Can better contracts mean faster payments?

Late payments are a significant problem for businesses but banishing the standard boilerplate could mitigate the impact. Here’s how businesses can make terms and conditions work for them.

Most businesses are squeezed for cash right now, and it is causing an increasing number of them to delay or default on payments. Small businesses are particularly hard-hit according to a 2022 report by Accenture and Xero, which estimates that late payments are costing them £684m a year.

This is also leading to more legal disputes since money is harder to come by and fewer businesses can afford to let things slide. Where once parties were more willing to come to an agreement and preserve the commercial relationship, they are now enforcing terms and conditions more stringently.

Although the Late Payment of Commercial Debts (Interest) Act and the Prompt Payment Code have both been introduced to make customers more accountable to their suppliers, the problem remains, particularly as 2022 saw the highest liquidation rate for UK businesses since Q3 2015.

Whether a business cannot pay its suppliers due to cash flow issues, or a supplier is chasing payments from customers, it’s at the initial contract development stages that both parties can ensure they are in the best possible position.

Ts, Cs and boilerplates

Unlike consumer contracts, business-to-business contracts are not governed as stringently, meaning the responsibility lies largely with both parties to ensure the terms and conditions reflect their requirements.

Too many businesses either rely on standard boilerplate supply agreements for their own terms and conditions, or they take another party’s Ts and Cs at face-value. It’s important that Ts and Cs are drafted with the help of legal advice and updated regularly to reflect the needs of the business and the current economic climate. A 30-day payment term, for example, is advisable where you are concerned a business may be at risk of insolvency and you need to make sure they do not run up a huge amount of aged debt.

Parties should also read the limitation liability clauses, payment terms, and deadlines for raising issues carefully and query them if they are too onerous or excessive before entering the contract. Suppliers, for example, should be wary of payment terms that are not staged, as a customer could refuse to pay on the grounds that certain aspects of the work were not completed. Likewise, customers should understand when a credit period ends, and when late payment interest may be charged.

Properly drafted terms and conditions can also prevent late payments. Interest payable on overdue sums and terms such as making the remaining and outstanding balance due if an instalment is not paid, and even withholding further deliveries while payments are overdue, are all possible incentives to ensure the customer pays promptly.

Last but not least

When resolving issues, the last terms and conditions sent before the contract is formed are the ones incorporated and which will be enforced.

As a customer, if you receive a quote from your supplier, you should send an email acknowledging receipt, accepting and attaching your Ts and Cs. Alternatively, if a supplier wishes to do business through their terms, they should ensure all quotes and subsequent communications (such as order acknowledgements) come with the terms and conditions attached.

Any staff involved in communicating with a supplier or customer should also be aware of this. As the main point of contact, your sales team must understand when they have the authority to enter a contract.

Although not unavoidable, late payments can be managed and mitigated through stronger contracts that are understood by both parties. It may be a cliché, but it’s true: putting the work in early will pay off – potentially with interest – further down the line.