Implementing late payment contractual clauses
Should I include late payment contractual clauses?
Businesses are free to agree their own terms for late payment of invoices or any debts. Negotiating late payment remedies between relevant parties means that everyone knows where they stand before entering into a contract. Not only does this help to avoid disputes in the future and create a smoother process should problems arise, but it can also reduce the formality of a statutory request which may come as a surprise to your client and consequently damage the business relationship.
Once you agree on late payment terms, these should be written down in a set of terms and conditions which are signed by both businesses. This provides proof of the agreement and can be referred to if needed. Ensuring that any late payment contractual clauses are clear and simple will avoid arguments surrounding their meaning or interpretation.
What sort of late payment contractual clauses are allowed?
Businesses are generally free to negotiate their contracts and this applies to late payment terms, at least to a certain degree. Statutory late payment legislation provides a back-up in case contractual clauses are not present. But the statutory interest rate of 8% over the Bank of England base rate could be considered very high by some businesses and the need to pay invoices within 30 days before this interest rate kicks in may be perceived as being too onerous. Although the intention of the legislation is designed to protect small businesses, it can actually have the opposite effect by scaring off potential clients. This is where softer contractual clauses may be required.
But although contractual clauses can serve to water down statutory legislation relating to late payment, businesses must still abide by certain principles. In particular, although the 30 day limit can be easily extended to 60 days (except in the case of public authorities where it should not exceed 30 days), anything beyond this must not be “grossly unfair” to the supplier. If a business is essentially browbeaten into accepting longer payment terms, this can be deemed unfair and the statutory limit will take precedence. Furthermore, if business agree to reduce the statutory interest rate, the agreed rate must still represent a "substantial remedy" for the supplier (and it should remain at the statutory rate in respect of public authorities).
In connection with debt collection, you need to be aware that the Debt Respite Scheme (Breathing Space Moratorium and Mental Health Crisis Moratorium) (England and Wales) Regulations 2020 will apply in certain cases to prohibit taking any step seeking payment from a debtor.
A variety of documents which may help with late payments can be downloaded from our Business Documents Folder.