may become of vital importance in the case of, for example, an insolvency. In such cases the right to sell will only arise where the relevant steps are taken prior to the liquidation or bankruptcy, ie before the moratorium period begins, otherwise consent will have to be sought from the Trustee or the court.

Liens can arise at common law if not expressly mentioned in contract, although such rights are more limited and do not encompass any power to sell.

Having strong provisions setting out what will happen in the event of non-payment will undoubtedly save time and reduce scope for argument in the long run. This is especially so in relation to recovery of legal costs. At the end of the day, the terms can be useful as concessions in negotiations relating to payment in the event of difficulties, and can therefore be tactically used to preserve the ongoing relationship as well as providing payment to the out of pocket supplier business.