Planning Ahead – How To Draft A Contract To Protect You From Bad Payers

If you run a business, bad payers are, unfortunately, inevitable. Whether this is because of cash flow issues, disputes, or dodgy dealings, you will likely have customers who cannot or will not pay at some point.

There are several effective ways to handle bad debts when they arise, but there are also some precautions you can take when drafting your contract which might help you if you do end up in the unfortunate position of having bad payers.

Make sure your contract is in writing

While this may sound obvious, having your sale contract in writing can be your first line of defence against bad debts. While it is tempting to trust your long-term customers or make one-off verbal agreements, your contract is your best opportunity to make the agreement clear and to protect your interests if things go wrong. You may be able to make a basic contract yourself, although it is always best practice to seek the help of a legal professional to ensure the contract does what you want it to do, and provides you with the best protections possible.

Clearly define payment terms

It is crucial that you are clear in your contract when and how you expect payment to be made. Firstly, this ensures you and your customer are on the same page, and gives them the opportunity to let you know if they are worried about meeting your expectations. It is better to find this out now than when payment becomes due. Secondly, if things do go wrong, it can prove that you made your expectations clear, and also that your customer agreed to these. This is invaluable if you need to escalate the matter to Court.

Include late payment consequences

Late payment interest serves an important purpose in compensating you for the short-term cashflow issues that can arise from late payment, along with the time you will spend chasing up the payment. Importantly, this can also act as a deterrent for late payment, if it is cheaper for your customer to pay today than next week, this gives them the incentive to pay on time.

However, you should be careful when adding in late payment consequences, as unreasonably high fees are unlikely to be enforceable by law, even if your customer agrees to them.

Include a dispute resolution clause

Many late payments are not due to the customer lacking funds, but rather due to disputes about the quality of the goods or services provided. If your contract does not deal with disputes, you may be stuck in a situation where you need to escalate the matter to Court in order to resolve the dispute.

A dispute resolution clause can take many forms depending on your preferences and the nature of your business. Options include mediation, arbitration, or alternative dispute resolution methods. This can work as an agreed framework between you and your customer for how disputes will be resolved and may help you come to an agreement to secure payment.

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Dealing with bad payers can be tricky, but using some of these precautions at the outset of your transaction may put you on a better footing if payment is not forthcoming. This list is not exhaustive, and it is always best practice to seek the help of a solicitor when drafting sale contracts, as they will be able to give you advice on how to best protect yourself when things do go wrong. If despite your best efforts, you are not able to recover a bad debt, Nelsons’ expert debt recovery team will be able to help.