Reducing bad debt through terms and conditions

By James Robbins, associate, Harrison Drury.

All businesses will encounter problems recovering debts at some stage, but the risks can be reduced by having clear terms and conditions of business.

Ensuring these terms are binding on your customers can deter them from paying late and increase your chances of recovering not only the debt, but also the cost of pursuing it.

The terms of business must be brought to the attention of the customer before the contract is entered into and it generally isn’t enough to provide them with the invoice, as the contract will often be complete by this point.

If possible, the customer should sign the terms of business and if they send a purchase order, this should be acknowledged with a copy of your terms of business and confirmation that these will apply.

The terms of business should include, amongst other things, details of the obligations on each party, when they are to be carried out and what should happen if they are not. They should also detail what happens if the contract is terminated, any retention of title clause and details of payment terms and late payment charges/interest.

Crucially, they should also include a term providing for you to claim your legal costs from a customer in the event that they fail to pay and solicitors have to be instructed.There is conflicting case law on whether such a term can result in costs being recovered for claims below the small claims limit of £10,000, but the court may use its discretion to order that they be paid. Such a term could in any event be a useful tool when it comes to negotiating early settlement and encouraging your debtors to pay on time.